Melbourne is in for an apartment oversupply warn industry experts

While talk of a critical housing shortage continues to plague Australian property markets and justify claims from experts that local house values will continue to remain stable well into the future, a contradiction of sorts is occurring in Melbourne’s CBD, where many are warning of an impending apartment oversupply.

A recent report in The Age revealed that property investors are being targeted in off the plan marketing campaigns for high rise developments that are yet to be constructed, in less than desirable locations.

Concerns have been raised by the general manager of multi-million dollar developer Australand, Rob Pradolin, along with a number of other industry exerts.     

Pradolin warns that 30 to 40% of apartment projects currently being advertised in Melbourne will fail to proceed due to the glut of stock soon to come on line. He says the banks are likely to restrict lending to high risk developments in favour of safer construction projects in prime locations.

”All those people who have paid deposits are locked in and can’t pull their money out until the sunset clause in the contract expires in three, four and sometimes five years’ time,” he said.

Research from Oliver Hume suggests that in June 2008 there were 18,585 new apartments in the pipeline for Melbourne, but this figure has almost doubled to 33,451 new apartments spread over 293 buildings that are currently being advertised to buyers. The same report reveals that only 13% of projects marketed in the past two years have actually started construction and that 90% of all apartment sales in the inner city in the first half of this year were to property investors, many from overseas.

A number of factors have contributed to less than astounding off-the-plan apartment sales, including the inflated Aussie dollar, stricter regulations for overseas investors and a slow down in migration numbers.

In addition, the banks have become increasingly cautious about lending to developers who are relying on off the plan sales from international buyers to raise the required revenue to get their projects off the ground.

Freehills property partner David Sinn says the major banks are seeking to reduce their exposure to a potential market oversupply in Melbourne by cracking down on construction lending.

He says, ”The sheer volume of projects trying to get up at the moment is amazing and there is only a certain pool of money available. The pool is insufficient to service all those projects.”

Unfortunately this has resulted in many investors and buyers, who have already forked out large deposits to developers, being left in the lurch when it comes to financing their off the plan purchases, as many banks are simply refusing them finance. Sinn says many buyers now have no choice but to wait their contracts out.

According to head of property research at Macquarie Bank Rod Cornish, many developers have been enticed back into the Melbourne apartment market by the steep price rises that occurred in this sector over the past year.

However Cornish says a slow down in overseas and interstate migration, along with a decline in international student enrolments for local universities, will impact underlying demand for inner city apartments.

Pradolin agrees that there may be a shortage of tenants for one and two bedroom apartments in the CBD and suggests owner-occupier based projects would fare better.

”Good apartment projects in good locations will always be in demand, but it’s the projects in secondary locations that have increased in number and that is where buyers need to be more much more cautious,” he warns.

A number of Melbourne projects which were expected to commence this year are already in development limbo, including the Verge Development – a proposed $85 million Southbank tower, the Baracon’s Wrap tower at Southbank and a nine complex in Prahran. All of these projects have been deferred for various reasons, including insufficient buyer interest to allow construction to commence.


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