The Melbourne CBD apartment market is heading for an oversupply that will cause property values to drop and hurt investors.
And unfortunately it’s too late for the new laws set to clamp down on Melbourne CBD’s skyscrapers to stop the predicted drop in inner city apartment prices over the next few years.
Planning Minister Richard Wynne announced that the government will limit the height of future towers to 24 floors unless open space offsets are provided.
But these stricter new density regulations won’t stop a “correction” for inner city apartment prices according to BIS Shrapnel managing director Robert Mellor.
These planning approvals were still coming through the pipeline and would keep adding to the apartment supply, Mr Mellor said.
“This financial year we will reach an oversupply,” he said. In the next financial year, 2016/2017 he said there would be a “significant excess” of apartments.
Of course there’s nothing new about this – earlier this year Michael Yardney wrote why he was concerned by the looming oversupply of Melbourne high rise towers
Melbourne has brought a huge volume of apartment stock on line in the past couple of years
Recently we’ve been building about 60,000 apartments a year.
That’s about twice the average level of the past ten years.
And it’s created a growing over-supply of inner city apartments, verging on a glut.
But a lot of this explosion has not been driven to meet resident needs, instead…
A lot has to do with foreign investment
The current CBD apartment boom is being fuelled by foreign investment at two levels:
1. At the retail level overseas individuals are restricted to buying new or off the plan properties and boy are they buying up all those new high rise monoliths.
However many local investors are also buying into these new apartments blocks and they’re likely to be burned by long vacancy periods and falling property values.
2. At the wholesale level overseas developers with deep pockets are snaring large development sites ahead of local developers and it seems like their appetite for property can’t currently be satisfied – there are multiple bidders for any high rise development site offered for sale in the Sydney or Melbourne property markets.
With nearly all the projects pre-sold, there is little evidence of purely speculative property development by foreign investors.
However some have been caught with their pants down, having paid large sums for development sites on the assumption that they could build skyscrapers.
In some ways history repeats itself…
If you look back at the history of Docklands in Melbourne you will find the developers overcommitted to apartment developments which then created a significant oversupply that continues to this day.
Many investors who bought in the Docklands have had little, if any capital growth for up to a decade, and while today there are few vacant properties, in the past there were long periods of vacancies and this is likely to recur again as an oversupply of high-rise towers in the adjoining CBD will compete for tenants.
Avoid investing in the Melbourne CBD or surrounding suburbs.
And if you have bought off the plan, see if there is a way that you can get out of your contract and use your money more efficiently elsewhere, otherwise you could be waiting a long, long time to see the capital and rental growth you’re probably expecting
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