Warning – some high rise apartment buildings will become the slums of the future

The way we live in Australia has changed.

Brisbane Off The Plan Apartment Buyers Lose Up To 36 Percent 2We’re trading backyards for balconies and courtyards and this has resulted in around one in five Australians living in an apartment today – up from one in seven in the 1990’s.

According to Australian Bureau of Statistics of the 10 million dwellings in Australia, around 10% of these are “attached dwellings” built in our eight capital cities over the 16 years to December 2018.

And the trend to medium and high-rise living will only increase as more of us will want to trade having space (big back yards) for being in the right place – living close to work, lifestyle facilities and amenities.

The problem is not all apartments are the same

Some will make great investments increasing substantially in value over the long term, but many of the high-rise towers built in the last fifteen years will continue to underperform with poor, if any, capital growth in the foreseeable future.

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Of course these Lego Land apartment blocks never made good investments.

They offered little scarcity and had no owner occupier appeal having been built with investors in mind, and often overseas investors who didn’t fully understand the needs of the local market.

Worse still… because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that on completion their properties were worth considerably less than their contract price.

The sad reality for these investors is that today, in light of the many media reports of structural problems in some of these high rise towers, there is a crisis of confidence with apartment owners concerned about what unknown issues and liabilities may lie ahead for them and potential purchasers are holding back not wanting to buy themselves futures problems.

Building Boom MelbourneThis sector of the property market has lost the trust of the buying public and confidence will take quite some time to restore as various stakeholders including state and local governments as well as the construction industry including building surveyors and certifiers scramble to shore up building sector.

You see…there tend to be three major types of building issues faces by apartment owners:

  1. Structural defects – These are the ones that grab the headlines but, in reality, major structural issues only relate to a small number of buildings.
  2. Fire issues – These often relate to inferior cladding used during construction. Cladding audits are ongoing, but so far 629 affected buildings have been identified in Victoria alone.
  3. Water issues – These are very common and occur to some extent in almost every new building – things like leaking balconies, showers and roofs. While these are a nuisance and can be expensive, they can usually be rectified.

Fact is, the buildings with major problems requiring mass evacuation are the outliers, but for those involved their losses will be significant as they will have hefty repair bills and have no real market for the sale of their apartment in buildings that could well become the slums of the future.

But that’s not all folks…

Bad Building ConstructionThe standard of high rise apartment tower construction is a vivid example of how in today’s disposable society, the quality of many things is falling in the pursuit of bigger profit margins.

This in stark contrast to the quality of the 100-year-old buildings that stand proudly next to them in our CBD’s.

They were craftsman built with durable materials and have stood the test of time and multiple generations.

They still stand strong today – a far cry from the buildings being thrown up in the modern era.

But I believe recent round of disclosures about structural problems in the apartment towers built over the last decade or two for the investor market is just the tip of a the iceberg.

Builder Develop ProblemIt’s been suggested the high profile stories that have hit the media are just the tip of the iceberg and many more buildings with structural problems – some big, some small – will come to light over the next few years.

Some developers will have the funds to repair their buildings, but others won’t.

And insurance often won’t come to the rescue of the unfortunate owners as sometimes it will be difficult to know where to lay the blame: –

  • Councils who have encouraged higher density development and at times been willing to negotiate building guidelines in order to promote development.
  • Developers who have chosen the cheapest builder to increase profit margins
  • Builders who been prepared to compromise to win the deal.
  • Contractors who may have been willing to cut corners like import cladding from overseas because it was cheaper.
  • Certifiers who approved the standard of construction.

And even if when the issues come to light they are repaired, what rational purchaser is going to want to buy into these building.

Imagine the owner’s corporation costs needed for rectification works. Imagine the extra insurance costs required to protect the owners.

And will the banks lend to prospective purchasers if anyone was brave enough to buy into these buildings

At the same time… will tenants want to move in if there is a chance they may have to evacuate? The trust is gone.

Two tiers of apartments in the future

These issues will lead to a flight to quality, meaning well constructed, medium density apartments and townhouses will continue to be strongly sought after and will keep increasing in value, making them great investments.

TownhouseAt the same time tighter future construction standards will lead to increased building costs and therefore higher eventual asking prices for the next round of apartments to be built, underpinning the future value of soundly built established apartments.

Similarly, the solidly build older established two and three story walk up apartments built in the 60’s and 70’s that used to be called “flats” have stood the test of time and will continue to make good investments.

On the other hand, owners of poorly constructed high rise apartments in the many “me too” buildings built in the last decade or two will find the value of their properties will languish.

While some of these owners may be keen to cut their losses, they will find their properties difficult to sell and many will not be prepared to or financially able to crystalize their losses, just like many of the unfortunate investors who bought in mining towns during the mining boom are still finding they are stuck with underperforming properties which are worth considerably less today  than they paid for them many years ago.

The bottom line

Demand for apartments is set to accelerate from a more diverse buyer profile as apartment living emerges as a preferred lifestyle for many, from the younger generation leaving home to the older generation wanting to downsize

Demand For AppartmentsThe peak of the current building cycle has now been reached and it has now emerged that many of the buildings built during the last construction boom will have a shadow hanging over them for some time.

At the same time reluctance from future purchasers will make it harder for new developments to have sufficient pre sales to get out of the ground at a time when tighter planning restrictions for apartments, particularly in suburban areas, will exacerbate the emerging undersupply of dwelling required by our growing population.

This will create two tiers of units moving forward.

Solidly built medium density apartments and townhouses developed by reputable builders and many of the towers that dot our big cities that could well become the slums of the future.

If you’re looking at buying an investment here’s 3 ways we can help you:

As you can now see – not all apartments will make good long term investments meaning correct property selection is even more important than ever.

Why not get the independent team of property strategists and buyers’ agents at Metropole to help you?

We help our clients grow, protect and pass on their wealth through a range of services including:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now! Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.

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Michael Yardney

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Warning – some high rise apartment buildings will become the slums of the future' have 2 comments

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    September 4, 2019 steve weingarth

    Absolutely right. Anyone buying into a home unit/apartment building under 10 years old needs to look at the quality. No one wants to live in sky homes where you can hear the music choices and voices next door and see poor finishes and low quality materials used so go for older buildings and check the Strata plan/owners corp work done over the years. This will be minor wear and tear issues in a good building,which keeps levies to a minimum and makes resale with good capital gain possible. Massive high rises are harder to rent and sell and ones poorly built today are problems tomorrow. Go for smaller, older buildings preferably with only one lift,no pool and mainly owner occupied.

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