The way we live in Australia has changed.
We’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 the 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.
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.
This 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:
- Structural defects – These are the ones that grab the headlines but, in reality, major structural issues only relate to a small number of buildings.
- 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.
And now it’s been revealed that there’s a list of list of nearly 450 buildings across the state of NSW with potentially flammable cladding that the State Government is keeping it secret due to security concerns.The list, developed by the cladding task force and provided to State Parliament, was given public interest immunity, which restricts public access.NSW Police Counter Terrorism Command advised the addresses should not be published due to safety concerns. The unit said the information risked prejudicing the interests of building and apartment owners.
- 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…
The 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 craftsmen 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 the 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 the iceberg.
It’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.
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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 buildings.
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.
At 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.
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
The 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 could well become the slums of the future.
Should you buy, should you sell, or should you just wait?
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