Investors should exercise extreme caution in the overheating apartment markets of Sydney and Melbourne. They should also be wary in Brisbane. No investor should enter these markets expecting to buy off the plan and sell at a substantial profit before completion in two to three years, given the looming oversupply of rental accommodation and worsening economy, according to leading analysts. Yet this is the premise on which marketeers are selling apartments in these cities.
At so-called investment seminars around the country, hapless investors are being urged to buy not just one but several units off the plan. The spiel is they can sell before completion and probably make themselves a 25%-plus capital gain relatively quickly. It's no fairytale, say these gurus, pointing to Real Estate Institute of Australia figures showing that median apartment prices leapt 21% in Melbourne and 13% in Sydney in the year to June 30. Sydney has seen a 27% rise in three years and Melbourne 50%. Brisbane prices have been more patchy, the median falling 6% in the past year but growing 27% over three.
It gets even better, say the gurus. Big gains can be made for small outlays if investors use deposit bonds. These enable investors effectively to buy apartments under construction with a 1% deposit instead of the usual 10%. On a $250,000 apartment, the outlay is $2500, not $25,000. The logic says investors can afford to buy 10.
"There is concern over some types of marketing [of apartments], particularly seminars which advocate selling before completion," says Rod Cornish, head of property research for Macquarie. "This is a very questionable practice. Some of these advise multiple purchases using deposit bonds. They advise investors to execute several on the same day through different institutions so each is unaware of the simultaneous transactions."
This is because the supply-demand equation is changing rapidly in Sydney and Melbourne and to a lesser degree in Brisbane. In the first two markets, prices are raging while rental vacancy levels are rising. Something has to give. The usual result is falling rentals followed by dropping values. Most analysts cannot see any reason why it will be different this time.
The cracks are appearing. Housing Bubble, Toil and Trouble, a research report from Macquarie Research Economics on the overall residential market, including apartments, points out the weak spot is the rental market: "This is the area likely to generate the correction [in prices]."
Macquarie says the growth in demand pushing up prices is coming "equally from first-home buyers and investors. However, the worrying aspect for the rental market is that for every first-home buyer, there is less demand for rental accommodation ... while every new investor adds to the supply of rental property".
It sees logic in the property rush. First-home buyers are enjoying a combination of historically low interest rates and government subsidies. Investors can choose between precarious stockmarkets and a booming property market with strong capital gains. "However, those capital gains are only achievable as long as new entrants continue to surge into the market this is the classic hallmark of a bubble. Our fear is that some recent entrants into investment property who have paid premium prices and are highly leveraged may be forced to sell these properties as they are either unable to find tenants or discover their rental return is insufficient to meet loan repayments. If this occurs at the same time that demand from first home-buyers abates, then prices could correct sharply."
Some will remember the crash in residential and commercial markets in the late 1980s. In hindsight, rising vacancies were a harbinger but the root cause was the flight of money out of equities into property after the 1987 crash. This resulted in huge overbuilding, with little regard for whether there was sufficient demand for all the new space being created.
Property is being seen by many as a haven, particularly from volatile sharemarkets resulting from the US terrorist attacks and a looming recession. The recent comparative strength of the listed property trust sector is evidence of this.
Brisbane-based researcher Michael Matusik says recent events could drive people into property, making it more likely that 1600 additional inner-city apartments mooted for Brisbane will go ahead. This is on top of 5700 new apartments either underway or firmly on the drawing board for completion by 2004. Matusik believes the market can absorb these but an extra 1600 will break its back.
"Brisbane rental vacancies are still tight, about 2%, and resale prices have also been strong," he says. "It's a Catch-22 situation prices are going up, there is no glut but in two to three years there may well be and then prices would drop. So it would not be a good move to buy something now in Brisbane if you want to resell in two to three years. Investors not prepared to take a five-year-plus horizon should wait."
Mellor expects no huge price falls in Sydney and is confident the five- to 10-year horizon remains good. He does caution against investing in an inner-city apartment. "Sit back and wait because the market will soften over the next 12 months and I was saying that even before the economic uncertainty we now face."
Cornish also cautions would-be Sydney apartment investors, particularly those considering a bland, traditional-style product with no points of differentiation, old or new. "People need to be cautious, particularly given price levels are now so high," he says. "This leaves a question mark over capital gains, particularly in the short term. I would be very wary of buying anything that had to be sold prior to completion. There will still be reasonable medium-term gains for savvy investors but they will need to be a lot more careful than two years ago to make money."
Field says there is already anecdotal evidence of rental falls of up to 15% for Sydney apartments. Investors with older-style, inner-city units may fare even worse as they lose tenants to both the first-home-owner scheme and new developments.
In Melbourne, the supply of new apartments is showing no signs of a slowdown, says Robert Papaleo, of property consultants Charter Keck Cramer. A record 3000 will come on this year, double the previous record of 1500 achieved last year. Strong supply will continue through to 2004.
As in Sydney, this will put pressure on residential vacancy levels and rentals, meaning investors, particularly those with old or poorly designed units, face falling returns, says Papaloe. "Many investors now buying apartments are following the herd rather than weighing up the fundamentals. If they believe they will make massive gains in one year, they are having the wool pulled over their eyes, but for selective long-term investors and owner-occupiers, the Melbourne apartment market is still attractive."
The NSWREI expects the Sydney market will experience a student-led recovery. "Agents believe the rental market will pick up as the 2001 school year draws to a close and students gear up for university and college next year," says its media release. They will want accommodation near unis and TAFE colleges.
It just goes to show that the never-ending optimism of the real estate industry has still not been dampened.
