Property investment high-rise warning

Analysts have warned property investors against buying apartments in Perth, parts of Melbourne’s CBD and Brisbane’s CBD as rapid increases in supply show signs of outstripping demand.

A huge increase in the construction of high-rise apartments is reshaping capital-city skylines, particularly in Melbourne, where 41,400 high-rise apartments were approved last year, a 30 per cent increase on 2012.

Most of these developments are intended for property investors, many of whom buy the investment properties through self-managed super funds. It comes at a time when the vacancy rate in Melbourne’s Southbank is more than 8 per cent and in Docklands and the CBD more than 5 per cent.

The result is apartment values in Melbourne and Sydney are falling by up to 20 per cent between purchasing off the plan and buyers receiving the keys, according to analysis quoted in the Australian Financial Review this week.

Nearly 44 per cent of apartment purchases in the most populous cities are below the sale price at the time of completion, with units in capital-city high-rises the hardest hit, according to WBP Property Group, a company specialising in valuations and property advice.

Its analysts said it could take between six and 10 years for the price to return to what was originally paid, with negative equity generally the worst for two-bedroom apartments priced between $500,000 and $700,000.

In Brisbane, analysts expect about 5500 new apartments have or will become ready for sale in Brisbane in the second half of this year alone. It follows a record-breaking year for off-the-plan apartment sales in Brisbane in 2013.

A report by social and economic market research firm Urbis said up to 45 projects could be added to the Brisbane market in the second half of this year. It predicted a levelling out of releases from this month onwards.

Unlike many investment property advocates in the Melbourne, Sydney and Brisbane markets, Portfolio Management Services has kept its focus on finding the best property investment options among established housing for its clients.

“Not all property is equal, especially when it comes to high-rise apartments,” Portfolio’s managing director Jock Bing said.

“… In most cases these properties are sold to investors – as few buyers actually want to live in them themselves, and for good reason. Noise issues, extreme density of living, small floor plans, inability to improve or add value, compromised design and, of course, no scarcity or rarity factor. To me, that also means they do not make good investments.”

Mr Bing said the sheer number of apartments meant landlords were constantly competing with each other for tenants, causing a dramatic reduction in rents.

“Not only are they competing with the identical building next door, across the street or in the next block, they are also competing with hundreds of identical apartments within the same building,” he said.

“We often hear feedback of tenants moving floors within the same building or moving apartments on the same floor.”

Portfolio instead continues to focus on established housing, a strategy that has produced total average returns of 9.3 per cent a year for the past 11 years and 11.7 per cent a year for the past 41, according to independent research companyAtchison Consultants.

“A good investment needs to be in demand by both owner occupiers and tenants,” Mr Bing said.

“Traditional small houses, townhouses and boutique or period-style apartments are always in demand. That is why our vacancy rates are at such low levels. Not only do tenants want to rent these properties but, when the time comes, both owner occupiers and future investors are also in the queue to purchase them.”

To find out more about Portfolio Management Services’ successful investment formula, or to discuss your property investment goals, call Portfolio on (03) 9621 1044 today.