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Should I invest in high rise apartments?

October 10, 2014

Is high-rise a good investment? Avoid off the plan?

Have Australians fallen in love with high-rise apartments, our resistance to vertical living finally overcome? The major property developers seem to think so.  Thrilled with the best 12 months for multi-apartment sales since before the GFC, they have a full pipeline of apartments ready to flow on to the market over the next few years.

State governments are evidently of the same mind. Barely a week goes by without a planning minister in one of our major capitals signing off a new multi-storey block, invariably with relatively little input from the local community or councils. And then there’s the major new precincts such as Parramatta and Green Square in Sydney and Fisherman’s Bend in Melbourne which will deliver significant new high-rise capacity in coming years.

Some proponents of high-rise living assert there has been a permanent shift in tastes that, combined with the lack of affordability for established property close to CBDs, has moved high-rise living from a minority lifestyle choice into the mainstream.

It is undoubtedly true that the sector has experienced a remarkable renaissance in recent times. Sales are strong and demand appears to be multi-faceted: first-home buyers, investors, downsizers and overseas buyers are all active. Indeed, with such breadth of interest, one can understand developers thinking that this will be a golden age for them.

Unfortunately, they are wrong. This is not a structural change but merely another cycle for the high-rise sector. And, if they are not careful, it could end in tears, just like the Gold Coast in the 1980s and Melbourne’s Docklands in the noughties.

Too much of this boom – like those before it – is artificial.  Yes there are supply constraints in our cities that warrant new builds, but poor policy decisions are accentuating the boom and, tragically, will amplify the downturn as well. The greater tragedy is that this is all so foreseeable and preventable.

Two major drivers of the boom are first home buyers and overseas buyers.  Both groups are effectively corralled towards new property because of government policy.  First home buyers who opt for new property receive sizeable grants and stamp duty exemptions that aren’t available when purchasing existing homes.  Meanwhile, non-residents are barred from buying established or pre-owned property by foreign investment rules.

But what will happen when this cohort of first time and overseas owners decide to sell in a few years? Who will buy these properties from them? It won’t be the new generation of overseas buyers. They won’t be allowed to, given that these properties will now be second hand. And it’s unlikely to be the new generation of first time buyers. They won’t be able to claim all the goodies from the government because, once again, these properties aren’t new anymore.

Consequently, investors – the third major group in this market – who had not already seen the writing on the wall will try to exit. Which could be horrible, as anyone who has tried to sell a cookie-cutter apartment in a multi-storey block when 15 other owners are trying to do the same thing will tell you.  Prices will fall and significant losses will be realised.

An early warning sign of what’s to come are rents. A number of property managers tell us that vacancy rates and time-to-lease rates are rising for multi-units apartments and it’s very difficult to increase rents.

Note that the established market isn’t immune. In areas where the two types of property are in close proximity, there is clearly some spill-over impact from the excess supply of new property on the established property market – such as Port Melbourne and Richmond in Melbourne and Surry Hills and Neutral Bay in Sydney. Here, new and old properties are, to some extent, in competition for the tenant dollar.

But we're not seeing a spill-over effect in to established property when it comes to the buying/selling market at the moment. No doubt some potential buyers of pre-owned property are being siphoned away to the new sector, but it appears that the vast bulk of buyers are still keen on second-hand property.  Nevertheless, it is possible – over a short term timeframe – that the confidence of the whole property market could be upset by a rapid reversal in the high-rise sector.  But we expect that this would pass and that, over the longer term established property – particularly period style houses and apartments – would increase its reputation as a safe haven from more speculative assets.

Now you may think that we're too pessimistic and that developers wouldn’t build if they didn’t think demand would hold up.  But developers aren’t in it for the long-term. It will be the buyers left holding the parcel when the music stops. Just make sure you’re not one of them.

Next steps: Talk to Wakelin Property Advisory about selecting a property that will perform as a property investment. Click here to read the process we undertake.

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