Opinion: Do predictions of an apartment oversupply in Perth hold up?

There continues to be a steady flow of publicity crossing my desk that makes claim to a looming oversupply of apartment product in Perth. But before you shelve your investment plans in our ‘State of Opportunity’, I thought I would set the record straight on a few issues!

The state of play!

Over the last 4 years, WA’s powerhouse has unequivocally been in mining, and property has been flat for around 4-5 years. In contrast to the strong Sydney and Melbourne property markets during this period, where there is talk of overheating, Perth has only seen a recent average annual growth (Circ. 8-9%) off a very flat market 4 years prior.

With the slowing of the mining sector, we are now seeing a lot of mining and resources investment moving back into property, and for good reason!WA has a strong population position, with the State Government’s population target aggressively remaining at 3.5million people. This is evidenced by the massive investment in infrastructure by the Barnett Government and steady population growth.

While we might be coming out of a flat market, we are also emerging out of a market that has been undersupplied.

It’s not all it appears to be!

Conflicting reports with figures supporting the number of apartment projects in the pipeline are largely based on ‘planned’ projects. The reality is that many of these won’t get off the ground, and here is why.

Recent changes in WA planning regulations have seen a lot of ‘first time’ developers jumping into the market. They are mostly opportunistic and have little to no experience of the regulations and capital requirements of this sector. Interestingly, we have also seen some of the bigger players reentering the market, putting even more pressure on the smaller players.

Unlike the east coast, WA does not get speculative buyers. Our market is underpinned by a bank requirement for projects to have 50-60% apartments pre-sold before construction. The local market largely absorbs these apartments, as many international investors still prefer to invest in the east coast.

Rental returns aren’t necessarily at risk!

Certainly, should there be an oversupply of apartments, as predicted, rental returns might be impacted, but that is assuming investor’s purchase all the apartments.

Over the last decade, we have seen a marked change in the percentage split between investors and owner-occupiers. Young people are moving away from the ‘house and land package’ located miles away from the city – a city that is only getting larger and creating havoc on traffic and public transport conditions.

It is already roughly a 50:50 split in apartment buyers, as more people take the lifestyle option to live close to amenity and infrastructure, reducing pressure on the rental market to perform.

The forecast looks good!

I have seen a lot of developers come to WA from the eastern states trying to emulate what they have done previously. It is often a recipe for disaster and, ultimately, many get burnt simply because it is a very different market.

What works in Sydney will unlikely get traction in Perth, so it’s important to get some local expertise to take you through the various layers of the process.

The market will always stabalise itself through supply and demand mechanisms - even more so in WA where we must minimise risk by proving demand prior to commencement of any project.

While this coming period in property is likely to bring tough lessons to some and a few abandoned project proposals, all indicators point to positive growth in the sector . . . just make sure you know who you’re dealing with!

Article by Lloyd Clark who is the Managing Director of the Match Group Pty Ltd