Investors looking to purchase in the apartment market before the close of the year should be cautious, a property research house says, as oversupply and weak demand from risk-averse buyers continues to challenge the market.
RiskWise chief executive Doron Peleg said the market for off-the-plan units in a number of high-profile suburbs across Australia’s eastern coast had seen a heightened degree of risk due to Covid-19.
“The equity risk, being the risk for price reduction that already had been high prior to the pandemic, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased,” Peleg said.
“Covid-19 has also increased materially the cash flow risk, as vacancy rates, are at an all-time high, peaking in May at 16.2 per cent before dropping slightly in June to 13.8 per cent.”
Sydney and Melbourne, which have been hurt by the loss of migration due to border closures, remain hardest hit with a high number of popular suburbs at risk.
Looking specifically at the Melbourne’s CBD apartment market, close to 4,800 apartments are expected to be delivered across the next 24 months, equating to 13.6 per cent of the existing unit stock due to settle over the next two years.
Docklands will see 1,300 apartments come online over the same period accounting for 12 per cent of of the existing unit stock.
Rouse Hill in Sydney’s north-west is also at risk of settlement problems, with off-the-plan apartments equivalent to twice the existing unit stock due to settle during the next two years.
As many as 1,661 high-rise units in the suburb 50km from central Sydney will settle during the next two years.
Building defects that hit apartment sector hard following evacuation of the 36-storey Opal Tower in Olympic Park Parkview Precinct and the “poorly-built” Mascot Towers last year, have continued to weigh on the suburb of Mascot.
A further 800 apartments are set to be delivered over the next two years which would reach 13.3 per cent of the existing unit stock due to settle over the next two years.
Elsewhere, the inner-Brisbane suburb of West End and Surfers Paradise on the Gold Coast, along with Darwin and Adelaide’s CBDs were also found to be at risk from high concentrations of investor stock due for completion, as the pace of growth across apartment markets continues to weaken.
“Over the medium to longer-term, it’s the land value component of the asset that does the heavy lifting for you and, therefore, buyers should look for a high land-to-asset ratio,” Buyers Buyers co-founder Pete Wargent said.
“The unit oversupply issue has been with us for some years now, and outperformance has mainly been in family-appropriate dwelling types in markets where demand is consistent and new supply has been restricted.”
In recent weeks auction clearance rates have seen a boost, however, prices have continued to trend lower as vendors revised their price expectations as buyers continue to pull back amid job worries.
Urbis director Mark Dawson said demand for new apartments would return as soon as the economy opened back up and the movement of people was lifted.
“The drivers of demand for apartments that were there before the pandemic—affordability, views, high levels of walkability, multiple transport options and convenient local living—will be just as relevant.
“We expect design and management of apartments will continue to evolve with customer preferences,” Dawson said.
“This could mean more flexible spaces within apartments, but also within buildings to promote healthy and practical lifestyles ready to deal with a changing environment.”
According to JLL’s second quarter residential apartment market report, apartment completions are expected to fall by more than two-thirds over 2021 from their 2017 peak.
Completions will drop to 18,300 apartments this calendar year, down 36 per cent from the peak three years ago, while apartment projects under construction could fall to 12,000, for the two-thirds drop, or even as low as 7,000.