13 Apr Is Melbourne facing an apartment oversupply?
Melbourne town planners have approved the construction of over 20,000 apartments that are likely to be built in the next four years. This is above the average annual construction level of 1000 a year. In fact, it’s four times above that!
Kevin: For some time, there has been quite a lot of talk about oversupply of properties, particularly in units, and particularly in the Melbourne market. We’ve unearthed some staggering figures. When I say “we,” that is the royal “we,” really meaning Michael Yardney has unearthed some staggering figures. He sent them through to me and I’m prompted to talk to him about it. Good day, Michael.
Michael: Hi Kevin.
Kevin: Was this a surprise to you, Michael?
Michael: Driving down the streets of Melbourne, I can see that there’s a lot of new apartments being built. Opening up the paper on Saturday, I can see that, as well. But the concern is they’re very much concentrated in the CBD, and yes, even the quantum of it did surprise me, Kevin.
Kevin: Tell us what the quantum is and bit of a snapshot, Michael.
Michael: Basically, according to Colliers International, Melbourne town planners have approved the construction of over 20,000 apartments that are likely to be built in the next four years. This is above the average annual construction level of 1000 a year. In fact, it’s four times above that. Currently, there’s lots of apartments under construction, as well. There are also heaps planned in the outer suburbs, but it’s the Melbourne CBD that’s an issue.
Kevin: That’s 20,000 just in the CBD?
Michael: That’s correct. In the CBD and very adjoining suburbs. That’s right, Kevin. Compared to Sydney, there’s only about 5500, and in Brisbane, 3000, Adelaide, 2300, and Perth, 1700.
Kevin: Over the same timeframe, same time period.
Michael: That’s what’s currently approved, and considering we’re talking about big high-rise complexes, they take quite a while to pre-sell and get off the ground. We’re talking about those coming on stream over the next three or four years, Kevin.
Kevin: How has this happened, Michael? I’d imagine that a lot of the people in decision-making areas of this would be a little bit more attuned to what’s coming through.
Michael: If we look back, there was a shortage of properties after our Global Financial Crisis, and at the same time, the way we lived started to change and more people moved into the Melbourne and Sydney CBDs. The developers started to get excited and cranked up construction of new apartments in Melbourne in late 2010.
Then we had a planning minister, who’s now our opposition leader, who decided to “Manhattanize” Melbourne, and he encouraged the development of large complexes, while the approval process for similar properties in Sydney was much more difficult.
But the other big factor was that a lot of this is coming from our Asian neighbors, who decided to invest their money here using funds from overseas, so they didn’t have to go through the local funding process, either, and interestingly, they’re selling a lot of these off the plan to Asian investors trying to put their money into Australia.
Kevin: Is there any sign that the Victorian government is slowing down their approval process?
Michael: We’ve got a new government now, a Labor government recently, and the suggestion is they’re going to be much more cautious. But Kevin, there’s another issue: it’s not just how many we’re building, but a scathing report came from the Melbourne City Council showing some of our newest developments are ten times as dense as permitted in town planning laws in other countries.
We have a lot more apartments per square meter, but the standard of a lot of those are very poor. They are of a poor construction quality with design flaws and lack of natural light – even bedrooms without windows, Kevin. But they’re being sold off the plan to overseas people. These are going to be the slums of the future.
Kevin: Goodness. I’m staggered in both of those cases, Michael. What impact do you think this is going to have on the Melbourne market overall?
Michael: I believe that over the next little while, we’re going to have too many new and off-the-plan properties coming on the market. Some locals who bought are going to be very, very disappointed when the contract has to be completed when the property is finished and it has nothing to do with the contract price that they signed. The valuation is going to come in at what the sale price is at the time, and some are going to lose a lot of money. They’re going to have to put in more deposit than they thought.
But of course, it’s also going to reduce capital growth – in fact, probably give capital losses initially – and reduce rental growth when there’s a big oversupply.
Kevin: I know you’ve been very cautious in your advice about buying off the plan. I guess this underscores that, Michael, doesn’t it?
Michael: It does, because we’ve been around and seen it before. Part of the problem with these sort of complexes, Kevin, is the long lead timeframes beforehand. It was a good idea in 2010, but everybody got in at the same time, and now they’re all finishing at the same time, and boy, is it going to create some issues.
Kevin: Michael, thank you for drawing our attention to this, and thanks, once again, for joining us.
Michael: My pleasure, Kevin.