Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 25 March 2015

Supply and property investing

Record approvals

There has been a lot of debate about tax policies and under-building in Australia.

Yet thanks to a heady combination of rising dwelling prices and low interest rates, building approvals are actually at record highs in Australia.

Notably over the next few years we are now set to construct more units and apartments than has ever been seen before in this country.

The supply response appears to be working. 

This has vital implications if you are considering investing (or "speculating" in the apparently favoured parlance of the day) in a unit or apartment in any one of half a dozen of our capital cities which is likely to experience pockets of oversupply over the next couple of years.

Of course, over the long term these figures are small fry and over time the new dwelling stock will be comfortably be absorbed by population growth as I looked at recently here.

Indeed, my contention is that the Intergenerational Report may have deliberately under-cooked the long term net overseas migration figures for the reasons I looked at here.

That said, over the short term a number of our capital cities will see clusters of apartment oversupply and investors need to be cognisant of what this could mean, including sliding rents, vacancy periods and, in some cases, yikes, declining dwelling prices.

Coorparoo gentrifies

I recently looked at West End and South Brisbane as two adjacent areas where apartment construction is going ballistic.

There are a few more regions around Australia as detailed here previously where unit supply is ramping up apace, but these are two premier examples.

I took the pocket camera out to another Brisbane suburb yesterday where a goodly level of construction is set to get underway - albeit not on anything like the same scale - Coorparoo. 

This "mixed-use" suburb is around 4km from the Central Business District and conveniently located on a train line - and there are certainly some quality investments to be found here.

There is also set to be a fair amount of new supply due to come online both here and in certain adjoining suburbs.

Don't overpay...

As a general rule when a development says that 1 bedroom apartments "start from" $359,000 and 2 bedroom apartments "start from" $459,000 (if my eyesight is any good, that is), typically this will refer to the most inferior apartments in the block and possibly those without parking spaces...although I can't say for sure in this instance.

Much of the new apartment stock will likely be sold offshore to Asian investors, of course, but these prices should act as a guideline for investors who are potentially looking to buy established 2 bedroom apartments in the vicinity.

If you are investing in a house with a high land value content this is one thing - but if you are looking at an apartment then the above figures should offer you a very strict set of guidelines as to how much you should be prepared to pay.

Construction of expensive new apartments can underpin prices for a time. However, particularly in an area where there is an elevated of new supply investors need to source apartments which you can always let out easily.

This becomes more challenging when there is a higher volume of new supply around. Look for spacious apartments in smaller or boutique blocks, ideally with a view and some outdoor space, such as a balcony. And don't overpay.

Below is a photo of the old Myer Coorparoo complex, for which "DA" has been approved for a new retail, commercial and residential development. This will include some 442 new apartments across 18 levels.

The wrap

An area such as this is close to the city will become far more popular - and more populous - over time, and it is gentrifying quickly.

But investors need to be sure that they don't overpay for generic unit stock which lacks scarcity value and may become difficult to let in time as vacancy rates creep higher.

In particular, investors need to understand that population growth does not in itself drive property price growth, as I looked at in more detail here.


And coming up...

Some cracking ABS releases are due out on Friday including Q3 2014 Demographics.

I expect to see that a slowing in net long term migration which has long been evident in the Overseas Arrivals and Departures data will lead total Australian population growth to have slowed materially through 2014.

I also expect to see population growth slowing significantly in the mining states, while Sydneysiders and whatever people from Melbourne are called these days (Melbournites? Melburnians? Mexicans?) opt to stay put, placing massive pressure on infrastructure and housing markets in those two cities.

In short, the strongest population growth in 2014 will be seen in the two most populous cities due to a structural shift in interstate migration patterns.

The Q2 2014 Demographics release has already showed that net interstate migration from New South Wales is at the lowest level on record across decades of data, which migration into the sunshine state of Queensland has slowed.

Even within Queensland we are seeing a shift of population away from some mining regions but employment growth in the capital city of Brisbane remaining relatively robust.

Also due out from the on Friday and Q4 2014 Finance and Wealth data, which is effectively a subset of the Australian National Accounts.

I expect the Finance and Wealth data to show that - while household net worth as a percentage of a annual net disposable income has not recovered to its heady pre-financial crisis peak - with dwelling prices and stock market valuations rising we will almost certainly see record aggregate household net worth as at Q4 2014, and in all likelihood beyond.