Residential Property

Cheaper city apartments still carrying risks

city apartments risks

Investments in city apartments still carry risks despite a decline in prices and demand from investors, a researcher has warned.

A property research group has warned investors a strategy that looks to take advantage of price reductions and lower investor demand for city apartments still carries a high level of risk over the short and long term.

RiskWise Property Research chief executive Doron Peleg said investors aiming to secure rental properties at discounted prices ahead of the reopening of international borders and the resumption of external migration need to consider the short-term risks related to the current high level of supply.

Peleg pointed out the supply of rental apartments was at a high level, both in existing stock and developments in the pipeline, and yet-to-be-launched off-the-plan projects that will emerge when demand for the latter returns.

“The first risk is poor or immediate negative capital growth for rental apartments,” Peleg said, adding there has been no shortage of investor stock residential units either near to or with quick access to major cities for the past decade.

“In many cases the feared oversupply risk has been realised, with a large pool of investors in new apartments experiencing both negative equity and serviceability challenges.

“The opportunity cost of buying an inner-city rental apartment could be high as houses with similar prices, but in the outer rings or in popular regional areas, are projected to deliver materially stronger capital gains.

“Put simply, even if a rental apartment does not depreciate or deliver some positive capital growth, effectively you are still losing as your wealth could have been substantially higher if you purchased a house in an area that enjoys good demand.”

On the issue of low external migration, chief operating officer Pete Wargent said this decline highlighted the possibility of reduced cash flow or serviceability risk.

“The decline in unit rents was largely concentrated around the inner-city markets of Melbourne and Sydney, contributing to city-wide drops of 7.6 per cent and 5.7 per cent respectively over the year. Unit rents also fell 4.6 per cent across the combined capital city unit market,” Wargent said.

“Reductions in external migration will also have a negative impact on the demand for dwellings, particularly smaller rental apartments.

“The federal government is expecting net overseas migration (NOM) in the 2021 financial year to drop by 71,600 people for Australia’s first experience of negative NOM since 1946. This negative trend is forecast to continue into 2022 and only return to pre-COVID levels from 2023 onwards.”

He said the reduction in overseas migration will continue to have an impact on rental apartments that have already seen an increase in vacancy rates and lower demand from investors.

“A stable jobs market is fundamental in external migration decisions. Consequently, poor economic growth and a soft employment market will see the attractiveness of relocation to Australia decline in the short term, while border restrictions make movement logistically challenging,” he said.

“In summary, serviceability risk is increased due to the combination of continued high supply of units, preference for houses in capital cities and regional areas, and uncertainty related to the rental demand largely driven by young renters and migrants.”


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