Docklands: Are gains to be had amid "oversupply" speculation?

The conversation around a potential Docklands oversupply has been going for some years.

Adjacent to Melbourne's CBD, Docklands is conveniently located and Places Victoria has big plans for the suburb.

With construction starting in 1997, and a 25 year time frame, we're right in the latter half of the development process. Teething problems have, almost inevitably, been highly scrutinised.

Last year, we reported that Docklands was beginning to find its feet after a difficult conception. However, there were still reports in late-2013 that water usage was revealing high vacancy rates in the area of around 11%.

The 2014 Prosper Australia report found that this had not improved this year. In fact, in terms of water usage, Docklands has potentially the highest number of vacant properties in Melbourne.

With a median unit price of $600,000 currently, Docklands offers a gross rental yield of 4.51% with a median weekly advertised rent of $520, according to RP Data. They note the average hold period for a Docklands apartment is seven years, and while a -1.64% dip has been seen in the median price over the past three months, the 12 month growth is at 6.57% with annual average growth of 2.38%.

Glenn Lucas, managing director of Lucas Real Estate, is a resident in Docklands. He began selling real estate in the area in 2000 before establishing Lucas Real Estate in 2004. It is now the largest independent agent in the area and this year secured the Real Estate Institute of Victoria's Residential Property Manager of the Year title.

He doesn’t believe that the vacancy rate is a huge issue.

SQM Research records the vacancy rate at 4.4% at present, down from  a 2013 peak above 9%, with regular swings prior to this.

His agency’s vacancy rate sits at around 2%, and he’s quick to note that changing vacancy rates, or cyclical results, are a normal transitional part of any new market.

“Real estate goes through cycles and when a developer puts a tower to the market it’s when the market is at its highest. Then it takes a couple of years to build the tower. It takes time for the buyers to settle,” explains Lucas.

“There’s a good demand for [existing] properties, rentals are not dropping at all,” he says.

Renters come in many forms in Docklands. He points to the professional couples and singles that like the convenience of apartment living in the area, but also says a number of downsizers are also active in the area. Some students in budget apartments also make up a portion of the market.

“There is a market for one bedroom rentals, but it’s the two bedrooms that have done very well,” he says. These rent for between $450 and $650 per week.

While success in the short term may not have occurred for everyone, Lucas has seen some of the first Dockland properties that sold off the plan for $450,000 now achieving $650,000.

He shared four of their recent sales highlights:

• 1401/20 Rakaia Way, Docklands VIC 3008 - $915,000
• 2504/90 Lorimer Street, Docklands VIC 3008 - $1,310,000
• 1902/5 Caravel Lane, Docklands VIC 3008 - $900,000
• 2301/1 Point Park Crescent, Docklands VIC 3008 - $1,160,000

Property Observer looked through the latest RP Data to see what sales we could find.

When looking at the sales record from September 1 to today, with 72 sales, it appears gains and losses are in a strong mix. Those who held the property since 2002 or prior, particularly those with larger apartments, seem to have done well with strong gains.

However, those purchasing for the short term – as well as a pain period in 2003 where it seems a number of investors overspent – have realised losses upon selling in the past two and a half months.

Refining the search to those in even more recent days, from 1 November to today, we found the following sales:

• Two bedroom, one bathroom apartment sold for $467,000 in 2008 and was listed as non-disclosed on the recent sale. It was advertised at $405,000 to $435,000.
• Two bedroom, two bathroom apartment was bought for $677,500 in 2001 and listed non-disclosed on sale. It was advertised at $759,000 plus.
• Two bedroom, one bathroom apartment bought in 2003 for $532,600 (after 2002 construction), it then sold in 2007 for $495,000, before selling again this month for $550,000.
• Two bedroom, one bathroom apartment sold in 2002 for $430,000 before being purchasing in 2011 for $505,000. It sold again for $505,000 less than two weeks ago.
• One bedroom, one bathroom apartment was listed as non-disclosed for sale price on 10 November. It transacted for $438,000 in 2002, and was asking for "offers over $420,000" this time round.
• Two bedroom, two bathroom apartment sold at the beginning of the month for $450,000. No previous sales information available, but seems it was asking $499,000 to $539,000, before lowering the expectations to $455,000 in January 2013.
• One bedroom, one bathroom apartment sold for $456,000 this month after selling in June for $310,000, prior to this it was bought for $301,000 in 1999.
• Three bedroom, two bathroom apartment sold for $1,310,000 on the 14th, previously selling for $1,100,000 in 2011. Prior to this it sold for $1 million in 2008 and $1,370,000 in 2005.
• Three bedroom, three bathroom apartment sold for $765,000 on the 11th. It was bought for $715,000 in 2013 and $683,000 in 2001.
• Two bedroom, two bathroom apartment sold for $730,000 on 11th. It last sold for $1,025,000 in 2010.
• One bedroom, one bathroom apartment sold for $335,000. It was purchased in February 2008 for $375,000 and March 2007 for $350,000.
• One bedroom, one bathroom apartment sold for $380,000 on 12th. It was previously bought for $400,000 in 2009.

Looking at the list a little closer, it shows that there were three clear losses, four clear gains, three “possible” losses, one “possible” gain and one that recorded no change (though likely a loss for the investor in terms of transaction costs).

What is particularly interesting is the losses seen by those who sold to our most recent vendors in the list; even when gains are seen now there has been pain in the past. Perhaps it suggests an emerging recovery.

“Like any investment, we recommend [holding] for the medium to long term,” Lucas urges of those considering a Docklands investment.

It seems he is on the money.