Top 10 ‘Danger Zones’ for apartment oversupply in Australia: RiskWise

Rouse Hill in Sydney's Hill District is expected to see its amount of units grow by over 200 per cent in the next 24 months.

It stands out in RiskWise's top 10 danger zone areas in Australia for high settlement and cash flow risk. 

Rouse Hill is set to see a further 1,661 new apartments in the next two years.

Rents have been one of the biggest issues during COVID-19, with inner city apartments in particular seeing significant declines.

Unit rents have been hit the most, with falls over the last three months in both Sydney and Melbourne reaching two per cent.

Buyer’s agent Rich Harvey said buying new apartments in outer suburban areas like Rouse Hill made no sense.

“While it may be nice to have a shiny new kitchen and bathroom, there is a significant downside price risk as the supply of land for further development is plentiful", Mr Harvey said.

"Investors and home buyers are far better off seeking apartments in locations where land supply is very low and demand for property high.

Mr Harvey said there is a settlement risk for the buyer in a market where prices are declining, if they discover the value paid for the unit has declined significantly.

*The table lists the riskiest areas in the country in terms of oversupply, based not only on the supply itself but also on low demand for rental apartments, in relation to that supply. Source: RiskWise

Sydney's Gosford will see its apartments grow 72 per cent, with 1,859 new apartments set for completion over the next two years.

Melbourne has the highest number of new apartments, some 4,744 to be finished, which will see their number of apartments grow by over 13 per cent.

RiskWise chief executive Doron Peleg said property investors should be extra cautious of the high degree of risk associated with off-the-plan units, that has further increased due to the COVID-19. 

"The equity risk, being the risk for price reduction that already had been high prior to the COVID-19, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased", Mr Peleg said.

"COVID-19 has also increased materially the cash flow risk, as vacancy rates, as per SQM, are at an all-time high peaking in May at 16.2 per cent. In June they dropped slightly to 13.8 per cent."

Mr Peleg said that the high-profile issues around cladding and defects has created enormous ‘reputational damage’ across the entire industry and because of this, investors have lost interest in high-rise unit developments and were turning to “safer” house-and-land packages suitable for families. 

Pete Wargent, co-founder of AllenWargent property buyers, said that units, particularly off-the-plan purchases, still carried a high level of risk of significant price reductions.

He noted that uncertainty in the economy has been heightened in 2020, and that buying into oversupplied areas at a time when the international borders are effectively shut this would only serve to compound risks.

Mr Wargent said that rental markets have been weak for inner-city apartments due to the absence of international students and tourists, and that where possible buyers should look towards more supply-constrained markets and assets with a genuine scarcity value.

“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. 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” Mr Wargent said.