Extent of inner city oversupply threatens to curtail wider city markets

Louis Christopher of SQM Research has issued a perintnent warning about the rise in vacancy rates in some of our inner city markets.

Overall, the vacancy rates for the eight capital cities are still low, despite a rise over the year to January. The average across the eight capital cities is 2.2%, compared to 1.9% a year earlier.

Perth, Brisbane and Canberra have all had notable increases, but the vacancy rates remain quite low at 1.9% for Perth, 2.4% for Brisbane and 1.9% for Canberra.

But, as always, it’s important to look behind the generalised figures.

Here’s what Christopher says: “On a month-to-month basis, vacancy rates can be quite volatile and are often moved around by seasonal patterns. That is why consideration of the annual change is critical in the overall market assessment. And, on that note, vacancy rates continue their slow rise. Nevertheless the rise is enough to now see a flattening of weekly rents for many locations as illustrated in our Asking Rents series.

“I would also like to make a note of warning for the CBD locations of Brisbane, Perth and Melbourne where vacancy rates are rising at a very rapid rate. Those who are considering investing in the CBD’s of these three cities should be strongly aware of this fact.”

I have raised this issue a number of times in the recent past, but it’s worth repeating. These markets have very worrying trends and, particularly in the case of Melbourne, have the potential to curtail the wider city markets around them because of the extent of the oversupply.

According to SQM Research figures, the Melbourne CBD vacancy rate is above 8% while nearby Docklands is around 9%. Southbank and Carlton are both about 5%. It will get worse before it gets better, given the current level of construction and the rate of which new projects are being approved.

The Perth CBD has 6% vacancies, as does East Perth, with West Perth around 5%.

In Brisbane, the CBD has a vacancy rate of 6.3%, while four near-city markets – New Farm, Kangaroo Point, South Brisbane/West End and Woolloongabba – all have vacancies above 4%.

The danger for investors is that marketers are pumping out promos which extol the positives of the individual projects and their locations, but make no reference to the hefty oversupplies amid which they sit.

Oversupply causes rents to fall and that drags down property values.

The developers building the new projects don’t care as long as they can sell them to someone and move on to the next project. In oversupplied markets, they tend to target distant investors who are unfamiliar with local conditions. The Chinese are the victims of choice these days.

Some of the more brazen marketers push the line that you should buy where Chinese investors are buying because they do lots of research. If you’re silly enough to believe this line of logic you deserve to end up with a dud investment.

Terry Ryder is the founder of hotspotting.com.au.

You can contact Terry via email or on Twitter.

Terry Ryder

Terry Ryder

Terry Ryder is the founder of hotspotting.com.au.

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