Almost time for Perth units to recover

Almost time for Perth units to recover
Larry SchlesingerJune 22, 2011

Perth apartments are good medium- to long-term investment opportunities, according to the Property Observer’s mid-year Property Clock.

Property analysts place the market at 4.30 on the clock, meaning it is not far off the bottom of the market and just behind the Brisbane market, which is still recovering from devastation from floods earlier this year.

The two biggest markets – Sydney and Melbourne – have both passed their peaks and are heading into a decline.

Hotspotting.com.au director Terry Ryder says its “danger time” for investors in the Melbourne unit market, as an oversupply of stock looms.

The outlook is also rather gloomy for Adelaide, where unit prices are cooling and more pain is predicted for investors.

Clocking in at two o’clock on the property clock, Adelaide is further along the property cycle than Sydney or Melbourne, suggesting a recovery in prices could come along sooner.

As for the smaller capital city markets, the situation appears particurlarly bleak in Hobart, which Ryder says has the “weakest prospects”. According to the clock, Hobart’s apartment market is well into a decline, sitting at three o’clock.

Darwin’s market is also heading down, but as it has the highest yields in the country, investors might still be able to find good opportunities. Furthermore, a discounted market might present opportunities for investors before resources projects in the area spark a revival.

Both Terry Ryder and SQM managing director Louis Christopher warn investors to steer well clear of the “basket case” Gold Coast and Sunshine Coast markets.

At 12 o’clock the market is at its peak (demand exceeds supply), at 3 o’clock the downswing has set in (an evenly supplied market0,) and by 6 o’clock it has bottomed out (an oversupplied market). At 9 o’clock the market is rebounding (supply is tightening).

 


 

Perth

Population: 1,696,065
Median unit price: $401,250
Rental yield: 4.9%
Property clock time: 4.30 

The demographics of the Perth market are all relatively favourable: a balanced but tightening market in terms of rental vacancies, decent demand for new units and steady construction of new apartment blocks.

Brendan Aylmore, WA branch director at valuer WBP, expects an increase in investor demand and a reduction in unit stock levels on the back of increase in rental yields.

A further boost to demand may come from first-home buyers pushed into the unit market due to increasing rents.

“There will be a large amount of office space being taken up in the next 12- to 18-month period with a larger number of new works being moved to the CBD, which should result in further demand for properties from both owner-occupiers and investors,” Aylmore says.

Hotspotting.com.au director Terry Ryder is also bullish on Perth units following three weak years. “Perth’s market is set to recover on the back of the resources boom and government infrastructure spending,” he says.

Not so bullish is SQM managing director Louis Christopher, who warns that Perth is more sensitive to interest rate movements than what many realise. Christopher sees Perth’s unit market at close to the bottom of the market, at five o’clock.

However, “another interest rate rise could set the city back to two o’clock” he says.

 


 

Sydney

Population: 4,575,532
Median unit price: $466,000
Rental yield: 5.1%
Property clock time: 1.30

At present there is a shortage of available rental units relative to demand, with construction of new apartments and sales continuing at a steady pace.

Demand close to the city remains strong, with Peter Chittenden, Colliers International managing director of residential, saying metropolitan Sydney’s property fundamentals remain sound as demand continues to outpace supply.

WBP New South Wales state manager Chris Lackey says Sydney’s apartment market prices are still at peak levels for new units, “however, activity is predicted to slow this year, which may see a softening in prices”.

“Basic lower-end unit stock is expected to be flat at best. Interest rates and a hit to confidence are the driving factors behind this change,” Lackey says.

While the market has been falling after the surge early in 2010, Hotspotting.com.au’s Terry Ryder says the long-term prospects are solid. “The change of state government will help, if infrastructure promises are kept,” he says.

While the RBA has held firm on interest rates to date, an expected increase in August combined with an ongoing downward swing in housing finance approvals is set to dampen demand, according to Louis Christopher.

“However, the magnitude of the decline will be minimal compared to most other cities. This is one city that really is experiencing a genuine shortage of rental properties,” he says.

 


 

Darwin

Population: 127,532
Median unit price: $384,000
Rental yield: 5.7%
Property clock time: 1.45

The Darwin unit market is characterised by an over-supply of available property relative to demand, with modest demand for new units and no major uptick in new construction.

Although the market has started to slide downward, investor interest could remain relatively strong due to strong rental returns. Darwin’s gross rental yield for units is 5.7%, alongside 5.6% for houses.

Both Terry Ryder and Louis Christopher are bearish on Darwin apartments.

However, while Ryder says the market is over-supplied, with developers offering incentives to sell product, this could present opportunities for investors to buy at discounts before the resources projects spark recovery.

But Christopher disagrees. “The bubble that is Darwin has popped. It is going to be a steep decline from here, particularly if the RBA lifts rates again.”

 


 

Melbourne

Population: 4,077,036
Median unit price: $433,000
Rental yield: 4.1%
Property clock time: 1.50 

Demand for new units is softening as construction of new apartment blocks starts to decline.

Louis Christopher anticipates a 5% decline in the Melbourne market in 2011.

“Stock levels have increased 105% for the past 12 months. Vendors are just now starting to drop their asking prices,” he says.

According to Terry Ryder, it’s “danger time” for investors in the Melbourne inner-city unit market due to the large numbers of new units under construction in the CBD, Docklands and Southbank markets and with more in planning.

“Over-supply looms,” Ryder says.

 


 

Adelaide

Population: 1,203,186
Median unit price: $325,500
Rental yield: 4.6%
Property clock time: 2.00  

There is a shortage of available property relative to demand, though vacancy rates are holding steady as demand for new units remain fair and construction levels remain unchanged.

WBP South Australian state manager Bart Quinn says sales volumes and prices for Adelaide’s unit market have fallen.

“Some large projects requiring off the plan sales have been put on hold due to weak demand and rising building costs. Buyers in the market for established stock are generally cautious and looking for good value,” he says.

Quinn says prices and demand for older-style units and flats in inner-city localities have cooled due to very weak demand from first -home buyers.

Louis Christopher expects “more pain to come” as vendors start cutting their asking prices. “However, there is a chance the magnitude of the declines will be modest,” he says.

Despite its position on the clock, investors can still look to Adelaide for opportunities in what Terry Ryder says is the most affordable mainland capital for units, supported by an underlying strong economy.

 


 

Canberra

Population: 358,222
Median unit price: $420,000
Rental yield: 5.4%
Property clock time: 2.20

Currently the Canberra unit market is characterised by a shortage of available property relative to demand, with vacancies tightening as the volume of unit sales declines.

In its Canberra apartment report, Colliers attributes demand for residential property to “the strength of the local economy, employment opportunities, population growth and lifestyle”. The ACT unemployment rate stands at 3.7%, well below the national rate of 4.9%.

Canberra sits between the peak of the market and heading into a downswing.

With its strong fundamentals, analysts expect any declines to be modest in comparison to other markets.

“Any dip in the market is likely to be small. Canberra remains our most reliable city market, buoyed by strong incomes and low unemployment,” Terry Ryder says.

But he warns investors to be wary of the Kingston foreshore precinct, which he says has a recent history of problems.

 


 

Hobart

Population: 214,705
Average unit price: $280,000
Rental yield: 5.5%
Property clock time: 2.50 

Hobart’s unit market is heading south despite a shortage of available property relative to demand. Vacancy trends remain steady as a decline in construction is matched by a softening in demand for new units.

“Unit stock levels are rising,” Louis Christopher says. “Hobart is another city where the magnitude of the declines may well be modest as income to house prices appears to be fair.”’

The proportion of family income required to meet loan repayments decreased to 34.2%, down from 35.3% in the December quarter 2010, according to the March quarter REIA/Deposit Power Housing Affordability report.

Despite improvements in housing affordability, Terry Ryder remains bullish on the unit market.

“Hobart is the city market with the weakest prospects,” he says, with the state economy, weak population growth and the political situation all “unhelpful” factors.

Ryder expects the market to fall further. Like the housing market, he says the unit market is showing signs of price decline.

 


 

Brisbane

Population: 2,043,185
Median unit price: $377,500
Average weekly rent: 5.1%
Property clock time: 4.40

Brisbane’s unit market position on the property clock is the closest in Australia to bottoming out.

Not surprisingly, it’s in line with its housing market, which sits at 5pm on the Property Observer housing clock

The market is characterised by investor demand underpinning transaction volumes in the inner-Brisbane market, “especially for price-pointed, affordable stock generating strong rental income,” according to the Colliers Brisbane apartment market forecast.

However, in the medium term Colliers says the market might be adversely impacted by rising interest rates and increasing vacancies.

Furthermore, although the inner-Brisbane vacancy rate is currently only 3.1%, a substantial volume of investor stock will be completed in the short term, and is likely to push up vacancies.

Daniel Lewis, WBP’s Queensland state manager, reports that Brisbane has remained well insulated over the past few years from decreases of as much as 30% in apartments values on the Gold Coast and Sunshine Coast.

However, recently units have experienced a slight correction in values.

“Affordable rental accommodation in Brisbane is scarce at present, resulting in strong rental income for units. Further correction in prices may result as the year continues for new stock in the CBD and new or near-new townhouses in the fringe suburbs,” Lewis says.

Louis Christopher describes the Brisbane market as “bleak” and says the bottom of the market is at least 12 months off. “There is over six months of stock on the market, he says.

Both Christopher and Terry Ryder agree on a gloomy outlook for the nearby Sunshine Coast and Gold Coast markets.

“The Gold Coast is a no go zone and the Sunshine Coast is also weak,” Ryder says. “Over-supply will restrict growth for several more years.”

“The Sunshine Coast and Gold Coast are basket-case situations,” Christopher says.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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