Article by: Michael Bleby
Source: The Australian Financial Review, 29 March 2016
Apartments in central Melbourne are being resold at up to 30 per cent less than their off-the-plan purchase price, sales data shows.
Not all apartments have fallen in value – some have risen – but analysis of a handful of transactions shows many apartments have failed to hold their value between original purchase and resale, typically a few years later.
The figures are the clearest sign the apartment boom in the Victorian capital is running out of steam and could show more widespread falls if owners elected to sell.
One property where prices have fallen is 27 Little Collins Street, which has 171 apartments in a 32-storey tower above a Sheraton hotel. The building was completed by developer Golden Age in July 2015.
A three-bedroom, two-bathroom apartment occupying 140 square metres and with two car parks sold for $1,565,000 in August, which is 29 per cent below the purchase price of $2,195,000 in November, 2010.
The price of a two-bedroom unit in the same building fell almost 23 per cent in a year, when it was sold for $1,075,000 last April, having previously been bought for $1,320,000 in June 2014.
A number of smaller apartments without car parks suffered falls from 4 per cent to 8 per cent between 2010 and their resale last year.
Golden Age managing director Jeff Xu said sales in the building were limited and there were no empty rental apartments.
“Some apartments will lose value, but that does not mean every apartment project will lose value,” Mr Xu said on Tuesday. “It depends on the location, quality and how you manage it as well.”
PRICE DROP PREDICTED
Melbourne’s surge in new apartments led to predictions more than a year ago than an oversupply was likely to push prices down. As of November, the City of Melbourne had 20,000 apartments under construction, another 19,000 approved and a further 30,000 dwellings awaiting approval. Half of all new homes under construction were in the CBD, according to the city’s Development Activity Monitor report.
While more apartments would limit the growth of rents, as long as interest rates remain low there was unlikely to be a big correction in prices, said BIS Shrapnel analyst Angie Zigomanis. That’s because buyers could still cover the gap between rental income and their mortgage payments, he said.
“Anyone who has bought an apartment off-plan and then looks to onsell within a couple of years will probably be looking at a 10 per cent decline,” he said.”At the broader level those price falls will be mitigated by lower interest rates and the fact that people aren’t necessarily going to be obliged to put their property on the market.”
TREADING WATER OR FALLING
At 108 Flinders, a 190-apartment building by developer Riverlee completed in August 2014, data from five transactions shows prices are treading water or falling, the numbers from CoreLogic RP Data show.
The figures point to a downturn in prices and demand for investor buyers of apartment dwellings.
“Generally speaking, you’re going to get a worse outcome if the apartment doesn’t appeal to owner-occupiers and only appeals to an investor,” said Matthew Baxter, a director of valuation firm Opteon.
“You’re more likely to have a more favourable outcome if the apartment you’ve purchased appealed to an owner-occupier as well as investors.”
Mr Baxter declined to comment on individual properties or their prices.
Apartment prices in Melbourne’s 3000 postcode fell 6 per cent in the last three months of 2015, according to figures from data provider Domain. While final figures for the March quarter are not yet available, the pace of decline was likely to speed up to as much as 9 per cent, Domain senior economist Andrew Wilson said.
Domain is owned by Fairfax Media, publisher of The Australian Financial Review.
SETTLEMENT RISKS MOUNT
With the number of apartments due for settlement ballooning, concern is rising about whether buyers will be able to pay for them, especially at a time when banks are tightening rules.
If banks value properties for less or cut the loan-to-value ratio they will offer customers, buyers will be forced to pay more at time of settlement. If they cannot pay more, they may be forced to sell into a weaker market.
The CoreLogic numbers complement separate figures compiled by valuation firm WBP showing half of 1794 properties purchased off-plan between December 2009 and August 2015 had been revalued below their purchase price.
WBP figures subsequently broken out for The Australian Financial Review in the 3000 postcode that includes central Melbourne show that the 197 properties valued suffered an average fall in value of $51,272, or 9.15 per cent.
In one case, a two-bedroom, one-bathroom unit purchased for $740,000 on 3 August last year was revalued at $600,000 – a 23 per cent discount –16 days later.
“For settlement risk, are we cautious? Yes, but are we worried? No. I’m not,” Golden Age’s Mr Xu said.
Developers could reduce the chances of customers not paying for their apartments by knowing who their customers are and communicating well throughout construction, he said.
“After you know their background, you have to have strong financial reserves to be prepared if something happens,” Mr Xu said.
“If the customer cannot settle, you have to ask why. Can you give them some vendor finance, or help them to come through the hard period? They become loyal customers.”