Property investors are being warned of a high degree of risk around off-the-plan units, according to Riskwise Property Research CEO Doron Peleg.

Mr Peleg said this risk has further increased since 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.

COVID-19 has also increased materially the cash flow risk, as vacancy rates per SQM, are at an all-time high peaking in May at 16.2 per cent.

At a Glance:

• Vacancy rates per SQM, are at an all-time high peaking in May at 16.2 per cent
• Areas with high unit oversupply carry ‘a very high risk’
• Unit rents have fallen in both Sydney and Melbourne of 3.6 per cent from CoreLogic's latest rental figures to August

In June they dropped slightly to 13.8 per cent.

The table below 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.

riskwise_danger_investment_zones.jpg

Source: Riskwise

Pete Wargent, co-founder of Buyers Buyers, a national marketplace now offering affordable buyer’s agency services to all Australians, said units, particularly off-the-plan purchases, still carried a high level of risk of significant price reductions.

"Areas with high unit oversupply carry ‘a very high risk’ and this is still a major issue in some property markets," said Mr Wargent.

"For example in Melbourne’s CBD, while the same city simultaneously has an undersupply of family-appropriate properties."

Mr Peleg said 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.

Rental values have also slumped across the country, according to CoreLogic.

In addition, unit rents have been hit the hardest with falls in both Sydney and Melbourne of 3.6 per cent from CoreLogic's latest rental figures to August.

Mr Peleg said investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase.

Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.

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

Mr Wargent said 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," said Mr Wargent.

"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.” 

Buyer’s agent and CEO of propertybuyer.com.au 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. 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. 

“In a market where prices are declining, there is a settlement risk for the buyer if they discover that the value paid for the unit has declined significantly. 

“Say the purchase price was $650,000 some two years ago, but at settlement the bank valuation came in at $585,000 (i.e. 10 per cent lower), then the purchaser has to find an additional $65,000 to settle the property.

“This could be a serious problem for some cash-strapped buyers.”

He recommended seeking independent advice and guidance from a local expert buyer’s agent who understood the dynamics of the local property market.

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