Melbourne is an excellent place to go for a holiday and wonderful place to be living in. There’s a nice mix of city life and country life. What appeals to the Singaporean in me is the good food that can (almost!) rival us in variety and quality.
I’ve just returned from a holiday there. A holiday should be just that, all pleasure no work. But invariably, as a portfolio consultant, a trip to an area where we have client’s investing in will result in me putting aside a couple of days for work (It’s a good thing I have a patient girlfriend.)
One word comes to my mind the moment I had an unobstructed view of the CBD from the Queen Victoria Market: Oversupply. The number of cranes rising from the panaroma of the city is quite bewildering. What does all this mean for the local property market?
Industry experts have been warning of an oversupply situation since 2012 when the development approvals for many of the projects we see standing today have gone through. A total of 5,769 homes will be completed by the end of 2014 and another 5,774 in 2015. Another 18,737 homes are expected by 2016 and 2017. These are staggering numbers considering that they are all in the City of Melbourne which includes not just the CBD, but also the suburbs of Flemington, Port Melbourne, South Yarra and Carlton.
Numbers do not lie, despite what your average real estate agent tells you about how great living in Melbourne city is and how foreign investment will continue to prop up the city apartment market. The risk increases with an oversupply situation in terms of valuation and rental yields. As usual, the late arrivals into the market will usually be left holding the hot potato when rental start to fall, which may lead to weaker holders liquidating their positions at a loss.
Melbourne already has the country’s lowest rental yields at approximately 4%. As developers continue to price new launches higher above market, we will continue to see yields being further compressed down in the city with more supply. It’s a simple matter of demand versus supply where current demand is not enough to match up to the supply. Other considerations include current price points in the city do not provide much upside in the short to medium term for investors.
Will Melbourne continue to flourish? The question is a matter of time. Whether you are looking at longer term report or in the short run.
In the short term, the oversupply will cause rental yields to fall which will then negatively affect valuations of current as well as new stocks coming on the market. It is at this point of time where buyers who do not have the holding power will have much of their equity wiped out and then liquidate at a loss and accelerating the fall in prices. It is at this point where developers will also stop building and move on elsewhere.
However, in the long term, Melbourne remains a desirable place for Australians to live and the population growth will see the available housing stock being taken up and rental yields will grow again as the imbalance in demand/supply grows as demand grows more than the supply.
The key for Melbourne buyers is the need to have holding power in order to weather this period of oversupply in the Melbourne CBD. Does this mean investors should avoid all of Melbourne? Certainly not. There are still plenty of value in areas where supply is short. Look to the suburbs outside of 7km outside the CBD area. We like places like Heatherton, Clarinda and Carnegie to the South East. There is Bundoora and Brunswick for the Northern side. These are areas that have fundamentals still supportive of consistent growth.
This brings to mind a conversation dinner I had with an Australian friend Leish at Cavallino’s at Lygon St. (Love their pizzas!) She had just become a homeowner of a 1 bedroom 1 bathroom apartment at Glen Iris. I asked her if she would consider instead to buy an apartment of similar specifications in the CBD at about $450,000. Her reply was rather alarming.
“Mate, I don’t know anybody that would be buying CBD at those prices. It’s crazy. Who are they going to be selling that stuff to? Certainly not to us.“
Considering the Australian regulations restricting foreign buyers from the resale market, investing in a property that the locals will buy is certainly an important point to take into consideration at the moment.
“Bulls make money, Bears make money. Sheep get slaughtered.”
Senior Portfolio Manager
RunningStream International Pte Ltd
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