Buying new apartments in Brisbane and Melbourne

Buying new apartments in Brisbane and Melbourne

Talking about the purchase of an investment property opens up all sorts of arguments, discussions and from time to time, polarises the parties involved. It can even spoil a friendly neighbourhood BBQ or coffee catch-up with a friend.

One of the many topics of discussion is whether or not it is a good investment to buy new or off-the-plan apartments in the two major capital cities of Australia; namely Brisbane and Melbourne?

While in the past, the main beneficial reason why an investor would buy a new apartment, before its completion was to save money. As an off-the-plan purchaser the benefit ensued that if you bought early, you would save from 5 and up to 10 percent off the purchase price “at the time” of the acquisition. This was measured against prices of similar completed apartments, on the day.   Developers would offer this reduction in  price in order to secure the pre-sales required to support their construction application with the banks.  As we can see, this relationship provided mutual benefit to both sides.

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The current trend has changed

The current trend however, seems to be going against this idea.  Developers have become greedy and with the support of the financial sector behind them they have been able to increase their asking prices.

In many instances, buyers are paying tomorrow’s market value for an apartment, receiving no added discount as a benefit for supporting a developer with pre-sales in the phase prior to completion . The underlying question is “but why?” I would argue the answer can be found in the increasing prevalence of two highly speculative new client bases:  overseas investors who have come onto the scene and in large numbers and the increase of Self-Managed Super Fund (SMSF) vehicles, set up for local speculators and investors.

Both overseas and SMSF investors are fueling the new-apartment development bubble as has never been seen before. With this in mind, developers and marketing companies have been able to increase:

  • The end property values to account for market forces that has seen a huge upswing in prices; and
  • To pay for the high commissions paid out to marketing agents and the financial sector. Commissions in the tune of 8-10 percent.

The repercussion of industry greed

The outcome of the high prices charged for new apartments and higher commissions than the industry norm is a no-brainer; the losers are the buyers, most of the time.

For years, I have been discussing the need for the Real Estate Industry and watchdogs to tighten controls against this push, but my calls have fallen on deaf ears and the outcome is:

  • We now have an understated over-supply of apartments across Brisbane and Melbourne;
  • The rental market cannot and will not effectively absorb the new supply, which will have an increase in rental vacancies; and
  • Inevitably, valuers will value down apartments to safeguard their client’s interest - the banks; resulting not only in significant reductions in values but also yields.

Where to from here?  

I have been asked by clients, friends and family; where to from here? I have shared the following with them for over 12 months and only now the mainstream are coming to the party.

  • Hold and wait, and wait for another 6-12 months before looking to buy, if you need to buy new;
  • Most of the new apartments are under-engineered, badly built and come with a lot of issues;
  • Have you noticed that most spruikers try and only sell you, new and off-the-plan apartments? And
  • Communicate as much as possible with local real estate agents that don’t have a vested interest in the new development. After all, they may be the ones that will manage the property for you.

Tips for managing your investment

If you do find yourself in a position that you have bought an off-the-plan apartment and your property is in the final stages of settlement; I recommend the following tip, to minimise long term vacancy.

Don’t rely on the selling agent’s “marketing company” to lease your apartment, particularly if they were the leading agency in the sales phase. You only have to ask; how many other investor’s apartments are they also trying to lease out?

Now if you are looking to invest in new apartments, our old and proven theory remains steadfast. Invest in low set building blocks and preferably ones that have no more than three levels.

Be sure to and look out for the next article on: buying in low set building blocks, versus high rise apartment blocks; the winners and losers.  

 

 

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