A Tale of Two Cities' Unit Markets

Posted on 16/05/2007  
One thing that can always be said about the Australian housing sector – it is hard to throw a blanket over the continent and proclaim a market trend for all. At opposite ends of the spectrum, Melbourne’s unit market is recovering, while the Gold Coast apartment sector is still in oversupply. Not surprising, when you consider that five new “ultra high-rise” towers alone added 1,734 more apartments to the Coast market. But more on that later.

A BIS Shrapnel study found that rental growth in Melbourne’s apartment market, which is forecast to strengthen in the next few years, is generating a recovery. The inner Melbourne vacancy rate reached a peak of just under 8% in 2004. The market reached balance in June 2006 with a vacancy rate of 2.7% and as of March 2007, the rate was below 1%. New demand in Melbourne’s inner city market is being driven by overseas students and inner city professionals, according to BIS Shrapnel’s study, Inner Melbourne Apartments, 2007-2012.

This is a turnaround situation from four or five years of a rental stock oversupply and subsequent poor growth in rents and prices. Report author Angie Zigomanis says that on average, 3,900 apartments per year were completed in inner Melbourne in the three years to 2005-2006.

“Weak rental conditions meant landlords had to be very competitive to attract tenants, either from existing inner Melbourne apartments or apartments in less expensive adjoining suburbs.

“As one way to avoid competing for renters, many landlords furnished their apartments and made them available to the short-stay accommodation market.”

Zigomanis estimates that 1,500 inner Melbourne apartments owned by investors are currently being used to cater to tourists and business travellers.

“The removal of this stock from the rental market, combined with strong demand from inner city professionals and overseas students, has soaked up the oversupply in apartment dwellings,” he says. “The Melbourne market is now tight as a drum.”

BIS Shrapnel forecasts a dramatic drop-off in apartment completions in 2007, after investors backed away from an over-supplied market and off-the-plan sales declined over the past three years. The report suggests that even now, many projects will not attract enough investor interest to get started. Add to that the lead time of up to 24 months for new apartment projects and there is little prospect of any new supply in that time frame to ease the tight vacancy rate situation.

Longer term, BIS Shrapnel estimates that Melbourne’s apartment stock will total 48,700 by 2012. This equates to the construction of 1,740 apartments a year over the next five years – quite a drop on average construction levels over the last ten years. The resultant continuing deficiency of rental stock is likely to mean solid rental gains for landlords.

Meanwhile, the Gold Coast apartment sector – the hardest to read of any metropolitan market – is suffering from low sales volumes and at least a year’s supply of new stock lingering in the background. There were 191 new high-rise apartment sales in the three months to February 2007, according to the quarterly Midwood Report. While this was an average performance for the past two years, it was much lower than the August 2006 and November 2006 quarters. The Midwood Report said stock at hand amounted to about 20 months’ supply at current sales rates.
 
The Gold Coast differs from most Australian apartment markets in that it has an “ultra high-rise” segment, those buildings with forty or more floors– namely, Circle on Cavill, Soul, Q1 and Oracle – totalling 1,734 apartments and penthouses. February quarter sales in this category ranged from $555,000 to $2.60 million.

Much of the activity (and media focus) has been on this high end, with Sunland’s mega-tower Q1 attracting record prices for its top drawer penthouses, although some penthouses were being offered in April at prices slashed by up to $500,000. Juniper, developer of the $500 million, 77-level Soul project had to renegotiate early off-the-plan sales as a result of delays in the starting date of construction. However, the company’s managing director Graeme Juniper was quoted as saying these sales were re-negotiated at the original prices. Soul’s 300 apartments start at $1.6 million, with a reported $400 million worth of units sold. Sunland’s $500 million Circle on Cavill (two towers totalling 637 apartments) is being completed this month with 95% of its units sold.

However, the Midwood report also lists 21 high-rise apartment projects and 31 medium-rise and low rise/walk-up projects on the Gold Coast. On the February quarter performance, buyers took up only 13% of the available new high-rise stock, leaving 1,262 apartments unsold. So even with a total population of 530,200 (projected to grow to 600,000 by 2010), the Gold Coast’s appetite for high-rise apartments could be tested in coming years.

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