Danger Zones Apartments

Oversupply of ‘off the Plan’ units – Danger Zones

RiskWise Property Research has identified the Top 10 ‘Danger Zones’ areas in Australia for high settlement and cash flow risk.

RiskWise CEO Doron Peleg said property investors should be extra cautious of the high degree of risk associated with off-the-plan units, that has further increased due to the 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, as per SQM, are at an all-time high peaking in May at 16.2 per cent. 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.

StatePost codeSuburbNew units next 24 monthsNew units next 24 months as % of units
VIC3000Melbourne               4,74413.6%
VIC3008Docklands               1,30712.0%
NSW2020Mascot                  80413.3%
NSW2155Rouse Hill               1,661200.4%
NSW2150Parramatta               1,55313.2%
NSW2250Gosford               1,85972.9%
NT800Darwin               1,20432.0%
QLD4101West End               1,21126.0%
QLD4217Surfers Paradise               2,77914.0%
SA5000Adelaide               1,26612.9%

Pete Wargent, co-founder of Buyers Buyers, a national marketplace now offering affordable buyer’s agency services to all Australians, said that 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, for example in Melbourne’s CBD, while the same city simultaneously has an undersupply of family-appropriate properties” Mr Wargent said.

Mr Peleg of RiskWise said that 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 falling 0.5 per cent in the June quarter – the sharpest decline in two years. In addition, unit rents have been hit the hardest with falls in both Sydney and Melbourne of 2 per cent over the past three months.

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 of Buyers Buyers noted that uncertainty in the economy has been heightened in 2020, and that buying into oversupplied danger zones areas at a time when the international borders are effectively shut this would only serve to compound risks.

Mr Wargent said that 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.

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.

“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”, Mr Harvey said.

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

Before you go ahead to buy ‘off the plan’ units in one of these danger zones, think twice and consult thrice.

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