Is the Brisbane apartment market oversupplied? A Wealth Manager’s perspective

The years following the GFC saw Banks and Developers exit the Brisbane apartment market at a rapid rate, mainly due to debt funding issues. The retraction sparked a growing deficit of new property developments and by 2012 the ever-increasing demand for inner-city living saw Brisbane reach unprecedented levels of under-supply. This imbalance combined with the eventual stability of the domestic and international economies, saw a rush to market by banks and developers to fill the supply/demand gap in the Brisbane apartment market.

By 2015, apartment developments in Brisbane were at an all-time high particularly in areas such as Fortitude Valley, Newstead, and West End where council rezoning had encouraged development investment. And so begun the media fear campaign of how you could lose your life savings and your first born if you bought an apartment.

Has price growth slowed in the inner city Brisbane apartment market?

So where are we two years later? Whilst median house and unit prices are not an entirely accurate measure of capital growth, the evidence suggests that price growth has slowed in the inner-city Brisbane apartment market. But despite a cooling in price growth, it seems the demand has not significantly slowed, and most new apartment buildings in the inner ring are still experiencing close to 100% sales prior to completion, including the heavily supplied Fortitude Valley, Newstead, and West End areas.

What effect has price growth and demand had on yields, vacancy rates, and long-term growth?

gross rental yields for Brisbane apartments

It appears that gross yields have remained strong for the Brisbane apartment market at around 4.8%, according to Place Advisory’s Inner Brisbane Apartment report (Dec 2016), and are still outperforming houses in Brisbane by over 1.5% pa. These are outstanding yields for any investment but particularly residential property. By comparison, gross yields in Sydney and Melbourne are between 3% and 4%. High yield rates are important in meeting the holding costs of your property, especially when borrowing is involved, and are a further consideration when building a portfolio and not simply buying one property.

Vacancy rates at the beginning of 2017 for new inner Brisbane apartments remain incredibly tight also at around 2.3%, according to Urbis, or an average of under 9 days’ vacancy per year. There is clear evidence showing new apartments have tighter vacancy rates than older apartments as tenants are opting for superior designs and Miele over Kelvinator. The main concern for off-the-plan high-rise apartment investors is possible long-term wait periods for tenants once their building is completed.

217 vacancy rates for the Brisbane apartment market

Long term growth in the Brisbane apartment market and the link to yield

What about growth rates? There is very little real evidence to suggest there is any difference in growth rates between any style of residential living, be it houses, apartments, duplexes or townhouses. Yes, the old adage ‘the value is in the land content’ seems to be finally put to rest along with the ‘80’s White Shoe Brigade’ spruiking another new house and land development. However, there is very clear evidence showing a high correlation between properties that are closer to the CBD and higher growth rates (excluding the CBDs themselves). This correlation exists amongst most modern cities throughout the world. Therefore, I would suggest that growth rates in areas with large supplies of apartments such as Fortitude Valley/Newstead will remain subdued until current supply levels dry up, before rebounding with a vengeance. Every investment’s capital value is intrinsically linked to its ability to provide future income, and so long as apartments promise good yields, long-term growth rates will remain high, particularly in the inner-suburbs.

Rental demand for new apartments will continue to be high also because more people desire the convenience of inner-city living including our entitled millennials who can’t afford to buy there. In addition, our generation of baby-boomers (the single largest population group) are now being encouraged with tax incentives to downsize. Not that they needed any encouragement as most of them can’t continue to look after the ¼ acre block and house maintenance and would prefer to be closer to the action now that they’ve retired and have time on their hands. Retirees want to be near the cafes, restaurants, theatres, transport, hospitals and the bingo halls. In Brisbane, there is very little of these services once you get out of town. The suburbs of Sydney and Melbourne are well established and enjoy all the services and infrastructure any socialite could want. But if you travel more than 10 kms out of the Brisbane CBD you’ll simply find yourself amongst the cul-de-sacs.

Why are larger property developers land-banking?

So where to from here? Clearly, we have seen a huge supply of new apartments in Brisbane over the past few years, but we have also seen huge demand from both investors and owner occupiers wanting to get closer to the CBD. Over the past twelve months, we have also seen a large reduction in apartment ‘building approvals’ due to developer’s being spooked by bad press and a tightening of lending policy for development projects. Place Advisory reports that as many as 38% of current projects with development approval will be deferred indefinitely. Most larger developers are now land-banking and are focused on selling existing projects. The fear of getting stuck with part of a development has caused concern and pricing competition among Developers which has contributed to the recent stalling of apartment price growth in the more densely populated areas of the inner-city Brisbane apartment market.

current apartment projects with development approval to be deferred

Considerations for investing in the Brisbane Apartment Market

So here are a few things to consider if you had written off the prospect of buying a new apartment as an investment vehicle.

Apartments vs Houses

The trade-off is that you will have to go further out of town to afford to buy a house over an apartment in your price range. For example, if $500,000 is my budget, I can buy an apartment within 5 mins of the CBD but I will probably need to go about 30 minutes out to afford a house. Remember, there is a clear correlation between being closer to the CBD and higher growth rates. Consequently, if I receive only 4% annual growth on my house because it’s in Carseldine and I receive 6% growth on my unit because it’s in Newmarket, my apartment would be valued at a staggering $508,000 more than my house after 20 years.

New vs Old

Australian residents can claim the depreciation on new properties as a deduction against their personal income tax. This benefit reduces significantly after 5 years and altogether on properties that are older than 40 years. This tax rebate can reduce your holding costs significantly and is important when assessing your cash-flow. Also important when calculating your cash-flow are the maintenance costs on new apartments vs older houses. Old houses require painting, fixing of roofs & gutters, maintaining gardens, replacing fixtures and fittings, and that’s before you even contemplate any structural repairs. So not only are gross yields lower on houses, but net yields can be substantially lower. For some investors, the impact of such expenses is too much of a shock for their budget to absorb. Remember, you should buy your investments based on the numbers and not on your emotions.

Do apartment supply concerns apply to all of Brisbane?

So, is there an oversupply of apartments in Brisbane? Well, possibly, in some suburbs. But what does it matter? The only thing that matters to me as an investor is that the yield meets my cash-flow requirements, and I achieve the highest growth rates over time. If I’m sensible, I can stay out of the high-rise multi-apartment buildings and still stay in the high-growth Blue-chip suburbs. As at the beginning of 2017, it is estimated over 90% of all new apartments on the market were part of a high-rise complex comprising of 60 units or more so it is unwise to assume all apartments are created equal. Most inner to middle ring suburbs have an under-supply of new, small boutique style apartments or townhouses that are easy to rent, enjoy high net yields and high growth rates, and are still within most investors budget. Whilst finding these is more difficult, they are definitely out there.

One final point…. I said earlier that inner-city apartment price growth had stalled in the last two years, mainly due to lending policy and bad press. Well it’s old news. If you haven’t heard the ‘over-supply’ story by now, you’re living under a rock. Most savvy investors make a point of listening to what the Cabbies/Uber drivers have to say, and do the exact opposite. There’s a very good reason for this… If everybody thinks an investment is bad, then that’s probably as cheap as it’s going to get. The GFC is a great case in point. In 2009, one year after the Global Financial Crises, the Australian All-Ordinaries Index rose by 39%!

One Comment

Andrew Birchley

Another great artical Stephen!

One advantage of established houses or appartments is assurance as to long term historical growth rates and floor area is often greater in established stock. However, this is quickly erroded by capital growth of ‘trendy’ new open design living, with lower vacancy and leased by professionals who push the yield up.

Another argument i have heard is that in 10-15 years both will be a similar price. In which case it may be location v street appeal v liveability.

I my personal experience it all boils down to strategy and objectives. If the strategy is 15+ years and aquisition is 100% financed than after tax and depreciation the benefits of a brand new trendy appartment will often outweigh buying old stock. There are a few exceptions.

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