Melbourne’s apartment glut builds

A few weeks back I reported how Melbourne rental vacancy rates, as recorded by SQM Research, have ballooned to 4.4% – a six year high:

Yesterday, the Sunday Age published an interesting article, Rental squeeze begins to ease, which adds some colour on the rental apartment glut that is developing in Melbourne.

MELBOURNE’S rental market has turned in favour of tenants with vacancy rates – particularly for high-end apartments – hitting a six-year high.

Apartments in St Kilda Road and Docklands have been most affected thanks to a construction boom that has flooded the area with new units whose owners are struggling to attract renters.

The glut should lead to cheaper rents and more choice as thousands more units are added over the next few years.

Last month, 550 apartments – more than one in five – were vacant in the prestigious St Kilda Road precinct.

Below is the SQM Research chart for the St Kilda Road precinct:

The vacancy rate in Docklands has nearly doubled in the past year, with more than one in 10 rental units now empty, according to SQM Research.

Below is the SQM Research chart for Docklands:
Although much lower than St Kilda Road and Docklands, Southbank’s vacancy rate of 6.1% is also well above the Melbourne average according to SQM:
Back to the Sunday Age article.

”Supply has run way ahead of demand. Melbourne is experiencing what regularly happens on Queensland’s Gold and Sunshine Coasts,” SQM managing director Louis Christopher said.

With a vacancy rate of 3 per cent representing a ”balanced” market for tenants and landlords, the figures show conditions are shifting in favour of tenants after years of the inner city reportedly being in the grip of a rental crisis.

The blowout is driven by a surge in the construction of off-the-plan apartments, re-creating many of the conditions that prompted the 2003-04 market slump.

But tenants don’t have the run of the market, with rents yet to be affected by the swelling supply…

Indeed, according to Victorian Government data, real Melbourne rents have so far held up, growing by 3% since March 2009 after a strong run in 2007 and 2008:

But Melbourne’s housing supply is set to continue increasing at an uncharacteristically high rate from here, owing to the large amount of dwellings construction in the pipeline. Β To put it mildly, Melbourne’s rents will be very lucky to track inflation over the next few years.

Back to the article.

…analysts warn rents will come under increasing pressure as the number of apartments in the central city swells by 40 per cent over the next three years.

”We estimate that 12,000 new apartments are under construction right now or are very likely to be built by 2015,” said Robert Papaleo, research director for Charter Keck Cramer. ”Forecast population growth won’t be enough to keep up with the rate of new supply, especially in the CBD and Southbank.”

While owner-occupiers have bought some of the apartments, the vast majority of these off-the-plan projects were targeted at investors, often from overseas.

According to the latest Tax Office data, Melbourne had 290,000 property investors in 2008-09, with above average concentrations in the inner-city areas of Southbank, Docklands, and the St Kilda Rd precinct. Given most of these investors are negatively geared, and Melbourne’s gross rental yields – at 3.7% for houses and 4.3% for units – are already the lowest in the nation and unlikely to see strong growth over the foreseeable future, it will interesting to see whether the bulk of Melbourne’s investors choose to remain in the market or exit en masse.
Back to the article.
The SQM Research figures also point to a general easing in conditions in the rental market across Melbourne, with properties available rising to 16,000 in December, compared with 13,000 in 2010. The city’s vacancy rate is now 4.4 per cent, the highest since 2005…Peter O’Brien, head of property management for Metropole, said it was now taking longer to lease properties and landlords were having to be more conservative in asking for rent increases.”‘[It’s] been a real shock to me because I’ve done 19 years in real estate and I’ve never experienced it this quiet in January before,” he said.”‘This time of year in the past rentals used to be able to get $20 to $30 more a week than what the property would be if it was vacant in October, but this year it’s pretty much staying the same. We’re not getting that extra money because there’s not as much demand.”

Shocked? You’re not reading enough, Peter. MB has been forecasting this for a year. The Age cherry picks a few statistics to give the story some hope but I suspect within another year or so the headline will more likely read “Oversupply hurting Melbourne property prices”.

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Comments

    • I just check my map and I can confirm that Sydney is a completely different city to Melbourne. They are miles apart.

    • Unfortunately in this respect, yes.

      Though I think there may be some localised gluts of ‘luxury’ apartments in areas like Haymarket/Ultimo, as construction on High Rises still seem to be going apace.

      • there’s going to be a glut of apartments in the Wolli Creek area of Sydney soon. Meriton just opened a 500 unit complex and there are another five separate construction sites for high density apartments that are all within 6-12 months of being completed.

      • Yeah, I see them on the way to work every morning. There’s an incredible amount of building going in there.

        I still see it as an odd location for that sort of density, I don’t think it’s close enough to the city to really make sense. It’s what you’d expect to be going into the inner west, where the demand really is, if the local zoning rules would allow it.

    • If you travel by train on the North Shore line, you can count at least 20 cranes.
      .
      I guess these have been pre-sold to overseas Chinese investors and our own mega mortgage mugs.
      .
      I would wait until settlement time before I count my chickens though.

  1. It’s a shame most of the oversupply is in areas/types of accommodation that I’m not interested in. Docklands in particular has a bad reputation as a windy and isolated place with undesirable apartments; friends of friends bought there some years ago only to find that the walls were really thin and the fittings were quite poor.

    It isn’t just city apartments that are suffering from high vacancy rates either, places like Point Cook and Werribee have really high vacancy rates too. If you look at the SQM site a lot of those outer suburbs have curiously high levels of rentals available – wouldn’t want to be trying to rent a McMansion out right now!

    • The Sacked Wiggle

      was talking to someone who lives at docklands who said much the same thing. Also it seems many apartments are serviced apartments (corporate owned?) for itinerant punters who turn up on weekends or for major sporting events. These punters are in party mode and run amok which irritates 24/7 365 days a year apartment occupiers.

      • I work in Docklands and it’s a terrible place in winter – cold, windy and desolate. It’s reasonably lively during the day in warmer months, but quietens down very quickly once people leave work.

      • There are hundreds of Grand Mercure serviced apartments scattered all over the towers at Dicklands. They are a real nightmare to manage. As far as I remember the apartments are owned by all sorts of investors who couldn’t sell them in the past.

        On top of that you have a whole block of Quest serviced apartments next to the Ethihad Stadium.

  2. Well as Leith says this has been predicted for a over a year by MB and like commentary.

    I am pleased to see the facts in the stats supporting the predictions.

    Also, I will be interested to see how much property comes online after the Tax Year in June!

    Won’t be much black left in those negatively geared loss making machines!

    TM.

  3. Apartment glut in Melbourne!!!!!

    Writings on the wall since early 2011, one wonders who buys these off plan apartments, with a 4% gross yield and with no hope of capital gain in the medium term, local investors won’t, FHBs probably want to but can’t really afford, that leaves O/S buyers and investors who are`having to deal with high AUS$.

    For lack of pre-sale, it won’t surprise if some of these mega residential developments in Southbank/CBD, fail to proceed and those have already commenced, stall.

  4. Im not familiar with Melbourne maybe you can paint a picture for us for the ones who have yet to visit.

    Are these apartment blocks isolated and not mixed use?

    Is Melbourne building Ghost “suburbs” like China’s ghost cities in the sense that you enter a suburb and its just towers of apartment blocks with nothing else?

    How far are these towers from the CBD?

    Thanks!

    • The large apartment blocks tend to be close to the CBD (within 3kms) in areas like Southbank, Docklands, StKilda Road and even inner South Yarra. But Melbourne is also building lots of low rise in the inner and middle suburbs, some 20kms plus from the CBD.

      On top of apartments, Melbourne has a lot of detached housing construction in the pipeline in outer surburban and ex-urban areas.

      Victoria, which represents 25% of the nation’s population, has been building roughly 35% of the nation’s homes, with much more in the pipeline. Hence, my concerns about oversupply.

    • You could make a reasonable argument that we’ve become a satellite international ghost city for the chinese, especially where high density developments are concerned. Take a stroll through any of these precincts after dark and there are very few lights on.

      A friend with very strong links says it’s a combination of the reported 15-20% annual money supply growth and the proceeds of the black economy looking for a place to hide. So in essence, as a nation, we’re swapping prime real estate, hard assets and businesses for printed money and in many instances the proceeds of crime.

      The media stories on foreign buying have ground to a halt. Nevertheless, many developments are still being funded by Asia. There are three high density suburban jobs being completed in the inner west, funded this way, without a sale board or piece of local advertising in sight.

      Given the large scale foreign interests in these projects, it’s hard to say what the outcome may be. If they have no intention of using or letting them, you’d think there would be no impact on the supply side. On the other hand should they decide to bail, it could be carnage. I’m told by said contact that many Chinese are now far more interested in the US, given the affordability and FX issues.

      • “I’m told by said contact that many Chinese are now far more interested in the US, given the affordability and FX issues.”

        Agreed. For all this talk about “smart Chinese money” being invested in Australia, if the money was really so smart it wouldn’t be investing in a country with a record high exchange rate combined with close to the highest real estate prices in the world. That’s the definition of stupid money.

      • +1 to all you are saying. As an Aussie who has lived in China for a long time, I’d agree with your friend’s comments. It will be interesting to see what the Chinese do with their Aussie real estate investments, especially if they have also amassed significant real estate holdings in China, and the down turn in both countries continues or gathers pace. I wouldn’t call a lot of Chinese smart investors, as many are still very new to it (no doubt there are many who are, but not in general, just yet).

        Foreign purchasing of residential real estate should be strictly controlled and monitored, and I for one, would never consider buying residential real estate while it isn’t, as the amount by which they distort the market is unknown, as is the threat they pose to it and our wider economy, should they decide to exit en mass.

  5. Melbourne is going to hit the wall. May take a year or two but steep declines in price seem inevitable, especially considering the fact that a lot of these properties are IP’s.

    I cannot see this not have an impact on other States. Contagion seems likely.

    I’m moving away further and further from the slow melt scenario. Economy down, mining profits revised downward, unemployment up, banks’ funding costs up, China faltering…

  6. 2011 was the first year I didnt put rent up on my IP in the CBD, following the manager’s advice. On top of that I got a letter from the council asking if I object to a new 69 storey behemoth in the area.

    LOL

  7. If the Chinese are buying 50% of these apartments and keeping them empty, then it makes sense for council to approve twice as many as would otherwise make sense.
    You see if the number of approved dwellings was set to suit a given infrastructure level then this would historically be calculated on the basis of people actually living in the dwelling and using the infrastructure. But if Chinese owner are not using the infrastructure then the restricted number no longer makes sense.

  8. GunnamattaMEMBER

    OK Guys, I see the tenor of the conversation. Melbourne is going to melt somewhere sometime.

    I am an Australian who has worked OS for 9 years, and is coming home. I come originally from country Victoria, but am not wedded to any particular state or region. I have a wife and kid (5). I figure I will just find whatever work is available when I get there – I am a business journalist but there is little point in getting into that in Australia. My question is – where should I be looking to buy within the next six months.

    If Melbourne melts will Geelong get a kicking too? Or Ballarat? Or should I opt for the sun and look at Sydney, Brisbane, Sunshine Coast or Gold Coast? (will they get a kicking?)

    Oz has about the most ridiculously expensive housing in the world, and the currency is high. But how does someone come back home into that?

    • maybe rent for a while? Other than general trends I dont think anyone really knows what will happen with house prices, besides the Govt can still drive them to an extend if they want.