Find below a guest post from Catherine Cashmore.
I attended ‘ The Block’ auctions on Saturday to assist one buyer who had his heart set on unit ‘1.’ If you ever wanted an open demonstration of Australia’s obsession with all things real estate, this is ‘The’ event, albeit, on auction day, the producers purposely try and keep it exclusive to avoid any leakage of the results. Times of the auctions are not openly disclosed, and those bidding, are required to go thorough the rather cumbersome process of being pre-screened and pre-registered to avoid large crowds of onlookers.
Each year I get requests to bid – usually from investors wanting anonymity. In most of ‘The Block’ renos home buyers are not the main demographic of bidder. The properties typically come with a million dollar ‘plus’ price tags. Most home buyers purchase around the median price bracket (which in Melbourne would fall into the $450,000-$800,000 range.)
Secondly, they are fully furnished which would be more of a headache for a home buyer than blessing. The thought of paying a premium price tag for furniture which is not required and would need to be sold, or stored, makes little sense. For this reason the marketing is weighted towards investors with depreciation schedules and rental appraisals, which on the face of it, are substantial. (See attached.)
It should also be noted that owner’s corporation fees are $8,935 per annum.
Whilst viewers are getting carried away with the interior styling and competitive drama which help make ‘The Block’ the No1 watched program in Australia, very little attention is paid to the immediate surrounds.
This was most evident a couple of years ago when the Richmond terraces were renovated. Located opposite a supermarket car-park and bottle shop, with large unit developments already planned for the same street, those who did purchase face future headwinds when marketing either for rent or re-sale once the initial ‘Block’ furore has worn off.
The last two Block renovations have taken place in South Melbourne. It’s a busy suburb, and Park Street – this year’s locality – is dotted with plenty of commercial pockets. However, it would matter little to a buyer, who would favour being walking distance to the city, Clarendon Street shopping strip, and Albert Lake Park etc – and therefore would be prepared to compromise.
When I wrote an article a few weeks ago on Australia’s obsession with real estate, I mentioned The Block, and warned buyers to concentrate on the aspects they couldn’t change, rather than the interior decor. In doing so, I was paying subtle reference to some research I’d done on the empty plot next door which the council informed me had approval for a 6 story unit development to commence early next year. It was a story the Herald Sun quickly latched onto emphasizing how it will cut off natural light and some city views for each unit – for unit 1, this would include the covered terrace.
As I was only employed to bid on the lower level, I didn’t attend each event – however, in the true flavour of ‘15 mins of fame,’ there are always those in the industry who make substantial efforts, year on year, to bid on each auction and play the usual tricks and tactics placing late bids and so forth, all for the sake of a bit of free promotion.
I question it, because if asked advice by a buyer, I generally try and talk them out of the ‘investment’ – in my mind, there are far better options for the money.
Whilst the depreciation and prospected rent may pay some dividend, would the property really – as was robustly suggested by the auctioneer and agents – gain capital value?
On their own, they are extremely difficult to appraise. The fixtures and fittings for the property ‘type’ are dramatically over capitalised. Unit one contains a huge double integrated fridge, an outside electric BBQ, two ovens, hydrotaps, frameless glass showers, spring-loaded cabinetry, fixed televisions all controlled by an Ipad as part of the package – and this doesn’t even touch the surface. And four bathrooms in a three bedroom ‘apartment?’ I’d suggest the space could have been better utilised.
Some I talked to were considering the ‘investment’ as part of a SMSF – however the responsibility for the maintenance and upkeep of all the fixtures and fittings, as well as the furniture falls at the feet of the landlord. If anything breaks down, the landlord must replace the appliance ‘like for like.’
Others were bidding ‘sight unseen’ over the phone having only watched the show or done the online ‘virtual’ tour. One gentleman investor I spoke to was also seeing the unit for the first time – his wife had done a ‘drive by’ – but had been unable to get in during the open for inspections and reportedly had no time to visit on a private inspection. Pure madness?
Three bedroom, four bathroom ‘apartments’ in mid density blocks aren’t common. The low ceilings, which were not overly evident when watching the program on TV, made the unit feel unusually ‘compact’ and as such, it fails to lose completely, that old ‘motel’ style.
I’m not tall, but given a few extra inches; I would have been able to change a light bulb if needed.
Unlike modern developments, the car park is not underground, and situated at the side, is more representative of the type you’d find in a lower grade apartment lot.
Unit one achieved $1.4 million more or less ‘under the hammer.’ I can’t give insight on the buyer, only to say, the price tag exceeded my own pre-estimate of fair value.
As I said above, finding comparable sales for this type of listing isn’t easy. Assessing if the buyers paid too much is hard considering a significant proportion of the cost is in the furniture. But perhaps, to draw comparison, it’s worth looking at what else you could buy you in the near vicinity of South Melbourne at that level.
1.2Mil – 1.5Mil would purchase a single or double story fully renovated period 3/4 bedroom terrace in one of the better streets of Albert Park, Middle Park or South Melbourne.
The house would come without additional owners corporation fees and as a heritage listed dwelling – in a state which has a CBD fast becoming ‘high rise central’ – would have a better chance of holding value than I would expect from an old renovated motel.
Expected rental return would be in the vicinity of $1000 per week, and using a standard depreciation calculator for the fixtures & fittings, it would be an estimated $4-$5K per year. That’s a pretty lousy yield.
If ‘old’ isn’t your style, the same dollars would comfortably afford a 2/3 story modern townhouse – once again without owners corp fees. Rent would be around $1,200 per week, and depreciation closer to $37,000 per year.
It might not be your personal style – but if given the choice as an ‘investor,’ it takes preference in my mind.
All in all – who are the real winners? Watercress Productions and Channel Nine of course – with or without the success of the auctions, they profit from their venture based on the advertising dollars alone.
