FLAT RETURNS-21 August 2002

Pam Walkley - Bulletin

Investors have rushed into new inner-city apartments in Melbourne and Sydney over the past few years, often in the mistaken belief they could make a killing by way of quick capital gains. A comprehensive study of resales of new apartments in Melbourne over the past 10 years provides the most damning hard evidence of the capital growth myth. The new study by property analyst Charter Keck Cramer of the 3000-plus new central Melbourne apartments sold since 1992 shows the average price gain was 1.3% a year after inflation.

And although the evidence is more anecdotal in Sydney, "for lease" signs dominate the landscape. Rent reductions of up to 40% in the medium-density market have been identified by consultant Herron Todd White, who warns of "ominous market indicators".

Australia's two major capital cities are now tenants' markets, say the experts.

Even the big lenders are nervous. In mid-August, the National Australia Bank warned that a flood of new apartments in Sydney and Melbourne would create oversupply and cause prices to fall.

Investors should only venture into these markets "with their eyes wide open", says Robert Papaleo, director ­strategic research Charter Keck Cramer. "And they should not expect to make quick capital gains even if this is what they are told at property seminars."

It all boils down to supply and demand. Developers have continued to flood inner-city markets with new apartments because there has been strong buyer demand. Big marketing budgets, seminars promising the Earth and interstate selling have underpinned that demand.

What has been left out of the equation is tenant demand. "There has been a dislocation between the sales market and the rental market," says Papaleo. "There are more renters out there but demand has not grown at the same rate as new supply, resulting in higher vacancies, lower rents and falling gross rental yields of below 4%."

One of the major attractions of buying Melbourne apartments off-the-plan is the big stamp duty savings that can be made – often $10,000 to $20,000. Says Papaleo: "In off-the-plan marketing, developers are able to 'sell the sizzle' while vendors of existing apartments can only 'sell the sausage'. This is because prospective purchasers will base their assessment on what is before their eyes rather than representations of what will be provided."

Charter Keck Cramer's study of the 10,200 apartments released since 1998 shows the median prices of two-bedders has risen from $269,000 to $500,000 between 1998 and mid-2002. While there are a number of factors influencing the rise, CKC says it is underpinned by strong demand from purchasers who are willing to pay the higher prices.

"By contrast, the resale market has been characterised by stagnant prices with the majority of resales achieving minimal, if any, capital appreciation over and above inflation," says the study.

This analysis, covering more than 3000 apartments resold since 1992, shows annual capital growth of 10%-plus only occurred in 6.8% of the sample. So much for marketing promises of more than double-digit growth from day one.

The best-performing buildings with regard to capital growth were Gateway Apartments, The Mark on Collins and Republic Tower in the CBD, St James Apartments, The Domain and Domain Hill in the St Kilda Road precinct and Clarendon Towers in Southbank. "Each of these buildings exhibits some point of difference to the broader market by virtue of either quality of location, quality of building or an intangible factor such as views," says Papaleo.

The worst-performing buildings, all of which showed falling capital values, include the Atrium on Hardware Street, 88 Park Street, 1 Exhibition Street, Paramount in Bourke Street and City View on Southbank.

A breakdown of the study showed the St Kilda Road precinct did best – although average growth of 2% a year can hardly be seen as earth-shattering – and one-bedroom apartments also scored better than their bigger counterparts.

Of course, as Papaleo points out, the other component of investment return is rental income. "The market for tenants is becoming more competitive. While there is no bloodbath yet, incentives are creeping into the rental market." He says these "bells and whistles" include furniture, rent-free holidays and more flexible leases. With gross rental returns only about 3.5% to 4%, there is not much room to move.



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