More risks for investors with rental apartments

Print Friendly, PDF & Email

THE coronavirus outbreak is expected to heighten equity and cash flow risks for investors presented by rental apartments that are unsuitable for families.

RiskWise chief executive officer, Doron Peleg said investors had already dealt with a variety of major events associated with rental apartments in recent years, including unit oversupply, credit restrictions and more recently construction defects.

“Last year the news of construction defects created major reputational damage to the whole industry, even in areas which weren’t affected, and now we have Covid-19 which also has a potential impact on property prices and serviceability,” he said.

He said while some investors might feel it was a prime time to buy for long term capital growth, it was highly likely prices would continue to fall.

Strong indications are that a recession is almost certain, with unemployment projected to be 7% by the end of the year. Peleg said the strong connection between employment, population growth and property prices had been clearly demonstrated already in Western Australia.

Population growth is likely to further decelerate across the country. Annual population growth slowed in the September quarter from 1.53% to 1.48%  due to a reduction in external migration.

“With Australia closing its borders and the now dire economic projections, it is highly likely there will be a significant reduction in external migration. If Australia has a relatively high unemployment rate and it is far harder to find jobs, particularly for migrants with no local experience, then obviously not only is the ability to move to Australia reduced but the attractiveness of Australia is also falling,” Peleg said.

“While it is a bit early to say what the price reductions will be, if these projections are correct, they will be highly likely across Australia as unemployment and underemployment materially increase. And this is the first problem for the majority of people when they buy an investment property because the key driver is long-term capital growth and not cash flow.”

Peleg said cash flow was becoming a major risk particularly for rental apartments where renters were generally younger, often single millennials with no children, who also had more flexibility to either stay with parents longer or make changes to their place of residence.

In the inner west of Sydney, about 74% of units are rental properties and these are considered fashionable with the “young and trendy”, Peleg said, who are now either unemployed or underemployed, making the risk of vacancy higher.

“With all the current stock in the pipeline, further increases in stock expected, a significant reduction in external migration and a large cohort of flexible renters who are likely to be materially impacted by the labour market … when you take all of this together, there is a higher material risk for rental apartments.”

In seasonally adjusted terms, dwelling approvals for the December 2019 quarter increased in several states and territories, particularly in Victoria with 26.7% and South Australia with 6.9%.

The Westpac-Melbourne Institute Index of House Price Expectations Index fell 6.6% in March, the largest monthly decline since February last year.