Ten riskiest suburbs for property investors

Doron Peleg
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ROUSE Hill, Gosford and central Melbourne are among Australia’s top 10 danger zones for property investors looking at off-the-plan apartments.

In a period of high settlement and cash flow risk, Riskwise analysis determined the riskiest areas in the country in terms of oversupply, based on pipeline numbers for the next 24 months as well as low demand for rental apartments in relation to that supply.

In Sydney’s fast-growing north west corridor, Rouse Hill has 1,661 new units expected to be delivered over the next two years, a whopping 200.4% as a percentage of units. Mascot’s 804 units equates to 13.3% and Parramatta’s 1,553 at 13.2%.

A little to the north, Gosford’s pipeline 1,859 units is 72.9%.

Melbourne has the highest number of apartments, with 4,744 expected, at 13.6%, and the Docklands precinct next door has 1,307, at 12.0%.

Surfers Paradise on the Gold Coast has Queensland’s highest supply pipeline, with 2,779 units representing 14.0%. West End on the Brisbane city fringe has 1,211 pending units, at 26.0%.

Darwin’s 1,204 units equates to 32.0%, and Adelaide’s 1,266 comes in at 12.9%.

RiskWise chief executive officer, Doron Peleg said property investors should be extra cautious of the high degree of risk associated with off-the-plan units that has increased further during the pandemic.

“The equity risk, being the risk for price reduction that already had been high prior to the COVID-19, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased.” Peleg said.

State Post code Suburb New units next 24 months New units next 24 months as % of units
VIC 3000 Melbourne                4,744 13.6%
VIC 3008 Docklands                1,307 12.0%
NSW 2020 Mascot                   804 13.3%
NSW 2155 Rouse Hill                1,661 200.4%
NSW 2150 Parramatta                1,553 13.2%
NSW 2250 Gosford                1,859 72.9%
NT 800 Darwin                1,204 32.0%
QLD 4101 West End                1,211 26.0%
QLD 4217 Surfers Paradise                2,779 14.0%
SA 5000 Adelaide                1,266 12.9%

COVID-19 has also increased the cash flow risk. Vacancy rates, according to SQM Research, peaked at an all time high in May at 16.2%. They dropped slightly to 13.8% in June.

Rental values have slumped. The 0.5% national fall over the June quarter registered by CoreLogic marked the sharpest decline in two years. Unit rents have been hit hardest, with falls in both Sydney and Melbourne of 2% over the past three months.

Pete Wargent, co-founder buyer’s agency Buyers Buyers, said that units, particularly off-the-plan purchases, still carried a high level of risk of significant price reductions.

“Areas with high unit oversupply carry a very high risk and this is still a major issue in some property markets, for example in Melbourne’s CBD, while the same city simultaneously has an undersupply of family-appropriate properties.”

House and land packages more popular 

High profile issues around cladding and building defects have created enormous reputational damage across the industry, Peleg said. As a result, investors have lost interest in high rise unit developments and are turning to “safer” house-and-land packages suitable for families.

Wargent said that rental markets have been weak for inner-city apartments due to the absence of international students and tourists, and that where possible buyers should look towards more supply-constrained markets and assets with a genuine scarcity value.

“Over the medium to longer term, it’s the land value component of the asset that does the heavy lifting for you and, therefore, buyers should look for a high land-to-asset ratio. The unit oversupply issue has been with us for some years now, and outperformance has mainly been in family appropriate dwelling types in markets where demand is consistent and new supply has been restricted,” he said.

Buyer’s agent and chief executive of Rich Harvey said buying new apartments in outer suburban areas like Rouse Hill “made no sense”.

“While it may be nice to have a shiny new kitchen and bathroom, there is a significant downside price risk as the supply of land for further development is plentiful. Investors and home buyers are far better off seeking apartments in locations where land supply is very low and demand for property high.

“In a market where prices are declining, there is a settlement risk for the buyer if they discover that the value paid for the unit has declined significantly,” Harvey said.

Peleg said investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase. Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.

“Buying into oversupplied areas at a time when the international borders are effectively shut this would only serve to compound risks,” Wargent said.

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