Brisbane units in oversupply – Angie Zigomanis

According to BIS Oxford Economics, nearly 20 per cent of the apartments in inner Brisbane are sitting empty and more than 50 projects have been shelved or ditched altogether. Angie Zigomanis from BIS Oxford says more than 10,000 new apartments have been abandoned or deferred by developers in the past 12 months.   We talk to Angie to get his thoughts on what is ahead for Brisbane and those investors who have already committed to inner Brisbane.
Kevin:  Nearly 20% of the apartments in inner Brisbane are sitting empty, and more than 50 projects have been shelved or ditched altogether as landlords struggle to survive in the city’s over-supply crisis. More than 10,000 new apartments have been abandoned or deferred by developers in the past 12 months amid waning investor demand, rising construction costs, and lending restrictions, according to a new report by economic forecaster BIS Oxford Economics.
Angie Zigomanis – who is the senior manager, residential property, for BIS Oxford Economics – joins me.
Angie, thanks again for your time.
Angie:  No problem at all.
Kevin:  There’s been a bit of a rise in off-the-plan sales since 2013, allowing for a greater number of projects to reach sufficient pre-commitment levels. Has this added to the problem, or has it actually created the problem?
Angie:  Well, it’s created the problem. At the start of this period, the inner Brisbane apartment market was fairly buoyant, vacancy rates were fairly tight, and those conditions set the pre-conditions for investors to pour into the market, whether it’s local investors, whether it’s investors from interstate, or investors from overseas.
One of the problems you get with the apartment market is that people often buy in in today’s markets, but because it takes two to three years for a major apartment project to work its way through to completion, often that project is being completed in tomorrow’s market, and if enough people are buying in today’s market, then you get the situation you have in Brisbane now where there’s over-supply in the future.
Kevin:  Of course, some people will commit to buying into a project only to find the project doesn’t go ahead because they just don’t reach those levels.
Have you got a feeling about how many people could be impacted by this, Angie?
Angie:  Not really. There are projects, obviously, that are pre-selling that perhaps are unlikely to go ahead, whether it’s projects not getting pre-sales levels or whether it’s the developer business being unable to get finance as well. That’s become an increasing issue as well, just because of the increasing risk that’s emerging for financiers in the Brisbane market. Many are pulling back, and it means that the next round of projects are less likely to go ahead.
Kevin:  The latest CoreLogic Home Value Index revealed a fall in unit prices in Brisbane by 0.6%, pretty small, but still, it is a fall. That was in the past month.
Is that going to ease the situation, do you think?
Angie:  This is the way markets operate, I guess. When markets get over-supplied, prices drop back to induce more demand. But having said that, I think, at current prices and at current supply levels, it won’t induce enough demand. And I suspect you’ll find the prices will continue to fall back further over the next year to two years.
Kevin:  That has to be good news, I would have thought, for anyone wanting to buy an apartment. Wouldn’t you agree?
Angie:  Yes, definitely. It makes prices more affordable and gets people into the market a lot more easily. The flip side of that, I guess, is also it means that if you’re a potential first-home buyer, rents are very attractive as well and may keep you in the rental market longer.
Kevin:  That’s very true.
How many unoccupied dwellings are there in inner Brisbane? Have you got a number?
Angie:  Our estimate is about 17% of apartments, so it’s a fairly high number. That’s an increase from about 11% back at the 2011 Census. The inner-city apartment markets tend to have a high level of vacant dwellings anyway, because you tend to get people from regional areas who have a second home and a bolt hole within inner-city areas where they can come in, see concerts, and what have you.
So, it tends to be higher anyway, but this is higher than you’d otherwise expect, and I suspect a big part of that are recently completed apartment projects that are looking for tenants.
Kevin:  We talk about inner-city Brisbane, but are there any better or worse areas of over-supply, say, coming outside of the Brisbane metropolitan area?
Angie:  Outside of Brisbane?
Kevin:  Yes, some of the suburbs like West End and things like that.
Angie:  Yes. So, within inner Brisbane, we suspect the areas with the biggest supply risk are West End and probably just northwest of the CBD, areas like Fortitude Valley, Bowen Hills, etc., where there are just huge [4:03 inaudible] of supply that are being put online, and the supply is being dominated by investor purchases as well.
Kevin:  Supply and demand is what real estate is all about. Have you got a feeling for how long it’s going to take to adjust so that the market can get back to a bit more balance, particularly the apartment market?
Angie:  We think that will be at least until the turn of the decade, so two to three years out from now, 2020–21, when you’ll start seeing potential rises in rents and things start to get soaked up.
At the end of the day, we’re fairly bullish on the demand side, and on the tenant demand side, there’s strong growth in overseas student numbers, which is a big source of tenant demand. The Brisbane economy is starting to show signs of turning around, and so we’ll see increases in employment in the inner-city areas, and that will attract a lot of young professionals and young professional renters into the city and draw in migration from interstate.
So, we’re actually fairly bullish on the demand side, but just the supply side is very strong. We estimate that there will be over 8000 apartments completed this financial year, compared to a long-term average of just under 2000 per annum. So, this really is a supply story, not a demand story.
Kevin:  So, it’s not a matter of build it and they will come; build it and you’re in trouble. But it’s all about, as we said, supply and demand.
What are we likely to see in the next couple of years? Will these prices continue to fall?
Angie:  Yes, I think there will be further declines. There will be challenges for rents, and I think as new supply continues to come online in the next year to two years, it means that a person who completes a new apartment building may be able to keep the same rents but that will really be attracting tenants from secondary apartments, so people with older apartments that can’t compete in the market will have to start discounting rents.
As rents get discounted, it means the gap between what people are getting in rental income and what they’re paying for their mortgage starts to widen, and there will be people who become increasingly stressed and will end up putting their apartments onto the market.
Kevin:  Of course, affordability is a big driver for sales, and Brisbane is still a very affordable market, I would have thought.
Angie:  That’s right, yes. We’re starting to see Queensland now attract population from the other states again. It’s taken a while because the economy has been fairly weak, and at the end of the day, there’s no point in moving to Brisbane if you can’t pay off a mortgage.
But now the job situation is starting to pick up again, we’ve started to see a big turnaround of people from New South Wales moving up north again, and just the most recent quarters of data coming out of the ABS suggest that’s starting to accelerate.
Kevin:  Angie Zigomanis, thank you very much for your time.
Angie:  No problem at all. Thanks, Kevin.

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