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Unit oversupply remains an issue in Brisbane CBD
Doron Peleg
19 Aug 2020

The inner-city Brisbane unit market, already hit hard by unit oversupply, continues to remain a huge danger zone for investors since the advent of COVID-19.

Not only is equity risk the major issue for investors, increased vacancy rates and risk to cash flow are also heavily impacting the market.

According to RiskWise Property Research CEO Doron Peleg, things have not improved in the market since the pandemic hit and, if anything, have become worse.

"RiskWise reported in July 2018 that there were 14,813 units in the pipeline in inner-city Brisbane for the next 24 months, being an addition of 20.1 per cent of the current stock," Mr Peleg said.

"Two years later and there is still a very high level of supply with 5,431 units in the pipeline, making up an addition of 5.9 per cent of the current stock."

Analysis by RiskWise in 2018 showed unit over-supply in inner-city Brisbane had created weakness in the market leading to a high level of risk for investors and, therefore, lower valuations and rising defaults on settlements. 

"The issue of oversupply is not a new problem and has been there for a few years and the continuous weakness of the unit market in inner-city Brisbane should raise red flags for developers and lenders," Mr Peleg said.

"Defaults have been rising and will continue to do so.

"One of the key factors has been developers' lack of foresight regarding unit oversupply as well as the impact of lending restrictions introduced from 2014. It seems there has been no methodological and structured risk-management approach including identification, assessment and mitigating action plans to address those risks. 

"This takes us back to the feasibility stage which includes the assessment of the projected fair market value and the likelihood of defaults and their potential consequences. Developers and lenders have to find the right balance between taking risk and making profit.

"COVID-19 has only served to increase the risk. Currently, there are a large number of high-rise properties being offered to a smaller number of investors. This is because there are less investors in the market mainly due to the pandemic.

"The point is that if developers and lenders had put more proper risk-management practices in place, this could all have been avoided."

Mr Peleg said it must also be remembered the value of off-the-plan property could decrease between the original contract date and settlement resulting in capital loss, as the equity in the home could be reduced, and this was well known in inner-city Brisbane.

He also stressed that 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.

He said houses for investors carried significantly lower risk because generally the cohort of renters, especially in the more established suburbs, comprised families and, in many cases, those with permanent full-time jobs. They were also more likely to deliver good medium and long-term capital growth.

Additionally, as rental properties are not fully substitute products with owner-occupied dwellings, there is inherent risk associated with them as they do not appeal to families looking for three bedrooms, with outdoor space, close to schools, transport and employment hubs.

Visit www.riskwiseproperty.com.au

About RiskWise:

RiskWise Property Research was formed in 2016 with the goal of providing property risk advise and research services to help its clients make informed purchasing decisions. 

Its goal is to provide private investors, home buyers, property professionals and institutional clients with detailed risk information to support smarter decision making. Its vision is to be a global leader in property risk rating and research helping its clients to achieve deeper risk insights so they can make smarter property investment decisions.

Visit www.riskwiseproperty.com.au