By Steve Waters
At the outset of this Melbourne update, it’s important to understand that it’s a city of market quadrants – and they’re each performing differently at present.
There continues to be a lot of talk about new apartment oversupply in the inner-city of Melbourne, which is the first quadrant, and that talk is true.
Some developers can’t find the buyers to settle their contracts – it appears they’ve simply disappeared.
Developer lenders are also very anxious due to falling prices because there’s just too much supply coming to completion.
The second quadrant however, which are detached dwellings close to the city, are performing very strongly. We forecast some 12 to 18 months ago that that section of the market (once you cross the river out of the CBD) would be buoyant and it will continue to do so this year.
A “regional” question
The third quadrant is the affordability corridor, which is down into the Geelong and Malvern regions, where buyers are getting big bang for their bucks.
Many people have realised that transport infrastructure from these areas into the Melbourne CBD is great as well as the local economies are generally self-sufficient.
There is extraordinary value in these places so people are willing to travel.
What’s interesting about Melbourne is that many people almost classify “regional” as being one hour’s travel distance from the CBD, whereas that’s not the case in Sydney and Brisbane.
The fourth quadrant for us is that “sweet spot” of older units in and amongst suburbs like Sunshine, Sunshine West and Albion, where the population generally stays for the long-term.
We’ve achieved some phenomenal results in these locations with attached dwellings in the low $200,000 price range.
Cash flow is king
Everyone has their own interpretation of what good cash flow is, but at RPG we believe a 6% is the minimum benchmark in today’s environment.
A lot of people think 4.5 or 5% is spectacular but we’re actually easily achieving yields of 6% in these affordable pockets.
Another benefit of these types of units is they have lower costs to operate, including more affordable body corporate fees than other capital cities.
As we head into this year, I think that first quadrant of inner-city new units will continue to suffer.
I can potentially see some administrators and liquidators coming into play, as well as mortgagee-in-possession’s starting to occur, in that quadrant over the next 18 months to 2 years as some developers struggle to meet their financial commitments.
Over the next 6 months, detached dwellings will continue to do well with steady growth, but perhaps not 10 or 15% annual growth like they’ve been used too.
As the year goes on, if we get an increase in the price of money via higher interest rates, there will be a negative impact on consumer confidence and then investors will start to seek out cash flow.
So, wherever you can achieve good cash flow, such as 6% and above in the fourth quadrant that I previously mentioned, those properties will start to climb in value because of that increasing demand from buyers.
Even if we do get interest rate rises, investors need to remember that rates will still be historically low.
A higher rate environment, however, is likely to remove a lot of the speculation out of the market, which will be a good thing.
Investors need to understand the fundamental differences between investor and owner-occupier unit stock in Melbourne, which is more obvious there than anywhere else.
Of course, one of the keys to capital growth is property that appeals to owner-occupiers so investors should always look for these types of properties.
My investment picks for this year in Melbourne would include older dwellings within one hour of the CBD that give good cash flow.
If you’re seeking capital growth over yields, then detached dwellings in the same locations could also be a wise investment selection.