HTW Month in Review - March 2011

The HTW Month in Review for March 2011 has the following advice:

"In Brisbane it means check your pricepoints, shore up your rental base and see if you can value add. One sector that achieves all three is near city second hand units. These little treasure chests are normally in a three storey walk up design with a couple of bedrooms and a garage or two. This is all within an easy stroll of the really desirable stuff like shops and restaurants. Think Paddington, Auchenflower, Ascot, New Farm, West End and so on. In fact, draw a line around the CBD at about the 5km mark and start hunting. If you can feed off demand from a nearby university or hospital, all the better. If you can also get close to the café centres then you’re on a winner. It is still possible to land yourself in one of these gems for sub $400,000 and it’s amazing what a lick of paint and some new carpets can do for such little cost. If your dollar is a bit tighter try the same sector further out but close to shops and transport. All in all these units give you plenty of long term upside with capital growth and rental return pretty much a sure thing."

"And now, the caveat. We are witnessing a few eager beavers leaping onto flood affected property in the hopes of landing a bargain. We at Herron Todd White Brisbane have been considering discount rates of approximately 10% to 20% for the new wetlands but it must be remembered that there is now a whole heap of potential purchasers who will take years (if ever) to come back to flood effected property. If the 1974 example is set to repeat, there may need to be a generational change in buyers before the market returns to former glories relative to the non flood bricks and mortar. Make your investment a wise one when you start to consider the long term grow."

Gold Coast:

"Prudent buyers are seeking out prime beachside locations and purchasing both units and dwellings at prices up to 50% discount from there peak in late 2007.

The ‘Buyers Market’ which has been created by and oversupply properties has seen a steady decline in value levels throughout late 2010 and into 2011 with Iocal agents reporting buyers are willing to purchase if they feel a large enough discount has been given. This is very evident with local agents advising cash contracts being offered at open homes which are not subject to finance."

Month In Review

The Herron Todd White Month in Review report, issued each month, often has useful commentary. Some extracts from the September 2010 report:

"Importantly, do not read ‘relatively affordable’ as ‘secondary quality’. It is better to stretch the dollar a bit and buy a dodgy looking second had unit with good bones and quiet position in an area such as Ascot or Toowong, rather than a brand newie in the same areas that is the size of a bathtub and has full exposure to rail noise. The good thing with these units is that they always have a strong rental demand and some value-add potential if you get something that needs a little love.

... there are some areas that you should steer clear of.

The first that comes to mind is on the Redcliffe Peninsula and specifically high rise unit developments. A favourable council hell bent on turning the area into something beyond a sleepy seaside habitat went gung ho with developers to create a mini Surfers Paradise along the esplanade. The result was a number of multi-level unit projects designed to take advantage of the views and the natural attributes that usually have investors salivating. Unfortunately the suitors became a little too enamored and far too many projects came out of the ground, with many units snapped up by out of town buyers for prices well beyond the average local punters cashbook. The result - there is now a glut of these attached dwellings throughout the area. Some initial buyers have lost large money and given the abundant supply on the market and the near zero demand from well informed local buyers, the prospects of growth appear somewhat limited for some time at least.

Gold Coast

Overall market sentiment has remained very slow/ subdued over the winter months, with minimal market activity and some less than impressive sale results. Therehas been a significant drop off in the number of sales and selling prices, and fingers are crossed that demand will increase as the election is out of the way and the weather warms up."

The report then lists recent sales where the vendor has lost money.

The report also states that the Brisbane apartment market is "peak of market" and that the Gold Coast apartment market is "declining" but that the Sunshine Coast unit market is at the bottom of the market. This would suggest that it is best to buy on the Sunshine Coast, than in Brisbane or the Gold Coast.

The Studio at St Lucia near University of Queensland

Last month, I wrote about The Studio development at St Lucia, located very close to University of Queensland. The developer released one of the two buildings to the market, and it sold out about 25 apartments in a week with no marketing.

There was an interesting comment about The Studio in Herron Todd White's July 2010 "Month in Review" as follows:

"High demand rental areas with reasonably assured income are a safe bet and one of our tribe suggested St Lucia is a good place to park the dough. The nearby university and ready access to facilities add up to strong demand. One development is claiming a 6.5% return on a $440,000 outlay for a double studio apartment design where both tenants share kitchen facilities. It’s geared towards cashed up, overseas students willing to part with over $250 per week per studio, which could prove to be a tall order. Our advice, if you’re interested in this type of investment, is to consider all options. Second hand multi bedroom units are offering a solid return and, more often than not, better capital growth potential compared to new stock. Just make sure you talk to one of our valuers before proceeding headlong into any under researched option."

Talking Up A Dead Market on the Gold Coast

Real estate agents are always the optimists. Take this story in the April 3, 2010 Courier Mail (a newspaper that relies on real estate agent advertisements for its profits, so you will only read positive stories in the Courier Mail about real estate). The story is about the Gold Coast off-the-plan apartment market, and is titled "New apartments to dry up". In the story, Julian Sutherland, a director of Ray White Surfers Paradise, says "History will show that buyers who put their foot on product at today's prices will benefit significantly when the supply constraints diminish over the next year or two."

Compare this with a report from March 31, 2010 from Herron Todd White, who are independent registered valuers. In response to the indicator: "Are New Properties Sold at Prices Exceeding Their Potential Resale Value", HTW responds for the Gold Coast apartment market: "Very Frequently". See page 51 of the report.

So, if buying a new apartment on the Gold Coast off-the-plan or recently finished, take care with what real estate agents tell you, because despite Julian Sutherland's positive views, the real story may be otherwise. And Julian earns his commission from selling off-the-plan apartments on behalf of developers, so he is not in any way independent.

HTW also reminds us:

"Like anything in the current economy, when investing in a holiday home, you need to take a softly, softly approach. You need to take your time, look at the fundamentals and make sure that they all add up. With the level of choice out there, it is even more important to select well, remembering profit is most often built into the purchase rather than the future sale."

Brisbane Report

"The Redcliffe peninsula was a stellar performer through the 2003 boom. The pointy end of Brisbane’s northern beaches appeared to be an undiscovered wealth of natural riches that went from obscurity to belle of the ball. Council was gung-ho in getting plenty of capital invested in the area and, on the whole, it has awoken this sleepy centre. The downside is the current and continuing oversupply of new units in the area, particularly in the high rise sector. Local government took on a flexible approach to development submissions where many projects were assessed on an individual basis with such items as public space contributions affecting the allowable density of a site. Much of these large scale attached unit developments also take advantage of water views and a café lifestyle that drives demand in so many other centres. The area saw a rush of investors from all around the country eager to take advantage of this now revealed gem. Unfortunately, oversupply is knocking the wind out of the areas sails (and its sales). Capital growth for new unit buyers has been a touch subdued and it looks to continue in this disappointing vein for a little while yet.

A surprise disappointment has been the multiple tenancy properties in greater Brissy. Multi room student complexes, genuine purpose-built flats buildings and boarding houses haven’t sparked as expected over the past year. The income sure looks good but its fair to say that some steam has escaped the rental market and future income potential is a touch more tarnished than it was 12 months ago. These properties probably have some good potential in the long term as long as you stick with the fundamentals - good location and a ready tenant base.

Infrastructure upgrades are another area that has lowered buyer expectations in locations that deserve a little more respect. Kedron is a good case in point. Almost overnight the Northern Busway turned sections of the suburb into a dust laden construction site – not the thing you necessarily want to wake to each day. The works have caused quite a bit of inconvenience and put off a few purchasers. The upside for those willing to take the plunge and grin and bear it is that, if finished right, these areas will benefit from improved transport access and useable community infrastructure."

HTW October Report

Sunshine Coast Report

"The sectors where we have seen biggest falls have been based generally around discretionary/lifestyle properties. Certainly the upper price level homes and units fall into these categories. Instead of people selling their principal place of residence, they are selling the holiday house and subsequently we have seen a significant softening in the values. In some cases, these values have fallen well below replacement cost.

There is an interesting change in the gap between lower priced property and upper priced properties. For example, a property that was worth approximately $350,000 in say 2005, is now worth in the vicinity of $400,000. Whereas a property that was previously worth $1,300,000 in the same period is now worth $1,000,000. This gap has shrunk significantly, which would lead us to believe that something has to give. Whether that is the lower priced properties are to fall in values, or the upper price properties are to increase in values, is anyone’s guess."

Gold Coast Report

HTW October report says:

"Over the last 9 months, it would be of no surprise that the new apartment market has been one of the hardest hit. Scanning the Surfers Paradise and Broadbeach skyline, it would be fair to say that there is currently limited activity on the building front, with a lack of crane activity. Developers are still holding apartment stock from residential developments (predominantly medium and high rise projects) completed in 2008, purely because the resale market (of near new apartments) is too competitive on price.

A large proportion of new apartment product on the Gold Coast is sold to interstate and to a lessor extent, overseas investors at price levels which are considered to be in excess of local market values. The premium paid for new apartments is often not sustainable on resale, especially within a short holding term.

The sustained softening in values of new apartment product is not limited to Surfers Paradise and Broadbeach, but is also apparent in the northern and southern parts of the Gold Coast. The new and near new apartment market in Coolangatta has been underperforming for some 18 months now. The completion of a number of medium and high rise projects towards the end of 2007 and early 2008, in conjunction with the increase in supply of near new apartments coming back to the market at that time, has had a signficant negative effect on market values. Market conditions are in such a state at the moment, that a new apartment project nearing completion is likely to see a signficant settlement risk (ie. purchasers may forego their deposits and not settle because of the significant drop in market values). In this development, of the 43 contracts signed “off the plan”, 41 were signed in 2007, in much better market conditions.

From Southport to Hollywell, the new medium and high rise apartment market is also soft with similar prevailing factors as to those experienced in the central and southern parts of the Gold Coast. Stock levels are high and sales rates are low. The resale apartment market is considered an impediment to these stocks levels reducing. Developers however are utilising innovative marketing techniques, in conjunction with professional marketeers which entice potential buyers to purchase. Rental guarantees, cash backs, and fitout incentives are just some of these. These incentives are generally built into the price."

Hope Island, which is considered an established good to prestige quality residential house location, is really yet to prove itself for medium to high density apartment living. Over the past 5 years there have been a number of large apartment projects built in this area, achieving only modest sales performance with most projects retaining considerable developer stock, some in the hands of receivers. There is currently approximately 300 apartments (in new projects) for sale in the Hope Island locality."

Valuer's Report

Herron Todd White Valuers report in their August 2009 report that the Brisbane, Gold Coast and Sunshine Coast apartment markets are at "the bottom of the market". They report no change in any market indicator factors over the past month.