Short term letting and Airbnb

It appears that in Queensland, it is difficult, if not impossible, to prevent lot owners in a strata titled building from renting their apartments via short term rental services such as Airbnb.

A recent decision of Lynkim Lodge [2016] QBCCMCmr 419 (14 September 2016) supports this.  See decision here.

However, most residential buildings prohibit the use of lots for commercial or business purposes.  When does renting an apartment on Airbnb stop being a residential purpose and become a commercial purpose?

In NSW, there is an action group trying to protect residents of apartment buildings from the dangers of short term rentals.  See NeighboursNotStrangers.  See also here.  They report that apartments in buildings with high short term rentals will drop in value and that there are higher body corporate costs.

Big Discounts to Lure Chinese

On page 3 of the Australian Financial Review on 15 December 2016 is a story titled "Big discounts to lure Chinese unit buyers."  It says that property developers are discretely offering discounts on new apartments in Brisbane and elsewhere to Chinese buyers, in a sign that lending restrictions and oversupply are beginning to affect prices.

Price discounts of up to 7% are being offered on Chinese property website fang.com.

An example is given of discounts on apartments in the Brisbane One complex near South Bank.  For a two bedroom apartment of 86 sqm, there is a $40,000 discount, so that the price is now $675,000.  To me, that discounted price seems to be over-priced!

"The market has slowed down a lot over the past six months and recently the only deals that are moving are those with big incentives."

A real estate agent reported that a number of his clients in Shanghai had been unable to obtain finance and therefore could not settle, and so lost their deposit.

Air Space and Common Property

A recent High Court decision supports a decision by a body corporate that did not allow an owner of an apartment in Noosa to join two balconies.  Doing so would appropriate air space which is common property.  The law in Queensland requires such an appropriation of common property to be approved by a vote of all owners without dissent.  If the body corporate in a vote denies that approval, and such a decision is unreasonable, then it can be overturned.  Here, the High Court said it was not unreasonable to deny an application by an owner to appropriate common property air space.

See High Court decision and this good article.

In contrast, see this recent decision where a body corporate's denial was found to be unreasonable.

Brisbane Rental Yields

The resale market for apartments in Brisbane at present is slow.  There are bargains if you are buying, and it is taking a long time to sell if you are a seller, and often the seller is disappointed with the sales price. 

At present, for apartments in Brisbane that are being sold resale (that is, not by the developer off the plan), the sales prices are decreasing.  Rents are also decreasing, as there is an oversupply.  This is a generalisation, and does not apply to all apartment types or all areas.

I have recently studied the Indooroopilly area.  The gross rental yields are good.  For reasonable quality 2 bedroom apartments, prices have dropped about 10 to 15%.  So apartment that were selling for $485K to $530K last year are now selling in the range of $425K to $500K, with most sales being about $450K to $465K.  Some vendors are selling for more than $100,000 less than what they paid.  The rents for these apartments have dropped from a range of $520 to $560 a week to $480 to $510 a week.  New developments with smaller but modern apartments are doing promotions such as 4 weeks free rent.  On an apartment that I own in Indooroopilly, I am getting a gross yield of 5.7% , where the lease was signed last week.  

Small city apartments are struggling, esp those that are rented in short term rental pools.  I have seen one apartment building in an Accor rental pool where net returns (after rates and body corporates etc) on large one bedroom furnished apartments have dropped from $13,000 a year to less than $5,000 a year. 

Declining Apartment Market in Brisbane

The September HTW Month-in-Review report suggests that for Brisbane, it is time to selling apartments and buy houses.  I have noticed that prices for apartments being resold are soft.  An above average apartment that was sold off the plan in 2007 for $550,000 is lucky to sell today for $470,000.

See attached from HTW (click on image to enlarge)

Brisbane Apartment Prices Up Slightly: RP Data CoreLogic report for May 2016

Brisbane apartment prices (to 31 May 2016):

May 2016 - up 1.3%

Quarter - up 0.8%

Year to Date - up 2.3%
Year on Year - up 2.4%  (Sydney is up 15%, Melbourne up 8%)
Median price based on settled sales of Brisbane apartments over the quarter - $385,000

Brisbane real estate agents say "sell now!"

I receive many newsletters and emails from real estate agents in Brisbane, especially those who specialise in Brisbane apartment resales.  All are advising that now is the time to sell, not the time to buy.  Some examples:

Position Property, Brad Munro:, Autumn 2016 newsletter

• "There is no denying that there are concerns over just how many apartments are being built across Brisbane."
• "The concern I have is that many of these developments are being sold anywhere from 80% to 100% to inventors.  Many of these buildings have 200-300 or more apartments -- there needs to be a lot of tenants to fill them all."
• "Rental prices will decrease which then affects the investment return for the investor.  Even now, with only a limited number of these developments being finished, the rental prices are down from what the investor was promised.  I believe there is more pain to come."
• "There are fewer buyers in the market."
• "I am really concerned as to what the next 3 years has in store."
• "I have no doubt that selling in the next 6 months is going to achieve a better result than waiting until next year."

Tessa Residential CBD Market Overview

• "We anticipate a stable and consistent market place in 2016..."
• Oversupply "is a reality throughout suburbs such as Newstead, Bowen Hills, South Brisbane and West End and as a result is having an impact on the rental market with rents across the City starting to soften."
• "We believe 2016 will represent the optimum time for sellers who are considering cashing in on the improved market, which has continued to grow since June 2013."

So sell now if you are thinking of selling in the next 3 years, but don't buy now -- wait till next year!

Brisbane apartment oversupply?

Will there be an oversupply of apartments in Brisbane?  In certain geographic areas, and for certain styles of apartments, I think that the answer will be yes.  Some clear reasons for oversupply include:

• extremely high level of construction of high rise apartments in some areas, many with a large number of small apartments
• low population growth
• apartments targeted at investors, not owner occupiers, so a more limited market segment of buyers and renters
• apartments being constructed in second and third tier areas.

However, I don't think that all the apartments currently "in progress" will actually be built.  This includes apartment projects that have good pre-sales and where "construction has started".  This is because:

• some developers are unable to obtain the level of finance needed to commence the project
• construction costs have increased dramatically, especially for union built projects, and so the project is no longer viable, even if the project is sold out
• simply because the site has been cleared, and some work has started, does not mean the that project is underway -- it may never be built.
• the number and percentage of presales in a development is often overstated by the developer in advertising and market surveys, and so the developer will not in fact be able to obtain finance at all.

So I think that the level of oversupply may be overstated.  There will still be oversupply, just not as bad as some people are predicting.

There are other risks in the high-rise apartment market:

• off-the-plan buyers may have trouble settling, because valuations may be lower than contract price, because banks are not lending to offshore buyers, and because banks are requiring a higher cash contribution.
• rents are likely to fall, which means that valuations will fall
• some projects are overpriced, and it is likely that after settlement sales prices will be less than  the contract price
• some constructions companies are in financial difficulties, and so are cutting corners -- the end product many be different, and lower quality, to what is expected by the buyer
• many buildings are being built close to other buildings, impacting light, view and ventilation
• foreign buyers may evaporate.

The question in my mind is whether this will impact the high quality buildings in good locations that have large apartments with good aspect?

HTW view on Brisbane apartment market

There has been a lot of talk about our inner city unit market with an oversupply situation that’s graduated from 'looming' to 'inevitable'. This sector is a huge concern. There are still heaps of projects that are yet to come online or are in the planning phase. They are also predominantly investor driven and this could be a recipe for a lot of heartache – particularly as a large percentage of buyers are interstate and international investors. Add to this the tighter restrictions on lending to foreign investors and you can see where it might all be heading. As we’ve been saying for some time – in terms of inner city units, the best per formers are, and will continue to be, those projects designed with owner-occupiers in mind.

If you’re wondering how tenant demand is tracking, we can con rm current data shows vacancy rates for houses at 2.5% and units at 3.2% (unit vacancy increased by 0.3% year-on-year). The combined  vacancy rate for all property types is 2.7%. The general rule is any result below 2% demonstrates an under supply of rentals, 2% to 3% seems balance, and over 3% represents oversupply. From the numbers above, it’s easy to recognise where the weak sector is in the market.

See June Month in Review

Glut of one bedroom apartments?

Many of the new apartment buildings have a large number of small one bedroom apartments, that have been sold to investors.  These investors are hoping to rent them.  In the past, a one bedroom apartment gives a good rental return relative to purchase price.

However, at present, there is a problem.  There are too many one bedroom apartments.  Owner-occupiers prefer two bedroom  (or larger) apartments or houses.  There is less demand for short term rentals at present, where a one bedroom apartment was a good alternative to a hotel room.  And most young Brisbane renters prefer to share and rent large apartments or houses.

Some one bedrooms are sold without a car park, making them even less attractive.  In my view, a one bed with no car that is 60sqm or less in size is worth about $310,000.

If rents go down, which they will, then capital values will fall.

There may be one exception here.  Some of the riverfront older apartments, which have larger apartments (e.g. a one bedroom over 70sqm) seem to be holding up well.  See for example this apartment and this apartment in Admiralty Towers

Recent Apartment Sales in Brisbane 4000

Here are some recent sales (all early 2016) with actual sales prices of apartments in Brisbane Postcode 4000.  These are all B and C quality buildings, and so expect to pay more for A quality:

• Skyline, Apt 91, 30 Macrossan Street, 3 bedrooms, 2 bathrooms, 1 car - $747,000
• Skyline, Apt 261, 30 Macrossan Street, 3 bedrooms, 2 bathrooms, 2 cars - $800,000
• Skyline, Apt 41, 30 Macrossan Street, 3 bedrooms, 2 bathrooms, 1 car - $731,500
• Festival Towers, Apt 3605, 2 bed, 2 bath, 1 car - $529,000
• Festival Towers, Apt 4006, 2 bed, 2 bath, 1 car - $570,000
• Festival Towers, Apt 1805, 1 bed, 1 bath, no car - $342,500
• Festival Towers, Apt 2503, 2 bed, 1 bath, 1 car - $499,000
• Charlotte Towers, Apt 508, 1 bed, 1 bath, no car - $350,000
• Charlotte Towers, Apt 2902, 2 bed, 2 bath, 1 car - $540,000
• M on Mary, Apt 3204, 1 bed, 1 bath, no car - $356,000
• M on Mary, Apt 607, 1 bed, 1 bath, no car - $360,000
• M on Mary, Apt 2609, 1 bed, 1 bath, no car - $327,000
• Felix, Apt 303, 2 bed, 2 bath, 1 car - $600,000
• Meriton Herschel St (Infinity), 2 bed, 2 bath, no car - $580,000
• Meriton Soleil - 2 bed, 2 bath, 1 car - $575,000
• Vue, 92 Quay St, Apt 2301, 2 bed, 2 bath, 1 car - $460,000
• Vue, 92 Quay St, Apt 2602, 2 bed, 2 bath, 1 car - $437,500

Has the Brisbane new apartment crash started?

On 10 March, the AFR reported that there will be a "very messy end" to the apartment boom.  See AFR story here.  It says:

""In Melbourne the oversupply will be significant, in Brisbane it will be worse. It is an accident waiting to happen," said BIS-Shrapnel managing director Robert Mellor at the group's six-monthly Building Forecasting Conference."

Has the end already started?

Let's look at a recent apartment project in Brisbane, that recently completed -- The Milton at 55 Railway Terrace, Milton.  Some examples of the disaster there:

• Apartment 1302 is listed for sale for 10% below in the initial price, at $365,000.  For a one bedroom apartment, looking West, which has a 55 sqm internal floor space, and a main bedroom that is only 3m by 3m, and no car space, $365,000 is expensive.  Rent is estimated by the selling agent to be $450 to $460 per week unfurnished, which seems to be optimistic.
• Apartment 2901 - one bedroom, is not even listed at a price -- "make an offer"
• Apartment 2709, which is four bedrooms, if it sells at all, will sell for a huge amount less than the current owner has paid
• Apartment 2005 is listed at $1.1M, which is very high for a 3 bedroom apartment in Brisbane that is only 123 sqm -- you can buy luxury two bedroom apartments elsewhere that are this size and at a lower price, and it only has a narrow tandem carpark
• Apartment 2311, is not listed with a price
• Apt 2609 is two bedrooms, "bring me offers"
• Apartment 3008, a top floor two bedroom, 91 sqm in total, is listed unpriced
• Apartment 3009, also a top floor two bedroom, is listed for $849,000 -- are they dreaming?
• Apartment 2511, 2 bedrooms, listed at $659,000 is said to be under offer
• Apartment 2007, 1 bedroom, is listed at $490,000
• Apt 502, 2 bedroom, 74 sqm internal, is listed at $499,000
• The list goes on.

The onsite agents, Mint Residential, have a large number of apartments for rent.  And so do offsite agents.  The following are rent ranges, depending on floor, car parking etc:

• 3 bedrooms, from $650 per week to $800 per week
• 2 bedrooms, from $570 per week to $720 per week
• 1 bedrooms, from $370 per week to $490 per week
• A fully furnished two bedroom is listed at $640 per week
• Some apartments have 4 weeks free rent, which (for example) in effect reduces the rent per week of a $500 a week apartment to $460 a week over a yearly lease.

The Milton won my award for the wildest advertising claims of 2010.  See this prior post.  In that post, I said:  "They have a sheet of paper showing investment returns for a 2 bed, 1 bath apartment listed at $650,000. The prediction is that this apartment will be worth $807,500 on completion of the project in 2013, and will be worth over $1M by 2016. The predicted rent is over $720 a week in 2013."

As can be seen from the above, this was in fact wildly inaccurate.  

The Milton has a host of problems, not simply that it was sold for prices that are way above market price.  The development is on a train line, with half the apartments looking west and close to a brewery.  The river views are distant, and will be blocked by construction of apartments in front.  Body corporate for a 2 bedroom is about $4,800 a year.  See comments in prior posts.  It is very dangerous buying off the plan in Brisbane.

Compare the above to a 2 bedroom, 2 bathroom, 1 car apartment, 106 sqm, with direct river views, for $700,000.

If The Milton is representative, then we are in for a very rough ride.

Selling without an agent

A new service has just launched, to allow property owners to sell without an agent.  Some real estate agents are so hopeless, and don't return buyers calls, so there is some appeal here if you know what you are doing.  See www.noagent.com.au

Will Brisbane Prices Increase This Year?

CoreLogic recently reported:

"The trend in home value growth is showing signs of increasing in those markets that have previously underperformed. These include Brisbane, Adelaide, Hobart and Canberra. Affordability constraints as apparent in these cities and rental yields been compressed to the same extent as what they have in Melbourne or Sydney. Home values increased in Brisbane by 5.5% over the past year, which is the fastest annual rate of value growth in a year."

The above 5.5% included houses and apartments.  Below is the information just for apartments, which is not as good.  The question is whether Brisbane will have capital appreciation across the board, or whether it will be limited to certain suburbs, or to houses (not apartments), or to houses and older apartments in better locations.  There appears to be great oversupply of new smaller apartments, in locations such as Newstead and South Brisbane, so capital appreciation of this dwelling type seems doubtful.

Brisbane apartment prices (to 29 February 2016):

February 2016 - down 1%

Quarter - up 0.9%

Year to Date - up 1.5%
Year on Year - up 3%
Median price based on settled sales of Brisbane apartments over the quarter - $391,000 (which is less than reported for the quarter ending May 2015).

Property Prices Double Every 10 years?

I have been to seminars by property agents and promotors, where they say that property is a sure investment because property prices double every 7 to 10 years.  CoreLogic debunks that "rule".

"Melbourne is the only capital city housing market in which home values have doubled over the past decade.  In fact, many cities are a long way from having doubled with values in Brisbane, Adelaide, Perth, Hobart and Canberra having all increased by less than 50% over the past decade."

See CoreLogic Report

Off the plan risks

Two stories in the AFR today are worth reading, both on page 33.

The first is titled "Industry warns of settlements failure".  It has a chart that shows that the average number of completed apartments in Brisbane for the period 2007 to 2014 was less than 2,500 a year.  For 2016, it is predicted to be more than 5,000 in the year.  For 2017, it is closer to 10,000, or more than 3 times the past average.

"The settlement risk will occur in places where prices are slowing and the market's getting harder."

"Banks are not only cutting back their LVRs, they are also taking a more conservative approach to valuing completed apartments, and in the case of at least one retail bank, this meaning between 15 and 23 per cent below the purchase price."

So if you are buying off the plan, and have paid a 10% deposit, you may need to stump up 40% of the contract price, because the Banks may only lend in effect 50% of the purchase price.

The second article is titled "Lenders nervous about incentives to apartment buyers".  It states:

"A recent survey by WBP Property sowed nearly half of the off-the-plan sales in the eight months to last August were in negative equity, which means worth less than the purchase price."  And this does not take into account transaction costs, such as stamp duty.

Apartment lawyer in trouble

Well known lawyer, Michael Teys, has been banned by ASIC from being a director.  Mr Teys often advises body corporate committees in relation to issues with onsite managers.  For example, he advised the committee of Admiralty Towers Two not to accept the assignment of the management rights from bank receivers to a professional manager due to the honesty and business skills of the proposed manager.  Very strange.  The pot calling the kettle black.

See http://www.lawyersweekly.com.au/news/18002-principal-lawyer-disqualified-by-asic

I suspect many committees have been unduly influenced by Mr Teys' almost religious like views of management rights. 

Brisbane Vacancy Rate Increases

According to the REIQ, the rental vacancy rate in the inner city of Brisbane is almost double that of the middle ring:

The REIQ Rental Report has revealed a higher vacancy rate in inner Brisbane as the supply of new apartments edges the 0-5km ring into weak territory for the December quarter.

The inner Brisbane vacancy rate reached 3.8%, up from 3.4% in the September quarter.

In contrast, the more affordable middle ring of 5-20kms tightened as the more affordable dwellings attracted residents, going from 2.4% to 2.1%.