Queensland Budget taxes absentee land owners

The Queensland Government’s 2017-18 budget announced a number of key tax changes relevant to Queensland property investors.

New land tax surcharge for “absentee land owners” from 1 July 2017

• A new 1.5% land tax surcharge is being introduced for “absentee” land owners with land holdings valued at $350,000 or more. 
• Absentee land owners are already subject to higher rates of land tax (and lower land value thresholds) when compared with individual tax payers. Draft legislation released this week indicates the Government intends the new 1.5% surcharge to be introduced as an increase to the existing rates without any expansion of the existing concept of who is an “absentee” for land tax purposes.
• The new surcharge rates will apply to land tax assessments issued on and after 1 July 2017, which will be based on a person’s Queensland landholdings as at midnight on 30 June 2017.  As a result, there is limited time to make any changes to property ownership arrangements before the new rules take effect.

No increase to Foreign Acquirer Transfer Duty Surcharge, but certain changes proposed to its application

In 2016, the Queensland State Government introduced an additional foreign acquirer duty surcharge (AFAD) which applies to transactions involving interests in what is called “AFAD residential land”.

In a welcome development, no changes have been announced to the existing Foreign Acquirer Transfer Duty Surcharge. The surcharge rate will stay at 3% (which is significantly less than the 8% and 7% surcharge rate that applies in New South Wales and Victoria, respectively).

However, the draft legislation proposes some additional changes to the operation of AFAD in Queensland.

·         The draft legislation expands the meaning of AFAD residential land to include “chattels” in Queensland which “can be directly linked to, or is incidental to, the use and occupation of the land”.  Currently, only residential land and not chattels attract the surcharge rate of duty.  The move to include chattels in the surcharge duty base is a response to Government concern about the way in which value can be allocated between land and chattels.  The changes remove any incentive for value shifting.

·         The draft legislation will expand the application of AFAD to certain agency transactions affecting AFAD residential land.  Currently, the agency provisions in the Qld Duties Act permit a foreign principal to avoid AFAD by using a non-foreign agent to enter into an agreement for transfer (i.e., when duty is originally assessed).  The proposed amendments effectively mean that, where a principal is a foreign person at the time the relevant transfer of AFAD residential land occurs, the agreement will need to be reassessed as if AFAD applied to the agreement. 

·         The draft legislation also proposes removing the ability of foreign companies (pre-incorporation) to acquire AFAD residential land without incurring an AFAD liability through the use of an Australian entity to enter into an initial agreement for the transfer of land prior to the foreign company’s registration.  Currently under the Qld Duties Act, the initial agreement for the transfer would not attract AFAD and the subsequent transfer to the foreign company (post-incorporation) would be exempt.  The proposed amendments will require such an agreement to be reassessed as if AFAD applies and the subsequent transfer will not be exempt unless the duty (including AFAD) has been paid.

REIQ says Brisbane apartment market is oversupplied

The REIQ reports, unsurprisingly, that the supply of apartments in Brisbane is showing an upwards trend, and is an oversupplied market.  I suspect the trend is that things will get worse for sellers, rather than better, over the next 12 months.

REIQ says Brisbane apartment market is falling

According to the REIQ, which is a real estate agents' industry group, the Brisbane apartment market is falling.

New Depreciation Rules only apply to properties purchased after 9 May 2017

The Federal Government has proposed adjustments to depreciation legislation in the 2017 Budget.  Investors who purchase existing apartments after 9 May 2017 will be worse off in respect of depreciation benefits, which will impact cash flow.

Under the new rules which are yet to be legislated by Parliament, investors will be able to depreciate new plant and equipment assets within a new property and items they add to their property; however subsequent owners who acquire a property after 9 May 2017 will not be able to claim depreciation on existing plant and equipment assets.

Investors will still be able to claim qualifying capital works deductions, including any additional capital works carried out by themselves or a previous owner.

The budget notes were clear that existing investments will be grandfathered. This means that anyone who has purchased a property up until 9 May 2017 will be able to claim depreciation as per normal.

See also BMT blog

Five months supply

A report from RP Data CoreLogic today says that there is about 5 months supply of property for sale in Brisbane.  This does not include off the plan properties that are for sale.

The months of supply figure compares the number of unique properties advertised for sale to the number of transactions in the market.  The analysis provides an insight into how long it should take to clear the volume of stock currently available for sale.  Off-the-plan housing stock is typically not advertised for sale as individual properties and as a result is not included within this analysis.

Based on the relationship between demonstrated housing demand and advertised stock levels, CoreLogic is seeing relatively more stock available for sale compared to demand for that stock across the capital cities at the moment.

Sunland Abian Apartment Resales on Alice Street

Sunland is in the final stages of completing Abian on Alice Street, in Brisbane city.  The building is high end residential, overlooking the Brisbane Botanical Gardens.  Settlement of new, off-the-plan apartments, is planned for June.

Sunland reports that the development is sold out.  A few apartments are available for resale:

• Apt 404, 4th floor, 1 bed, 1 study, 2 cars, 84 sqm, $695,000
• Apt 1204, 12th floor, 2 bed, 2 bathrooms, 2 cars, 112 sqm, $1.3 million
• Apt 1603, 16 floor, 3 bed, 3 bath, 2 cars, 225 sqm, $2.7 million
• Apt 2703, 27th floor, 3 bed, 2 bath, 2 cars, 225 sqm, $2.7 million

The larger apartments are about $12,000 a sqm.

Next door, is Quay West, built by Mirvac about 20 years ago.  It is interesting to compare recent sales in Quay West.  For example, Lot 60, which is 1 bed, 1 bath, 1 car on about level 10, at 75 sqm, sold in January for $500,000.  Lot 102, which is the same apartment on a higher floor, sold late last year for $513,000.

Also,

• Apt 2102 on the 21st floor is up for auction, which will be a good guide to market price.
• Apt 1203, 12th floor, 1 bed, 1 bath, 1 car, 75 sqm is listed for sale fully furnished at $510,000
• See also Apt 2001

The Quay West apartments are less than $7,000 a sqm.

It will be interesting to see whether the Quay West apartments increase in value or the Abian decrease in value.  Abian, being newer, should have higher values than Quay West, but nearly double the value is hard to explain.

Uncertainty

From RP Data CoreLogic:

There’s a lot of uncertainty in the property market right now.

On the one hand property has boomed in Sydney and Melbourne triggering concerns of overvaluations and a property bubble.

On the other hand property has dropped in Brisbane (down 9.1% from its 2008 peak) and Perth (down 18.5% from its 2007 peak) because of a mining downturn.

Jack Russell beats the body corporate

The body corporate adjudicator recently allowed a dog to reside in an apartment, even though a number of apartments in the building were used for short term or holiday rentals.

See The Mirage [2017].

"Pets are not necessarily incompatible with high density living. No evidence has been provided that this dog is inherently unsuited to predominantly indoor living.

While it is not possible to determine the basis upon which owners in general meeting voted against motion 11, submissions by the committee and two lot owners raised hypothetical concerns. In particular they are concerned that if the dog barks, the body corporate would not be able to take enforcement action, because the applicants only stay in their unit for one or two weeks per year. In my view it is unreasonable to refuse permission to keep a pet based on hypothetical concerns, without a cogent basis to believe the animal will actually cause problems or the lot owner will not comply with conditions of approval. It is appropriate to impose conditions to avoid problems arising, and to withdraw approval if those conditions are not met.

Similarly, it is difficult to see how the body corporate would not be able to take enforcement action in the event that the applicants’ dog causes a nuisance. While there may be a time delay between when a breach of the conditions occurs, and taking of enforcement action, I do not believe this means that the conditions of approval cannot be enforced against the applicants. The applicants are the owners of unit 25, they stay in unit 25 whenever they visit the scheme and the requested approval relates to the keeping of a dog in unit 25 only. It stands to reason that if the applicants are in breach of the conditions of approval, then the body corporate could withdraw the approval and they would not be able to bring their pet dog into the scheme on future visits to their unit. 

While I note the concerns raised by the owners of unit 45 regarding temporary or short term approvals, any such approval must be given by the body corporate in general meeting in accordance with by-law 11. Further, there is no legal basis for owners to be forced to allow short or long-term tenants to keep a pet in their lot. Even if the Body Corporate approves dogs generally, or in a specific case, a tenant still requires the approval of the lot owner under normal tenancy arrangements. If owners in the letting pool do not want dogs in their lots, they do not have to allow them. Potentially the building manager could decline to accept lots in the letting pool where pets are allowed in that lot."

Recent Brisbane City Apartment Sales

M on Mary
Apt 1506, 1 bed, 1 bath, no car - $310,000

Charlotte Towers
Apt 4011, 1 bed, 1 bath, 1 car - $390,000
Apt 2804, 1 bed, 1 bath, no car - $311,000
Apt 3602 - 1 bed, 1 bath, 1 car - $410,000

Casino Towers
Apt 2306, 1 bed, 1 bath, no car - $310,000

Riverplace
Apt 277, 2 bed, 2 bath, 1 car - $600,000
Apt 157, 2 bed, 1 bath, 1 car - $552,000
Apt 175, 2 bed, 1 bath, 1 car - $552,500
Apt 234, 2 bed, 2 bath, 1 car - $772,000

Aurora
Apt 528, 2 bed, 2 bath, 2 car - $808,000

Admiralty Towers Two
Apt 3, 3 bed, 2 bath, 2 car - $975,000
Apt 95, 3 bed, 2 bath, 2 car - $1,350,000
Apt 100, 2 bed, 2 bath, 1 car - $730,000

Felix
Apt 216, 2 bed, 2 bath, 1 car - $520,000

Admiralty Quays
Apt 49, 3 bed, 2 bath, 2 car - $1,075,000

More the most part, these prices are similar to prices that were being achieved 7 years ago.  Riverplace has had the biggest increase in value over this period.

Brisbane Apartment Prices in Freefall

The latest CoreLogic report, issued today, shows that the prices of Brisbane apartments are falling, dramatically.
See https://issuu.com/corelogicaustralia/docs/2017-05-01--corelogichomevalueindex

Brisbane apartment prices (to 30 April 2017)

April 2017 - down 3.1%

Quarter - down 1.9%

Year to Date - down 2.1%

Year on Year - down 3.1% 
Median price based on settled sales of Brisbane apartments over the quarter - $400,000

A 3% decline on a $500,000 apartment is a loss of $15,000.

Rents are also dropping, on my rough calculation by about 5%.

Brisbane apartment sales slow

The AFR on 27 April 2017 had a story on page 39 about apartment sales slowing in Brisbane and Melbourne.  "Slower off-theplan apartment sales in Melbourne and Brisbane have resulted in fewer projects staring construction, a sign the apartment markets in these two cities may have peaked."

The story says Brisbane is worse than Sydney and Melbourne.  "While it has 11,000 units due to be completed between late 2017 and 2022, current pre-sales of apartments have slowed forcing developers to abandon projects.  ... Only 52% of the 5,897 apartments currently marketed have been pre-sold."

There is good news.  "Despite many off-the-plan sales having extended settlement periods, this has not translated into substantial settlement failure across the market.  However, projects completed later int he cycle may be exposed to higher levels of settlement risk than those approaching completion."

Trade Marks and Building Names

The Federal Court recently decided in favour of the onsite manager against an offsite real estate agent in relation to use by the offsite agent of a trademark used by the onsite manager.  The trademark was the same as the building name, but this did not allow the offset real estate agent to use the building name as a trademark.

See

Accor Australia & New Zealand Hospitality Pty Ltd v Liv Pty Ltd 

[2017] FCAFC 56

http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2017/2017fcafc0056

"243    In our view, the underlying principle reflected in the reasoning quoted above applies to the circumstances of the present case. Apartment owners enjoy the right to describe the location of their apartment by reference to the words “Harbour Lights” and they enjoy the right to let their apartment so described at that place.  Neither they, nor any third parties, enjoy the right to provide the registered services from the building or from any other place by reference to the words “Harbour Lights” based on any notion of invoking, in good faith, the use of the words on the footing that, because the complex is called “Harbour Lights”, the words form part of the common heritage in the nature of a town, suburb or municipality. 

244    The words are, of course, the name of a particular building complex configured in the way earlier described and thus the words necessarily identify (like all names attached to a particular building) a place on the planet as distinct from other places but that does not mean that the words thus become part of the “common heritage” giving rise to a “likelihood” that other traders would want to make honest use of the words in connection with similar services as an expression of the exercise of a “common right of the public”. The primary judge correctly concluded that the trade mark is inherently adapted to distinguish the designated services of the owner from the services of others."

Body Corporates in Queensland can't prevent AirBNB in their buildings

This recent decision confirms previous decisions that a bylaw in a Queensland strata titled scheme that prevents short term rentals, such as AirBNB, is invalid.  Not a great result for apartment residents.
See  Macleay Tower & Villas [2017] QBCCMCmr 12 (17 January 2017)
 http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/qld/QBCCMCmr/2017/12.html

Brisbane Skyline Changes

This is a good article from the Brisbane Times:  Brisbane's Skyline to Be Transformed in 2022

It has interactive photos with sliders that show the likely changes.

Western Suburbs Brisbane Apartments

A real estate agent has issued a interesting report regarding sales of houses and apartments in the Western suburbs of Brisbane (Indooroopilly, Taringa, Toowong, St Lucia.)  The report is available here.

According to this report, the 2016 market was worse than in 2013, 2014 and 2015, based on number of sales and also on total sales prices.

For example, in Indooroopilly, in 2015 a total of $130M in apartments were sold.  In 2016, this dropped to $60M.  In Toowong, $117M in 2015, dropped to $82M in 2016.

It seems that 2016 was a good time to buy but not a good time to sell?

The report lists the top 10 apartment sales in each suburb.  With a number of new buildings reaching completion in 2017, I suspect that the top sales in 2017 will be concentrated in a few of these new buildings.  For example, Aspect Property Group's Centra in Toowong has a number of apartments above $900,000 that settled in January 2017.  All of these sales will be higher than the top Toowong apartment sale for 2016, which was $862,500.

When looking a new buildings, keep in mind this report --  you may be paying top dollar!

Valuer says Brisbane will get worse

Independent property valuers Herron Todd White say that the Brisbane apartment market is about to enter a decline.  It looks like values will go down.  We have not had a boom in Brisbane since 2007.  Who said property prices double every ten years?  If you bought in 2007, you may still be underwater!

The report says:
"Brisbane property has been a heartbreaker over the past few years, offering so much promise, but failing to live up to the hype – and anyone hoping 2017 would prove to be “The Year of the Brissie” will probably be disappointed again.

The hoodoo continues to be employment-fuelled interstate migration and, truth be told, we can’t see anything on the economic horizon to suggest southern buyers will start heading here in droves.

That’s not to say we should be ignored - on the contrary, Brisbane is one of the country’s most forgiving capital city markets. There are very few disappointed long-term buyers in our sunshine- state’s big city, provided they stuck with the fundamentals and bought the right property in the right position at the right price. With this historic performance as a foundation, there are opportunities to get into Brisbane and hold tight that will leave you feeling very satis ed with your decision come a market cycle or two.

Herron Todd White Brisbane has always been keen on well located second hand units as a strategy for those trying to get a foot on the market. They usually offer an affordable option in a great location, and while capital gains aren’t always mind blowing, good tenant demand ensures you can continue to service the mortgage without too much stress. There is, however, a very real oversupply risk looming for investor units in our city as new stock struggles to find demand. This is having a negative flow on to our traditionally solid second-hand unit market. If you buy investor-grade unit stock in particular – new or old – please tread with caution in 2017."

Student "Apartments"

There is a social media advertising campaign underway for Atira Student Living in South Brisbane.  The rooms are extremely small:

• 16 sqm for a studio
• 21 sqm for a twin studio
• 33 sqm for a 2 bedroom apartment
• 55 sqm for a 3 bedroom apartment.

A typical apartment bedroom (4m x 3m) is 12 sqm.  A typical hotel room is about 33 sqm.  A small two bedroom apartment in a low quality complex is about 75 sqm.   There are many two bedroom apartments in Brisbane that are 110 sqm and larger.  These Atria rooms are small.  And they are charging more than $460 per week for a studio.  (A furnished one bedroom that is 72 sqm in a good location is about $550.)

Students are best advised to look at regular apartments on realestate.com.au and compare against student apartments before renting.

Brisbane Still Going Backwards

According to RP Data CoreLogic, Brisbane apartments did badly in 2016.  See report here.

Brisbane apartment prices (to 31 January 2017):

January 2017 - down 0.1%

Quarter - up 0.2%

Year on Year - down 2.7% 
Median price based on settled sales of Brisbane apartments over the quarter - $380,000

The report says:

Mr Lawless cites the large number of high-rise units currently under construction as another factor that may slow overall housing market performance. He said, “Dwelling approvals have already peaked across the high rise sector, as have construction commencements. However, the unit supply pipeline remains at unprecedented levels with a large proportion of these high rise units located within the inner city regions.”
“As these units flow through to settlement, the risk of buyers receiving a finance shock is becoming heightened.”
”Metadata flowing across CoreLogic valuation platforms is showing more than 40% of off-the-plan settlement valuations are coming in under contract price across the Melbourne, Brisbane and Perth unit sectors. While the large majority of these ‘under valuations’ are not showing a significant gap between the contract price and settlement valuation, more significant differences can be seen in some projects and precincts. Buyers who receive a valuation lower than the original contract price will generally require a larger than expected deposit in order to meet the loan to valuation ratio required by the lender.” 

Solicitor Assaults Neighbour - Then Sells House

Last year, it was reported that controversial Brisbane solicitor, Robert Hynes, assaulted his neighbour, who happens to be a barrister.  The Hynes family house is now for sale.  The house, in 18 Ormond Street, in Ascot, Brisbane, is in Hynes' wife's name.  She purchased the house in 2009 for $2M.  Hynes Lawyers went through a restructure in 2013, and not everyone was happy.  Restructured and now Hynes Legal, this firm is well known for its aggressive body corporate and management rights practice.

The advertorial in the AFR and The Domain, without some of this detail, is below.

Brisbane City Apartment Sales

Recent sales in November and December 2016:

Parklands

Apt 3104 - 2 bed, 1 bath, 1 car - $590,000

Apt 3036 - 3 bed, 2 bath, 1 car - $650,000

Charlotte Towers

Apt 1207 - 2 bed, 2 bath, 1 car - $460,000

Apt 1502 - 2 bed, 2 bath, 1 car - $490,000

Apt 1704 - 1 bed, 1 bath, 0 car - $322,500

Apt 602 - 2 bed, 2 bath, 1 car - $510,000

Riparian

Apt 4301 - 3 bed, 3 bath, 2 car - $2,562,000

Admiralty Towers One

Apt 135 - 2 bed, 2 bath, 1 car - $615,000

Apt 21 - 2 bed, 2 bath, 1 car - $720,000

Admiralty Towers Two

Apt 29 - 3 bed, 2 bath, 2 car - $1,059,000

Meriton Infinity

Apt 2907 - 1 bed, 1 bath, 1 car - $420,000

Apt 5006 - 2 bed, 2 bath, 1 car - $600,000

Apt 5406 - 2 bed, 2 bath, 1 car - $580,000

Riverplace

Apt 109 - 1 bed, 1 bath, 1 car - $516,800

Festival Towers

Apt 2905 - 1 bed, 1 bath, 1 car - $390,000

Aurora

Apt 248 - 2 bed, 1 bath, 1 car - $400,000

Capital gains were best for direct riverfront buildings and worst for the large apartment towers built by Devine (Charlotte Towers and Festival Towers and Aurora).  The Devine developers now run Metro.

Recent Southbank Sales in Brisbane

Arbour on Grey
180 Grey St
3 bed, 2 bath, 2 car, 191 sqm, sold for $1,165,000
2 bed, 2 bath, 1 car, 106 sqm, sold for $740,000
174 Grey St
3 bed, 2 bath, 2 car, 186 sqm, sold for $1,487,500
3 bed? 128 sqm - sold for $820,000
172 Grey St
3 bed, 2 bath, 2 car, 155 sqm, sold for $1,010,000

Saville
161 Grey St
2 bed, 2 bath, 2 car, 119 sqm, sold for $920,000

Galleria
15 Tribune St
2 bed, 2 bath, 1 car, 120 sqm, sold for $570,000

Saville Southbank

Howard Smith Wharves

Under the Storey Bridge are some old wharves.  I remember in the late 1980s parking my car on the wharves in this area.  There are now plans to redevelop the land, to build a small hotel and exhibition area, plus restaurants and cafes.  See http://howardsmithwharves.com

If completed, this will add value to the nearby apartments, Riverplace, the Admiralty buildings, and others nearby.

Construction was supposed to have started at the end of last year.

Is it better to rent or buy?

Here is a comparison of two similar apartments in a Brisbane inner suburb, in the same complex, with each apartment being side by side.  These are good apartments, two bedrooms, two bathrooms, each 119 sqm total size, in a complex with a pool and gym.  Both were sold for similar prices.

Apartment A - owner occupant
Price - $465,000 plus stamp duty $7,500 approx.
Repairs and improvements before moving in - approx $8,000
Monthly costs
Loan repayment - $2,500 a month
Rates - $107 a month
Water - $98 a month
Body Corp - $375 a month
Insurance - $20 a month
Total - $3,100 a month

Apartment B - rental
Price -$450,000 plus stamp duty $14,100 approx.
Rent per month - $2,210 per month

Thus, the renter is $890 a month or $10,680 a year better off, and had no capital outlays, and does not have to pay for repairs and improvements (usually another $100 a month on average).  The renter can easily move to another location if work needs to take the renter there.

Another way to look at this is that the weekly rent should be $715 a week to cover all costs that are included in the rent.  But the rent is only $510 a week.  The landlord is subsiding the tenant to the tune of $200 a week.

Brisbane Apartments -- What happens next?

Most predictions for the Brisbane apartment market for 2017 are that prices will fall, and that there is going to be an oversupply or glut of apartments.  Well, maybe.

I think there may be a glut of certain kinds of apartments in certain areas.  For example, there are a large number of apartments under construction in Bowen Hills and Newstead.  Many of these apartments are small apartments in large buildings.  Some of the buildings are not in great locations or have poor aspects.  I am not sure who will want to live in these apartments.

But I don't think the news is all grim.  My reasons for saying this:

1.   In certain areas, there is no a glut of apartments.  Or even where a number of new buildings are under construction or have just been completed, the area has many facilities and a good location.  For example, South Brisbane, Indooroopilly and Toowong have new apartment buildings, but these are excellent areas, and can probably hold up to the new stock entering the market.

2.   Existing apartments that are 10 to 20 years only are good value.  Many are large apartments and are located in the better areas, and have good views.  Compared with newer apartments, which are smaller, the older apartments look very price competitive.

3.  There is a shortage of large apartments.  As baby boomers look to downsize, and wealthy families move from Asia to Brisbane, they are looking for apartments that are more than 120 sqm in size.  There are very few apartments in Brisbane that are spacious and luxurious.

4.  Compared with Sydney, or the freestanding house market in Brisbane, prices for apartments have been relatively flat for the past 2 to 4 years.

5.  Rents have decreased for some apartment types, but I think that rents will not keep decreasing.  I suspect that this time next year, we may start to see rent increases for certain apartments.

6.  Not all apartment buildings that have been announced or that are being sold off-the-plan will actually be built.  The potential oversupply is less than anticipated.  (That being said, there are a lot of apartments under construction, and there will be an oversupply.)

One example to consider.  Sunland is building Abian on the corner of Albert Street and Alice Street in Brisbane city.  The apartments were sold off the plan about 2 years ago (it has sold out) and settlement is likely to take place in June and July this year.  It has a great location, overlooking the Botanical Gardens, and will not be built out other than on the rear side.  It is on a corner block.  It is tall, but there are only about 150 apartments in the building.  Most are large.  The quality of the build and finishings are reported to be super.  There are resales available, and it is said that these kinds of prices are being achieved:

• Two bedroom, 69 sqm - from $680,000
• Two bedroom, 103 sqm internal- from $1,150,000
• Two bedroom and study, about 135 sqm internal - from $1,175,000
• Three bedroom and study, 150 sqm internal - from $1,700,000
• Three bedroom and media room, 200 sqm internal - from $2,700,000

This does not suggest to me that there is oversupply of this kind of apartment in this location.  (Or do these high prices tell us that a crash is coming?)

On Wednesday, the AFR had an article that said:  "... This year, that courage may well pay off for investors in established apartments.  In Melbourne, Brisbane and Adelaide, owners of these older style 1930s to 1970s built apartments saw little or no return last year and would have enviously watched houses perform substantially better.  This divergence in performance has been due to an oversupply of new units suppressing the entire apartment sector.  But with a slew of recent ABS data showing the apartment building boom is fading, we may well see the first signs of a recovery in older style unit prices and a vindication for remaining faithful to these assets in hard times."

Is now the time to buy established Brisbane apartments?

Admiralty Towers One Sales

Some recent sales from Admiralty Towers One, which is located at 35 Howard Street in Brisbane.  This is a direct riverfront building, although not all apartments have river views.  Some apartments have spectatular views.  The apartments are larger than most apartments being built today, with some one bedrooms about 70 sqm and some 2 bedrooms more than 130 sqm.

Apt 21 - 2 bed, 2 bath, 1 car - $720,000

Apt 56  - 2 bed, 2 bath, 1 car - $710,000

A[t 49 -  2 bed, 2 bath, 1 car - $692,000

Apt 135 - 2 bed, 2 bath, 1 car - $615,000

Apt 121 - 2 bed, 2 bath, 1 car - $575,000

Apt 88  - 1 bed, 1 bath, 1 car - $415,000

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%.

Brisbane Prediction

"Brisbane Avoid: High density apartments in the CBD, West End and Fortitude Valley. Recommend: Character houses in low density, established areas with good schools, transport and lots of renovation activity."

See Property Observer

China limits cash moves offshore - danger for property settlements

A story in today's Australian Financial Review is titled "China limits cash moves offshore" and show the risks for developers in relation to off-the-plan sales contracts.  The Chinese buyer may not be able to get the cash out of China, and then may not be able to settle the contract on completion of the building.  And try suing the Chinese buyer.  Some buildings under construction in Brisbane have more than 80% offshore buyers, so I suspect that some developers may run into troubles next year.

China limits cash moves offshore
AFR, 21 Jan 2016, p1

Shanghai | Chinese banks are delaying and even blocking some foreign exchange transactions under a decision by the central government to limit capital leaving the country, a move that could hurt demand for foreign assets including Australian property.

At meetings on Monday and Tuesday afternoon senior bank executives were told by the government to toughen up their capital controls.

While they haven't introduced new rules, one executive told The Australian Financial Review banks were using existing measures to slow the amount of money going overseas. The crackdown has seen more stringent checks for both companies and individuals.

"We are now refusing all foreign currency transfers where the documents are not fully complete … previously the requirements were not so strict," said a bank executive in Shanghai who asked not to be named.

...

An Australian real estate agent based in Shanghai, Scott Kirchner, said the tougher capital controls could "cause problems for Australian developers as clients may not be able to get their money out of China".

"I'm advising people not to sign a contract unless they already have their money outside China," said Mr Kirchner, a director of BellerChina. "There is lots of uncertainty at the moment and that might affect sales."

In China, individuals are restricted to exchanging the equivalent of $US50,000 in foreign currency each year.

American lawyer Dan Harris said on his blog on January 14 that his firm's China office had received more "money problem" calls in one week than it had received for the whole of the past year.

"If there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars," said Mr Harris from Seattle-based firm Harris Moure.  He said it had affected real estate agents and companies waiting for Chinese investment money.

Previously, one option for those interested in buying overseas property was to use the currency quotas of friends and family.

Alternatively, underground channels in Macau or Hong Kong were available to get money out of the country. Both these methods are now under increased scrutiny as the government tries to stabilise the yuan.

"They haven't introduced any new capital controls but the implementation of existing measures has been strengthened," said another executive, who works at one of China's big state-owned banks.

David Olsson, a China Practice Consultant at law firm King & Wood Mallesons, said Chinese banks "have clearly got some direction to look more closely at outbound capital flows particularly around Shanghai and Shenzhen".

He said it was not expected to affect legitimate outbound investment and Australia would continue to be a big beneficiary of Chinese investment in agriculture, services-related sectors and tourism."