Oversupply of Apartments – Fact or Fiction?

Posted Monday, May 30, 2016 Comments (0)

Australia is currently witnessing a significant boom in the number of apartments being built; city skylines are littered with cranes, particularly amongst the major cities across the east coast. As a result, banks are tightening their lending policies to apartment developers. The following table, compiled by CoreLogic RP Data, shows the top 25 locations in Australia with the most expected unit completions in the next 24 months. 

Brisbane is expected to have the 2nd highest number of unit completions in the next 24 months, and as a result, it is becoming increasingly difficult to obtain finance for apartment developments via normal bank channels. 

Changes to the bank lending environment 

Australia’s large banks have tightened their lending to apartment developers due to new capital requirements and Australian Prudential Regulation Authority (APRA) enforced changes to the restrictions on investment lending, which has increased the settlement risk at the end of a project. 

In the past, banks were comfortable with pre-sold apartments, or ‘pre-sales’, equating to 80% of the debt provided by the bank. However, most banks now require pre-sales of 100% or more in addition to also reducing the amount they will lend to 75% of total development costs, down from 80%. 

It is likely that smaller banks and non-bank lenders will take advantage of the opportunity to provide funding to apartment developers in lieu of the larger banks tightening their lending requirements, but even so, it is becoming increasingly difficult to obtain finance for apartment developments in Australia’s major cities. 

What does the future hold? 

At the end of last year, the Reserve Bank of Australia announced that Australia’s high-rise construction boom, led mainly by an increase in foreign buyers and investor activity, could result in an excessive increase in construction activity and future supply overhang. The graph below is testament to the sharp increase in unit complex approvals in 2015. 

As the supply of new apartments continues to rise over the next 24 months, some property analysts are concerned that this will have a detrimental impact upon apartment prices. 

However, with valuations of recent settlements coming in at close to, or in some cases above their contract price, there are no alarm bells ringing as yet. 

As major banks continue to pull back from development funding throughout inner Brisbane, the property market is starting to see a pullback in supply in certain areas. As such, lower volumes of supply will continue to keep apartment valuations at, or close to, contract value as it is deemed a less competitive environment. 

Further, there has been an estimated 15% rise in construction costs over the past three months, which has resulted in projects becoming less feasible via bank channels and some developers not proceeding with proposed developments; this will reduce the expected supply of apartments, which will further strengthen the valuations of newly constructed apartments. 

Lev Susany is an Analyst at Balmain Brisbane, specialising in sourcing commercial investment, construction and residential finance for property investors, developers and owners in South East Queensland. 

Email Lev: Lsusany@balmain.com.au
LinkedIn: http://au.linkedin.com/in/levsusany

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