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Purchasing in high rise towers has always been risky business for investors. Resale values have taken a dive again (as has occurred periodically in the past) and it’s no wonder why! In every market, scarcity of a commodity that is sought after is a catalyst for value growth. Property is no different!
In the case of property, scarcity of land or a sought-after dwelling type are the prime objects of desire (as opposed to an unattractive, one-off or unusual design).
So, what happens when you have many identical apartments for sale at the same time? Nothing good.
For 13 years and counting, we have been educating our clients to pay close attention to the principles of supply and demand when selecting property, especially high rise, new apartments. Where there is over-supply, there will be limited opportunity for value growth. This can in turn adversely affect rental yield because prospective tenants have an abundance of similar apartments to choose from.
What’s going to separate your apartment from the one down the hall?
And what happens when yours no longer has that new sparkle and there are hundreds of brand new ones nearby?
A new apartment can be likened to a new car – except the new car is parked on a very small nominal piece of land in the sky that you also own. We use the analogy when discussing new high density apartments, what is a new car worth the moment you drive it off the car lot?
A whole lot less!
The same logic can often apply when someone starts living in a new high rise apartment. And now there is yet another reason to think twice about investing in high density apartments – the perceived safety risk that is currently in the media spotlight.
Property developers looking to maximise their profits often aim to spend as little as required. At times, cheap materials are used and corners are cut. The AFR has quoted a recent study conducted in New South Wales which found that up to 2,500 buildings used non-compliant cladding material. An audit of high rises in Melbourne has revealed that 100 of these buildings have safety problems (out of the 170 that were audited). That means more than half that were audited have safety problems! Wow….that is a lot.
Melbourne’s Docklands fire in 2014 was exacerbated by inferior cladding that consisted of plastic cased in aluminium. After the extremely shocking and sad events of the recent inferno in London, the future safety requirements of high rise towers is under the proverbial magnifying glass. It sounds like some of the more shoddy developers will start to feel some heat of their own. We have all seen the effect that occurs when a magnifying glass has a little extra light shining through it – it can get very hot indeed!
Given the statistics outlined above, this can only be a good thing for those living in high rise towers in the years ahead.
All the best with your Property Planning.
David Johnston is the founder of Property Planning Australia and the author of ‘How to succeed with property to create your ideal lifestyle’ and ‘Property for life – using property to plan your financial future’.