Experts warn on Melbourne unit boom

INVESTORS in Melbourne's booming medium-density apartment market, many from Hong Kong and Singapore, are being warned there is a danger of oversupply and that the apartments will not hold their value. Analysts say unsuitable office buildings, at rock-bottom commercial values, are being converted to apartments, but even those in the newly built developments may not prove a good investment despite the speed with which they are selling off the plan. Much is being made of the failure of an apartment in inner-suburban Carlton to sell at auction recently. It was part of a series of developments by Central Equity, and as the first to go on sale it was seen as a litmus test for the market. The Rathdowne Street flat, in a development marketed heavily in Hong Kong, was bought for A$196,000 (about HK$980,000) off the plan a year ago but was passed in at A$182,500. It is still unsold and although the owner has a six per cent rental guaranteeit is reportedly vacant. But developers have rejected the criticisms that flats are bad investments. Central Equity's managing director, Dennis Wilson, told the South China Morning Post: ''It is a nonsense when people say there is going to be an oversupply. The market has just started.'' Central Equity, which recently opened an office in Singapore, will launch a Hong Kong office this month. Mr Wilson said it was selling about 20 per cent of its developments in Singapore, many to business people who lived part of the year in Melbourne. ''They are looking long term. There is very little turnover in our properties,'' he said. A report, Central Equity, commissioned from Melbourne's Swinburne University of Technology found there was a shortage of medium-density accommodation in Melbourne and the market would grow. There is no doubt sales of inner-city, medium-density flats, most of which are sold off the plan to save up to A$10,000 stamp duty, are booming. In an otherwise depressed market, inner-city flat sales soared by 77 per cent last year and their median prices jumped by A$10,000. This year, figures are expected to be higher. Central Equity sold 238 of 258 units in its Willesmere project in an historic former psychiatric hospital within three weeks. Mr Wilson said Central Equity's A$14.3 million after-tax profit last year was proof that the inner-suburban medium-density market was healthy. It would improve next year, he said. But analyst Richard Wakelin, investment manager with Collins Simms, said just because developers were making money did not mean those who bought their apartments would do so. He said the warnings he issued last year had proved well founded: buyers were being caught up in the boom, attracted to new and recycled complexes through clever marketing tricks such as rental guarantees and off-the-plan sales to avoid stamp duty. ''People generally pay a premium for new property and within two to four years the prices are not suitable in a re-sale situation. We have already seen evidence of properties failing to bring the price that people paid for them off the plan 18 months or two years go.'' Mr Wakelin said it was common for rental guarantees to be artificially high. In a recession, buyers were looking for income rather than capital growth, so falsely high rental guarantees were included in the package as an inducement, he said. Agents have reportedly been offering cash-back deals, rent-free periods and service connections to lure tenants to some developments. Ideal re-sale criteria included scarcity value - a select flat in a select block in a select location. Many of the new suburban units were similar, he said. A report to the Victorian Government by property consultants Rogers Milne and Associates also warns that the inner-city flats market could collapse. The market's future depends on renters' enthusiasm, it says. Investors would desert quickly if tenants could not be found. Agent Baillieu Knight Frank reiterated the warning for converted commercial properties: it was not initial sales but tenanting and reselling that could prove the market had no depth. Forecasters BIS Shrapnel also warn of a potential glut: approvals for inner-Melbourne units increased three-fold in two years, yet the depth of demand was unknown. Max Beck, of leading developer Becton Corporation, said: ''I don't know that any of us know how deep the tenancy market is and it all depends on that.'' The recession meant developers could buy once-expensive land for inner-city developments at prices unlikely to be repeated. In the short term, apartment re-sale prices may drop, and in the medium to long term location would ensure profits - but only after the building stopped. He warned offshore buyers to look for a company with a reputation to protect.