Why CBD apartments make terrible investments

Are inner city apartments in Sydney, Brisbane or Melbourne on your investment radar?

If so, you should proceed with caution, as I’m predicting some potentially profit-crunching changes to the apartment market moving forward.

It’s all about Supply & Demand

As with many property related troubles, it boils down to one of the basic fundamentals of investing: supply and demand.

I’ve already written about the fact that in some Sydney suburbs we’re building too many apartments.

You see… 

When the supply of any product or service – whether it’s bananas or buildings – is low, there is less to go around.

And when demand for that particular item is also high, it can cost a pretty penny to get your hands on your slice of the pie.

In real estate, low supply and high demand puts pressure on the housing market, often leading to value growth, while high supply and low demand can have the opposite impact, stripping value from the market.

As so it is that the latter situation is unfolding in many capital cities around Australia.

Overseas buyers will get a shock

It seems that developers are taking advantage of the growing Chinese appetite for Australian property, by selling a glut of brand new apartments to unsuspecting international buyers.

Developers are enticing foreign buyers to invest in off-the-plan high-rise developments in the inner cities of Melbourne and Sydney, and my concern it that it could be leading to a massive over-supply of this type of property – and a subsequent ‘boom and bust’ scenario.

However, there’s a second issue at play here, which is just as concerning – if not more so – than the supply and demand imbalance.

It seems that some of these developments have been very poorly designed and constructed, with some dodgy developers knowingly targeting foreign buyers (many of whom buy sight-unseen) so they can cut corners with construction, installations and finishes.

I know of one complex in Mascot, Sydney that is only four years old, but it’s completely riddled with problems.

The building is structurally unsound, with issues including unsound waterproofing, cracking render and potentially dangerous electrical work.

Did I mention this was a high-end apartment complex – one which promised high quality fixtures and luxury finishes to attract A-list tenants?

Luxury is definitely not what buyers ended up with – unless you count ceilings that collapse in as being an art installation, rather than a dangerous structural fault!

The tenant who had the misfortune of having his bathroom rooftop collapse on him quickly reported the problem to his property manager – but nothing was done about it.

Reportedly, he didn’t even pass the information on to the owner.

It wasn’t until a new property manager took over the apartment for an overseas investor that all of these issues came to light.

A conflict of interest?

Why did the initial Property Manager fail to act in his client’s best interests?  

Maybe because he was involved in a classic conflict of interest, as the property management company runs out of the same office as the developer.

According to construction law, if a building defect is picked up on quickly and passed onto the developer, it is their responsibility to rectify the damage.

If a reasonable amount of time passes, however, then it simply becomes ‘wear and tear’, making the investor liable to cover the repair expenses.

Do you think there was much incentive for the property manager to hurry up and inform their landlord client of damage, when doing so could potentially cost their employee thousands of dollars?

I don’t think so either.

Now, I’m not saying that all capital city apartments are poorly built.

There are plenty of reputable, professional builders who do a fantastic job of delivering high quality properties to the market.

I’m not even saying that you should avoid investing in these types of properties altogether. 

What I am saying is that there are many expensive traps you can fall into as an investor, if you’re not doing enough research – and investing in CBD apartments in the current market could be one of them.

If you’re considering buying an off-the-plan CBD deal, you need to make sure this type of investment suits your strategy, keeping in mind that you may need to think long-term if a supply and demand imbalance puts a lid on price growth in the short term.

You also need to make sure you have a rock-solid understanding of the the track record of your developer, in particular, understanding the relationships between the developers, sales agents and strata managers.

Once you become an owner, it’s essential that you make sure that you appoint an independent and qualified property manager – someone who has nothing to do with the sale of the complex – to manage your best interests.

To turn a profit in the property game, you need to stay a step ahead of everyone else

In my mind rather than buying an inner city new or off the plan apartment, I’d invest your hard-earned dollars in an established property in an area where there in NO oversupply of new stock that will hold back rental and capital growth for years.