Melbourne's future supply of apartments and townhouses: Secret Agent

Melbourne's future supply of apartments and townhouses: Secret Agent
Melbourne's future supply of apartments and townhouses: Secret Agent

GUEST OBSERVER

Secret Agent believes that knowledge about supply is crucial to making an informed and successful investment. This report will forecast what the supply of apartments and townhouses in Melbourne will be over the next 12-36 months.

Why is supply important?

Basic economics tells us that when supply is high, unless the market is in equilibrium, prices will drop because demand will not be able to keep up.

There is a less obvious reason that makes supply important. One of the biggest differences between supply and demand is that it is possible to forecast supply, and almost impossible to accurately predict demand.

It can seem like demand is certain. An investor might think he has struck gold when he discovers a suburb with rapidly rising rents and a growing demographic of people moving into the "hot new area" to live. Yet, in the background, a surge in planning proposals may cause supply to expand considerably. Supply created by developers does not trickle into the market but arrives in large batches, as each developer tries to use the same metrics to make guesses about demand into the future. All of a sudden, a glut starts to weaken rents and can drive away owner occupiers who had previously wanted to live within the area.

Demand is so difficult to accurately forecast that even the world’s biggest companies are often wrong when it comes to this. A great example is the large oil producers who have seen their profits diminished. They had continually invested in new wells with the expectation that the price of oil would continue to increase as demand intensified, only to see it collapse due to fracking and other factors.

World iron ore producers who made substantial long term investment decisions based on high iron ore prices made a similar error. There was too much focus on present demand rather than on future supply conditions, which could have helped them make sensible decisions over the business cycle.

Another example is this season’s avocado prices. Strong demand and a tough growing season caused prices to soar
at the beginning of the season. As the season went on, prices started to moderate as supply caught up. No doubt avocado trees are being planted in record numbers with some producers seeking to benefit further from high prices. However, the likely outcome is diminished prices as supply starts to surpass demand. To maintain margins, differentiation is required, such as higher quality or varying varieties. The lesson here is that it is also the structure of supply that is crucial to evaluate.

The Australian property market has seen a sharp rise in supply. Developers have become much more comfortable with higher supply levels of their own product. Demand has been strong but it is only a matter of time before they too will have to differentiate.

How do we predict future supply?

Forecasting supply is especially useful in the property market. It is possible to know how many and where the upcoming apartments and townhouse developments will be, due to publicly accessible approved planning applications. This has huge implications for investors and home buyers.

Using data published by the Australian Bureau of Statistics (ABS), Secret Agent modelled Building Approvals by Statistical Area 2 (SA2) over the past financial year (July 2015 – June 2016) for two categories: apartments and townhouses. This report summarises our findings. Note that the figures may be slightly underestimated because it does not take into account approvals made prior to July 2015, which may still be in construction stages. 

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Melbourne's future supply of apartments and townhouses: Secret Agent

Part 1: Flats, units or apartments (including those attached to a house)

This is a measure of the upcoming supply of apartments. For larger buildings (4 stories and above), construction usually takes between 12 and 18 months, while for smaller buildings it can take up to 12 months. Therefore, the number of building approvals over the past 12 months in this category reflect the amount of supply for the next 12-18 months. Table 1 shows the ten suburbs with the highest amount of new developments of this type.

As expected, development in inner Melbourne (CBD, Southbank and Docklands) is much higher than anywhere else. Combined, these three suburbs account for almost 30% of growth of new apartments in metropolitan Melbourne. Southbank has by far the highest density of development, as its total area is much smaller than the CBD, yet there are nearly 2,000 more apartments being built here. West of the city, Footscray is the only major site for development. 

Notable suburbs in the inner north are North Melbourne (648), Brunswick (748), Brunswick East (468) and Collingwood (428). Further north, Preston (934) and Heidelberg West (612) have issued the highest number of building permits.

In the inner east, South Yarra (848), Richmond (566) and East Melbourne (550) are expected to see the biggest increases in new apartments, as well as Box Hill (1940), Doncaster (1056) and Malvern East (924) further to the east. To the south of the CBD, South Melbourne (1234), Albert Park (932), St Kilda (820), Caulfield (510), Bentleigh (612) and Cheltenham (942) have the highest number of new apartments being built. 

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Melbourne's future supply of apartments and townhouses: Secret Agent

Part 2: Semi-detached, row or terrace houses, townhouses

This shows the number of new townhouses being developed, as it includes any residential development of a subdivided block of land not included in the other category. As there will usually be less properties to be developed per site, some of these constructions have already been finished, while the vast majority will be completed within the next 12 months. 

While development of new apartments is mainly concentrated around the CBD and inner Melbourne, Port Melbourne is the only inner city suburb featured in the top ten list for semi- detached, terraces and townhouses. Note that most of the new developments in Port Melbourne are concentrated in the old industrial area of the suburb, which has recently undergone zoning changes to become residential. 

The inner and outer north have the highest density of development, with suburbs like Glenroy (640), Reservoir (488), Pascoe Vale (456), Craigieburn (364), Preston (336) and Heidelberg West (296) all making the list.

More suburbs in the inner west are experiencing development of townhouses compared to apartments. These include Altona North (316), St Albans (230), Braybrook (218) and Sunshine (212).

To the east, Doncaster (380) and DONCASTER EAST (222) are again feature suburbs, while to the southeast, most of the development seems to follow the major rail network through Malvern East (166), Oakleigh (164), Clayton (212), Springvale (124), Noble Park (174) and Dandenong (272). 

Observations on future apartment supply

Secret Agent studied hundreds of floor plans of upcoming apartment buildings whilst compiling this report. The "Better Apartments" design standards draft for Victoria is currently in its consultation stages, so it was interesting to see that a number of these advertised apartments are not compliant with the proposed standards. It's likely that a big portion of the supply over the next year will not meet the quality of apartment living we are hoping to achieve. Here is a summary of our observations.

Balconies are too small.

Many balconies do not meet the minimum 2m dimension nor the minimum size requirements (8m2 for a 1 bed dwelling and 10m2 for a 2 bed dwelling).

Some apartments have used juliet balconies, a.k.a. false balconies, to allow for ventilation without actually providing open space.

"Snorkel" or "saddlebag" bedrooms are widespread.

This L-shaped layout is an ineffective yet popular solution
to provide light access to the second bedroom of 2 bed dwellings. The "snorkel" is often too narrow to be considered habitable, and in many cases direct light does not penetrate into the actual room due to its depth.

Light wells are too small.

These non-compliant light wells are much smaller than the suggested minimum area of 9m2 with a minimum dimension of 3m, for buildings up to 13.5m (approx. 4 storeys). The example on the right was taken from an 8 storey building. These bedrooms would either have compromised access to sunlight, views, or both.

When appropriately designed, light wells increase the surface area of the external envelope and introduce more openings (i.e. windows) to allow light into dwellings.

Some bedrooms adjoin the lift core.

This isn't good news for light sleepers. Placing noise sources directly adjacent to habitable areas (especially bedrooms) increases noise transmission. Unless adequate acoustic insulation is in place, you can expect to hear each lift ride throughout the night. This has long term implications on health and happiness. 

Storage cages are too small.

New design standards suggest a minimum of 6 cubic metres of additional storage space for 1 bedroom dwellings. Common sizes for today's apartments (that is, if they have any) are 3 and 4 cubic metres, and 2.5 cubic metres for storage above car spaces.

Quality can vary within the same building.

An apartment building can have both A and B grade units, even within the same level. A proposed residential tower in Abbotsford had a combination of 70sqm 1 bedroom dwellings and 70sqm 2 bedroom dwellings. These 1 bedroom units are far bigger than the inner Melbourne average of 47sqm, whilst the latter sits just below the average of 73sqm.

2 bedroom dwellings are most often compromised.

1 bedroom dwellings usually have satisfactory access to sunlight and size. It’s the 2 bedroom dwellings that have the most compromised layouts, usually involving a "snorkel" bedroom in the floor plan (see point 2 on the previous page).

3 bedroom units are less common and are usually located around the corners or on the upper levels of the building. These apartment types tend to be of higher quality and command a premium. 

Conclusion

Future supply is fairly simple to predict. The implications of the forecast are far more complex. This report will conclude with a summary of points you should draw from our forecast of Melbourne's upcoming supply.

1.  High supply in certain suburbs does not mean you should avoid buying in these areas. You just need to be more careful with what you choose to buy. Differentiated products will perform better in the long term.

2.  While the new supply figures may seem high, it is important to consider context. For example:

  • How many existing apartments are in that suburb?
  • What is the proportion of apartments, townhouses 
and houses in that suburb?
  • How big is the suburb?

3.  The availability of surrounding amenity and infrastructure should also be considered. Suburbs with high supply
and good amenity and infrastructure will outperform suburbs with high supply but lacking in these features. An example is the Glenroy area, which has a large volume of supply coming up amidst a grim future for job growth, as many automotive industries based in this region will be shutting down by 2017.

4.  Generally, investors may want to consider the areas identified as having a high supply with caution. Rental yields are likely to be driven down unless the properties are suitable to family occupants.

5.  Home buyers may want to consider areas where there
is a greater supply of townhouses, since these may be more suitable to a growing family. Townhouses are also an affordable alternative to a house, especially in areas of high supply.

6.  The quality of supply in the apartment market is lacking in many areas, especially for 2 bedroom units. This reinforces the importance of implementing better design standards for developers to adhere to.

Overall, for those interested in maintaining the value of their property investment, present areas of demand with excellent amenity to jobs, transport and lifestyle options that also offer scarcity and very little opportunity for future supply to be created will be long term winners. 

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Melbourne Apartment Market

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