RiskWise Property Research has identified the top 10 ‘danger zones’ in Australia for unit investment.
RiskWise CEO Doron Peleg said property investors should be “extra cautious of the high degree of risk associated with off-the-plan units, that has further increased due to the COVID-19”.
The equity risk was already high prior to COVID-19, but with low investor activity, increased risks with rental apartments, vacancy rates hitting an all time high in May (16.2 per cent), and a new cash flow issue, it’s not a rosy time for owners of units.
RiskWise have listed the riskiest areas in the country in terms of oversupply, based “not only on the supply itself but also on low demand for rental apartments, in relation to that supply”.
“The high-profile issues around cladding and defects has created enormous ‘reputational damage’ across the entire industry and because of this, investors have lost interest in high-rise unit developments and are turning to ‘safer’ house-and-land packages suitable for families,” Mr Peleg said.
He said buying rental apartments unsuitable for families is “an enormous gamble, with both equity and cash flow risk expected to materially increase”.
Just last week Mr Peleg warned of the oversupply of Brisbane apartments, saying “the continuous weakness of the unit market in inner-city Brisbane should raise red flags for developers and lenders”.
He blamed “developers’ lack of foresight regarding unit oversupply”, and lending restrictions introduced in 2014.
“It seems there has been no methodological and structured risk-management approach including identification, assessment, and mitigating action plans to address those risks,” Mr Peleg said.
“This takes us back to the feasibility stage which includes the assessment of the projected fair market value and the likelihood of defaults and their potential consequences.
“Developers and lenders must find the right balance between taking risk and making profit.
“COVID-19 has only served to increase the risk. Currently, there are many high-rise properties being offered to a smaller number of investors. This is because there are less investors in the market due to the pandemic.”