Perth August 2017

The month in review: Perth

By Herron Todd White
August 2017

Residential investment activity hasn’t exactly been the most exhilarating BBQ conversation in Perth over the past 12 months. It’s like a problem gambler – you only ever hear about the wins! However as the market approaches (or potentially is already at) the bottom of the cycle, it might be time to start studying the form guide again.

The rental market in Perth remains oversupplied and subdued but has stabilised.

However there are no indications that the rental market is likely to rise by any significant amount any time soon, hence investors would be wise to target capital growth opportunities, of which there are many.

Many off the plan investors are finding that their previous strategy of signing contracts through 2014 to 2016 has not gone to plan, with the declining market conditions resulting in valuation pressures at settlement. However a reversal of the strategy could pay dividends, particularly if the developer is holding a proportion of the apartments but cannot or is unwilling to re-price the product until post settlement of current contracts. Once this difficult period has played out, the developer may be willing to negotiate to a far higher degree on the last remaining stock and bargains may be had.

Due to the influx of modern apartments, slightly older apartments appear to have been oversold by the market, with value reductions of 30% in 18 months not unheard of. Hence there are some great opportunities in both the new and established inner city apartment market.

In order to take advantage of this strategy though, investors need to do a significant amount of research and ensure they are comparing apples with apples. There is a vast amount of product available, with each complex offering a confusing assortment of benefits, and investors should ensure that the benefits they are considering are what the market actually wants. Local independent advice can be the difference between a great investment and an ordinary one.

Development sites in particular have been on the nose over the past three years and the development potential premium in many instances has evaporated almost entirely. These opportunities in our mind are the best for above market returns in the short to medium term, but caution needs to be exercised. Investors considering this path need to tread carefully, with many sites purchased during the last cycle no longer likely to be developed to the same standard or density depending on location.

Locations that come to mind include Nollamara and Craigie in the north and St James and Coolbellup in the south. In many locations however, two or three lot sites can be found with a minimal premium to be paid above a single dwelling value and they offer a holding income until development plans have been finalised. What makes many such areas additionally appealing is that profit can be made without building new dwellings, as there is sufficient demand for small vacant allotments given the price attractiveness. We strongly encourage any one considering such an option to seek professional advice as there are many pitfalls for the uneducated.

The other point worth noting is that Perth is currently in the midst of a property cycle at polar opposites to the rest of the country. For our eastern states investors, it may be worth investigating a counter cyclical play with Perth appearing to be in the driver’s seat in comparison to many other markets throughout Australia.