The month in review: Perth
By Herron Todd White
The level of investor activity in Perth has steadily declined over the past six months in line with a reduction in rental yields, an increase in the residential vacancy rate and an increasing supply of housing stock.
The majority of investment activity at the moment is targeted towards new turn key products, with both apartments and villa complexes attracting interest. However the market is extremely price sensitive and the majority of activity is in the sub $500,000 range with the motivation being that it represents a lower risk option. Market activity above $500,000 is largely driven by the owner occupier market, although we note that while money is cheap relatively speaking, there remains some speculative investor and developer interest in the market.
A large number of apartment developments are approaching practical completion and pricing of any unsold stock is extremely sensitive. This is prevalent in the CBD and city fringe locations such as Rivervale, Maylands and Northbridge. Given the declining market conditions over the previous 12 months, many off the plan contracts are now showing a high premium which is unobtainable in the current market. True pricing levels can be hard to ascertain as developers withhold stock from the market until post settlement of the off the plan contracts rather than re-pricing their unsold stock which has the potential to inflict valuation pressure on those contracts.
A decent portion of the current contracts approaching settlement are from overseas buyers and local investors, however this has swung over recent months to a larger portion being interstate buyers, as locals become more cautious. Comparatively, Perth is still seen as relatively affordable with a reasonable yield (average of 4%) on offer. Local buyers are using more caution in investment decisions, however there has been a spike in the level of owner occupiers upgrading into new apartment complexes. The consequence of this is that the established apartment market in areas such as South Perth has stagnated as the interest is directed towards newly marketed complexes. The majority of this activity is in the $600,000 to $900,000 market segment.
In the detached housing market, investors are generally seeking a turn key product, able to achieve a return on investment from day one. This is leading to a decrease in interest in the current marketing strategies of some developers, whereby the investor is required to settle on a small allotment (sub 250 square metres) prior to construction commencing, as opposed to genuine off the plan developments. The inherent risk in this scenario is a front loaded profit, whereby the land is sold at an inflated amount, with the building contract subsequently appearing to be reasonable value. However the developer is simply reducing the risk profile of the development for themselves by bringing as much profit as possible forward in the development timeline. As the overall risk profile of the residential market increases, investors are seeking a less one sided contractual position. This is particularly prevalent in inner suburban areas which typically attract a more sophisticated investor. We note that as demand for this product eases, developments in outer areas are increasingly at risk of failing to satisfy pre-sale requirements and developers are increasingly defensive of maintaining contracted positions and are often seeking alternative financial solutions for their buyers. This is currently being witnessed in East Cannington, Beckenham, Kelmscott, Aveley and throughout the Peel region.
Amongst all the doom and gloom, there is a significant upside to the Perth residential property market at present. From an investor’s point of view, they are currently spoilt for choice, both in terms of type of product and location. Any cash buyer in the market will be in a very strong negotiating position in a market where some segments are down 10% over the previous six months. Interstate investors are already increasing their presence in the market place and we would anticipate that this will continue as markets in the eastern states continue to cool. If this fails to occur, the lull is likely to be for longer and potentially deeper than currently forecast, although as we have seen many times previously, the media is likely to play a significant role over the next 12 months.