Oversupply and what it means for investors

This week, 2GB rang me to seek my professional comment on an article that was on the front page of the Australian. Macquarie Bank published a list of Australia’s Top 50 Risky Suburbs and Ben Fordham wanted to clarify for his listeners, what made a ‘risky’ suburb for investment and how that might affect lending practices.

Interestingly, Ben made a statement about how we’re told as investors to buy properties within 10kms of the CBD. It’s true you can’t go too far wrong is this vicinity, however to be more accurate, the golden rule is 2-10kms from the CBD. Investing within 2 kms of the CBD is a terrible idea as the research demonstrates, time and time again, that this is one of the areas most prone to oversupply. 

Quite simply, the CBDs are the areas that are easiest to develop. 

It doesn’t have the same building restrictions in terms of height and floor area and there are fewer residential complaints.  It can be cheaper to build because there is usually less space allocated for outdoor living, especially in terms of balcony space. But most importantly for the investor, Australian’s don’t like to live in the CBD.  We like being close, in the inner city suburbs, but not actually in the CBD. Most Australian CBDs are like ghost towns after 6pm during the week and on weekends.

Banks know that Australians don’t like living in the CBD and their lending policies reflect this. It’s much harder to get a 90% lend, making this kind of property harder to leverage. Even in the ‘great lending’ era pre-GFC, lending policies in this area in every city in Australia was usually capped at 80%.

With a tendency to oversupply, the rental yield can suffer as tenants have more bargaining power when brand new apartment blocks go up but aren’t filled quickly.  For the Australian investor, this is even more important as, in recent years, they’ll be competing against money borrowed from China at a much cheaper rate. 

Typically Asians prefer to live in the CBD.  In countries like Hong Kong, Singapore, Japan and China, living in the CBD is the most prestigious place to live.  So when there is an oversupply in the CBD and investors drop the rent to attract buyers, a local investor can only afford to drop it so far before the consideration to sell becomes a real possibility. If you’re borrowing at 4 or 5% compared to 1 or 2% it’s easy to see that the local investor will need to let go of the property sooner, not taking into account pulling in funds from elsewhere.

So Investor Beware – the 5-15kms zone is much safer than the CBD.

To find out more call Calla Property on (02) 9016 2852 and listen to our resident property expert discuss this topic on Ben Fordham’s show on 2GB