Darwin has made the list of the riskiest areas in the country for property investors, due to an oversupply of rental units and low demand, according to new research by property market researchers RiskWise.
Even as Australians flee locked-down cities for the coronavirus-free Northern Territory, the new report by RiskWise released this week, shows demand for rentals remains low, posing a risky environment for investors.
RiskWise chief executive Doron Peleg said there is a “high degree of risk” in certain areas, which also included Melbourne city, West End in Brisbane, Adelaide and Surfers Paradise.
He said investors should be “extra cautious” when deciding to purchase a house. The COVID-19 pandemic has driven up vacancy rates across Australia to an “all-time high peaking in May at 16.2 per cent, and dropping slightly in June to 13.8 per cent”.
“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 were turning to safer house-and-land packages suitable for families,” Mr Peleg said.
“Investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase.”
Strong demand in a tight market
Elders Darwin Real Estate manager David Oliver, says vacancy rates were sitting at seven per cent before the onset of the coronavirus pandemic.
But the increase in people who have relocated to Darwin, coupled with the fact many people have cancelled plans to move interstate, has driven vacancy rates to an all time low of 0.9 per cent.
“There is actually a strong demand,” he said.
He says lower interest rates have spurred on buyers to come into the market and are purchasing to stay.
“We have seen more demand for inner city apartments, particularly in the past six to eight months,” he said, adding that Darwin is seeing some of the lowest vacancy rates in eight years.
“We’re looking at quite a strong consolidated market provided our community is managed.”
In the lead up to the global coronavirus shutdown, development of high rise apartments had almost stopped, Mr Oliver said.
“In those early months of the pandemic, construction basically came to a halt and we haven’t seen much of a pick up.
“So what we have is a low vacancy rate, a buyer pool dominated by buyer occupiers, and much of our land being bought up.
“With the limited development due to the slowdown in construction, we are actually looking at a tight market.”
Coronavirus-induced recession poses risks
Pete Wargent, co-founder of Buyers Buyers, a national agency, highlighted uncertainty in the economy has been heightened in 2020. He says buying into oversupplied areas at a time when international borders are effectively shut “would only serve to compound risks”.
“Rental markets have been weak for inner-city apartments due to the absence of international students and tourists…where possible, buyers should look towards more supply-constrained markets and assets with a genuine scarcity value,” he said.
The oversupply of rental apartments is not a new issue, Mr Wargent added.
“Out-performance has mainly been in family appropriate dwelling types in markets where demand is consistent and new supply has been restricted.”
Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage, RiskWise’s David Paleg said.
“Across the country, rents fell 0.5 per cent in the June quarter. It is the sharpest decline in two years, and a reversal of the growth recorded before the start of the COVID-19 pandemic,” he said.
“The equity risk, being the risk for price reduction that already had been high prior to COVID-19, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased.”
The Top 10 riskiest areas to invest in Australia (RiskWise):