A ticking time bomb for high rise apartment owners | Research statistics all property investors must understand

If you’re a property investor, I’ve got a warning for you. 

Some high-rise buildings are going to become the slums of the future. 

As a property investor, it’s important to recognize that you’ve got to own the sort of property that’s going to outperform the averages, and many properties in the future are going to underperform because they have a shadow hanging over them. 

That’s the one million apartments build over the last decade or so. 

In today’s episode, I’m going to explain a little more about what I mean and what you can do about it. 

I’m also going to have a chat with Brett Warren, director of Metropole Properties Brisbane about the research you should do to help understand what’s happening on the ground in property markets. In fact, it’s the research that we do and he’s going to explain how we do it and what you should look for. 

Then, in my mindset moment, I’m going to tell you a story about a Cherokee Indian. This story has an interesting message that will help you gain some clarity for your future. 

Warning – some high-rise apartment buildings will become the slums of the future.

The way we live in Australia has changed. 

We’re trading backyards for balconies and courtyards and this has resulted in around one in five Australians living in an apartment today - up from one in seven in the 1990’s.

The problem is not all apartments are the same. 

Some will make great investments increasing substantially in value over the long term, but many of the high-rise towers built in the last fifteen years will continue to underperform with poor, if any, capital growth in the foreseeable future.

This sector of the property market has lost the trust of the buying public and confidence will take quite some time to restore as various stakeholders including state and local governments as well as the construction industry including building surveyors and certifiers scramble to shore up building sector.

You see…there tend to be three major types of building issues faces by apartment owners:

1. Structural defects – These are the ones that grab the headlines but, in reality, major structural issues only relate to a small number of buildings.
2. Fire issues – These often relate to inferior cladding used during construction. Cladding audits are ongoing, but so far 629 affected buildings have been identified in Victoria alone.
3. Water issues – These are very common and occur to some extent in almost every new building – things like leaking balconies, showers and roofs. While these are a nuisance and can be expensive, they can usually be rectified.

Fact is, the buildings with major problems requiring mass evacuation are the outliers, but for those involved their losses will be significant as they will have hefty repair bills and have no real market for the sale of their apartment in buildings that could well become the slums of the future.

But that’s not all folks…

The standard of high-rise apartment tower construction is a vivid example of how in today’s disposable society, the quality of many things is falling in the pursuit of bigger profit margins.

This in stark contrast to the quality of the 100-year-old buildings that stand proudly next to them in our CBD’s. They were craftsman built with durable materials and have stood the test of time and multiple generations. They still stand strong today – a far cry from the buildings being thrown up in the modern era.

But I believe recent round of disclosures about structural problems in the apartment towers built over the last decade or two for the investor market is just the tip of the iceberg.

It’s been suggested the high-profile stories that have hit the media are just the tip of the iceberg and many more buildings with structural problems – some big, some small – will come to light over the next few years.

Some developers will have the funds to repair their buildings, but others won’t. 

And insurance often won’t come to the rescue of the unfortunate owners as sometimes it will be difficult to know where to lay the blame: 

• Councils who have encouraged higher density development and at times been willing to negotiate building guidelines in order to promote development.
• Developers who have chosen the cheapest builder to increase profit margins
• Builders who been prepared to compromise to win the deal.
• Contractors who may have been willing to cut corners like import cladding from overseas because it was cheaper. 
• Certifiers who approved the standard of construction.

And even if when the issues come to light, they are repaired, what rational purchaser is going to want to buy into these buildings? 

The bottom line:

Demand for apartments is set to accelerate from a more diverse buyer profile as apartment living emerges as a preferred lifestyle for many, from the younger generation leaving home to the older generation wanting to downsize

The peak of the current building cycle has now been reached and it has now emerged that many of the buildings built during the last construction boom will have a shadow hanging over them for some time.

At the same time reluctance from future purchasers will make it harder for new developments to have sufficient pre sales to get out of the ground at a time when tighter planning restrictions for apartments, particularly in suburban areas, will exacerbate the emerging undersupply of dwelling required by our growing population.

This will create two tiers of units moving forward. Solidly built medium density apartments and townhouses developed by reputable builders and many of the towers that dot our big cities that could well become the slums of the future.

Research statistics for property investors

People often ask us, “what research do undertake at Metropole?” What do your research team and your buyers agents do to understand what’s happening in the local market? 

There’s lots of information you can get on the internet, lots of reports that come out, but I believe that when you have an on-the-ground team that has been purchasing properties and buying and selling on the ground, you can learn from their perspective, and that’s what I’m going to talk to Brett Warren about.

The common things that most investors and homebuyers look for:

• Median house prices
• Auction clearance rates
• These are lagging indicators
• Metropole property experts drill down a little deeper and look for more immediate indicators

What Brett Warren’s team looks for:

• Asking prices
• Stock on market
• Time on market - If time on market shortens significantly, it means the market is heating up
• Discounting
• Demographics of the market

Brett’s team doesn’t just look once, they look and analyze information each day. 

They also examine the difference between this time in the market and what the market was doing this time in previous years.

Links and Resources:

Michael Yardney

Metropole Property Strategists

Metropole’s Strategic Property Plan – to help both beginning and experienced investors

Brett Warren – Metropole Properties Brisbane

Organise a time to speak with Brett by clicking here 

Read the show notes plus more at the show web page A ticking time bomb for high rise apartment owners | Research statistics all property investors must understand

Some of our favourite quotes from the show:

“Which wolf is going to win your battle? Let me answer that right now: the one that you feed.” – Michael Yardney

“Median prices are very much a lagging indicator because what’s reported is often what’s been sold 30, 60, sometimes 90 days earlier.” – Michael Yardney

“At the end of the day, the property statistics can help you get a better understanding of the property markets, and the statistics we’re currently examining are suggesting that it’s a great time to get into the market.” – Michael Yardney

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