The oversupply of units in Brisbane’s inner city shows no signs of abating and is exhibiting plenty of red flags for developers and lenders, according to a research group.
RiskWise Property Research has highlighted that not only is equity risk a “major” issue for investors, the market is also being impacted by increased vacancy rates and risk to cash flow.
The group’s CEO, Doron Peleg, has warned that there’s still plenty of supply still in the pipeline – 5,431 units to be precise – an addition of 5.9 per cent of the current stock.
Back in 2018, RiskWise analysis was already pointing to weaknesses in the city’s unit market – leading to an elevated level of risk for investors.
The result? Lower valuations and rising defaults on settlements, which Mr Peleg has flagged as “not a new problem”.
He believes the “continuous weakness of the unit market in inner-city Brisbane should raise red flags for developers and lenders”, with defaults expected to keep increasing.
“One of the key factors has been developers’ lack of foresight regarding unit oversupply as well as the impact of lending restrictions introduced from 2014. It seems there has been no methodological and structured risk-management approach, including identification, assessment and mitigating action plans to address those risks,” Mr Peleg outlined.
“This takes us back to the feasibility stage, which includes the assessment of the projected fair market value and the likelihood of defaults and their potential consequences. Developers and lenders must find the right balance between taking risk and making profit.”
Mr Peleg has warned that “COVID-19 has only served to increase the risk”.
While there are no less high-rise properties on the market, there is a smaller pool of interested investors.
But the problem could have been avoided “if developers and lenders had put more proper risk-management practices in place”, according to the CEO.
He’s also urging investors to remember that the value of off-the-plan property could decrease between the original contract date and settlement, and that this could result in capital loss.