Looming crisis just around the corner…

Read a spooky article today By Jon Giaan...Who incidentally is a developer.

He reckons it is all unravelling in Melbourne with the appartments. In a big way. Most people here are across this....but its the scale of everything that has got my interest.

Normally I'm sceptical about any media on the market....but this is a guy who should be trying to push the market higher.....not deliver warnings.

Makes for an interesting read. Especially in that context.

 

Apartments are monumentally in big trouble. I wouldn't want to be holding any at the moment (alas I have two legacy ones), let alone have debt on them.

The real question is is the apartment blow up going to be contagious... Especially if China has a hard landing. There's a huge debt bubble brewing over there and in Aus as well, looks very reminiscent of US 2008.

Really need to start hedging my bets.

 

Or get into a position to move in and pick up some bargains in the not-to-distant future.

Apartments are a bit precarious; the Body Corp etc kills the cashflow, lots of investor owned apartments in one complex can dilute the rental demand and stop rent increases, and no-one can guarantee Cap Gain.

 

Yep will be picking these things up for nothing soon, direct from developers. That's if you even want them.

 

US crash there were as much as 70% drop in real estate, can you see properties in major capital cities dropping this low?

 

I think we have been spreading the word on PC not to touch this product, many will get burnt.

 

A hard landing is only a risk case at this stage. You could say we've had a debt bubble for 10 years...but prices have kept going up.

Those shoebox sized apartments are just about the worst investment you could make. Even if they fell 25% would you buy it?

 

Not really. But neither did anyone in the US. Or anyone buying BHP in the super at $30, which I'm sure there's no shortage of either here or amongst friends you'd know.

Shows how much we all know.

 

Probably not 25%. Would you buy it for 50% though? $250k with car spot brand new two bed room with skyline views and swimming pool and club house etc. Can I tempt you with $150k maybe?

 

I certainly would not want to be owning CIP in Perth at the moment, its ugly at the moment.

 

Haha. You have to wonder though, with all this foreign investment into these apmts. At some point, you would think they would want to exit their investment and sell their high strata apmt which is no longer "new", can only be sold back to locals but doesn't match well the needs of the local market.

 

Of course cg in oversupplied apts will be in trouble...will it be contagious? I dont think so. The demand for non oversupplied well located stock is still strong and will continue to be strong imo.
Might see overseas targeting that market more. ie the OO market and renting it out to rentvestors or other long term tenants ..instead of the frenzy we have seen to date from overseas buyers in investor oversupplied apts.

 

Cbd office space has a 25% vacancy rate, and increasing!

 

You'd want to be holding a lot of Syd and Melb retail spaces though. Imagine a street that had no one living there before. Suddenly 10000 more customers, daily. If they gave you $1 each per day you'd make $10000 a week.

 

You want to be careful of the type of retail though. If it can be done overseas then danger. Things that must be done here should chug along ok. For instance a pizza chain might be managed overseas and ordering systems overseas, but the pizza would have to be made, or at least heated up and perhaps delivered, by local teams on the ground here. Same deal with coffee. Food service should be ok as people need to eat. I would be wary of things like clothing stores, given the popularity of buying clothing online.

 

Yes I can see it happen hence the need to have hard ratchets on atleast half of your rentals

 

It wouldn't matter if it's a good spot. If the current business fail, a new one comes in.

I had a place a few years ago that had around 3 new apartment blocks around it, a new hotel across the road and a new ASX 20 local headquarters across the road. Anyway the tenant left, I ended up with 4 parties wanting to pay 50% more rent and I had to choose which one I wanted.

 

Jon is posting another warning again. He makes a compelling argument.
How the crash will play out

 

Already happening - friend from you-know-where - bought 5 apartments in a development complex. It was meant to settle in 2 weeks, but it's been postponed, because apparently too many people have forfeited the deposits and the developer is probably going to default at this rate.

My friend's quite worried her deposits on her 5 apartments are going to disappear. I told her she'll probably lose less money just forfeiting the deposits.

 

"when you’ve got cookie-cutter apartments without much to differentiate them-selves, it’s even more problematic."

When there is nothing to differentiate themselves, then all it becomes is a commodity. The only viable strategy for commodities is being lowest cost producer. It'll be a quick race to the bottom for the apartment developers.