Melbourne: Behind the Research Black Curtain

Posted by Luke Graham

One of the largest challenges that a property researcher faces is coming to terms with the fact that property itself is perhaps the most emotionally charged asset class, and the drivers of performance will vary depending on the market within which the particular property operates. Often, investors struggle with this concept to their peril.

When posed with the question of whether Melbourne was ready for more thorough consideration and analysis, the three main concerns that initially needed addressing were:

Typical rental yields lower than the rest of Australia,

Inner-ring apartment sizes smaller than the rest of Australia, and

Perceived oversupply of residential property.

Fortunately, when analysing Melbourne we were able to address all of these concerns as well as others that arose during the process. Some of our findings are explained below.

Rather than increasing in price at the rate Sydney property has, Melbourne’s response to a national increase in property market activity was to reduce the size of housing at a heavier rate. This resulted in the size of a typical one bedroom apartment being well below the parameters set by the Blue Wealth research model as well as an increasing prevalence of bedrooms without windows.

Why was this successful? ‘Bad stock’ was (and continues to be) absorbed to a heavy extent by foreign investors who are unfamiliar with the Australian standard of living, as well as domestic investors who were led (in our opinion) toward a substandard investment. This has created two markets within Melbourne:

1. Sustainably designed homes with a view to appeal to owner occupiers and tenants alike into the future.

2. Unsustainable developments that are capitalising on Australian foreign investment policy and the lower ‘cost of capital’ available overseas.

After reaching this conclusion on the Melbourne market, our view was further affirmed when local government came to a similar finding. Melbourne’s Lord Mayor announced to developers that they are to ‘stop building coffins and start building homes’ in a bid to ensure occupants of housing in the Melbourne CBD were represented in the future planning of the city.

The silver lining to this cloud is in fact greater than the cloud itself. The two-tiered residential market in Melbourne has provided Blue Wealth clients with the opportunity to invest with confidence in Melbourne. This ensures that their thoroughly researched property will perform into the future and leave the inferior collection of inner-city Melbourne apartments in what will become Melbourne’s ‘construction dark ages’.

Posted by Luke Graham, on 23rd Sep 2014