Cautious optimism returning for Melbourne apartments

Investors are cautiously creeping back into Melbourne apartments, under the assumptions that the market has bottomed and prospects for rental and price growth are improving for the medium-term.

Of all Australian capital city apartments markets, Melbourne’s has probably felt the most pain from the pandemic, with the closure of international borders resulting in widespread vacancies, falling rents and plunging values.

But Urbis director Mark Dawson said research for the company’s latest Apartment Essentials reports showed rents were starting to stabilise and sales rates were lifting prior to Melbourne’s latest coronavirus-related lockdown.

“There was a visible pickup off the floor in late 2020,” Mr Dawson told Australian Property Investor Magazine.

“The clearance of inventory started to pick up in Melbourne, and continued in the first quarter of this year.

“It was behind the likes of Perth and Brisbane but it’s getting back up there bit by bit.”

Mr Dawson said a feature of the improving sales rate was increased participation in the market by investors, some of whom consider the market to have reached its cyclical trough and are expecting better times ahead.

“You can see across the country that finance commitments for investors have been creeping up and through our surveys we’ve seen that happening too,” Mr Dawson said.

“They’re all watching what’s happening, obviously rents have come back a bit in the inner city market but they look to have stabilised in recent times, and the listing volumes that we had during certain points of COVID have also settled."

Mr Dawson said one of the key considerations for investors was Melbourne’s future supply pipeline.

As apartment sales dwindled during the heights of the pandemic in 2020, developers pulled back on future project launches in line with the reduced demand, concentrating instead on selling those projects which were already under construction or recently completed.

“The pipeline has generally been trending down, particularly in Melbourne,” Mr Dawson said.

“The decline in approvals has been clear over time and the rate of launches has been trending down pretty clearly, so where we are at the moment is you are getting a bit more absorption of that residual stock and that more limited pipeline of stuff in pre-sales.

“That’s what we need to continue to see and I’ll be interested to see what impact this lockdown has on that, because we were clearly starting to see a bit of momentum there.”

Mr Dawson said many investors participating in the Melbourne apartment market had similar motivations to first home buyers, in that they were looking for counter-cyclical opportunities under the assumption that those times do not last forever.

He said investors had been buoyed by Australia’s swifter than expected economic recovery, continuing easy access to finance and an expectation that pain from the dip in values and weekly rents had already been felt.

“If you look through a more optimistic lens of vaccines being rolled out, people starting to return to work and migration to likely reach higher levels in a couple of years’ time, when you put that together against a thinner pipeline, you start to think there is a better prospect of rental and price growth over a five year period coming off this base than if you had been buying two years ago when things looked a bit shinier,” Mr Dawson said.

“It does speak to ongoing confidence in Australia and the big cities. 

“Melbourne is still an attractive and desirable place. It has had the door locked for a while, but once it opens, there is going to be a long line to get back in, recognising that the rebound can happen.”

The downside risk, Mr Dawson said, was that the momentum built in the first few months of 2021 may have been derailed by Victoria’s latest COVID outbreak and its associated lockdown.

“Prior to the latest lockdown I would have said I was confident that the market had reached the bottom,” he said.

“It got to a very low level last year and was creeping up quite visibly and almost seemed to be tracking behind the other markets in Australia in terms of recovery.

“There is a risk that that’s been set back by the most recent lockdown, but I am hearing that there is some good sales momentum in projects that are out there. 

“I’m optimistic that conditions will continue to be stable and improve, but we’ve got quite a way to run still, there is plenty of room to improve.

“The surrounding momentum that we’ve had with the wider housing market will drag demand back to off-the-plan apartments as well.”