How to make a windfall from the apartment market..
I was sent this article today from a subscriber interested to know what effect – if any - it may have on the cycle.
The article reveals plans by the NSW government to overhaul planning rules in Sydney for high-rise apartments.
In short, controls would be placed on both the design and size of apartment buildings.
“On a high-rise development site the amount of land that can be covered by the tower has been reduced by about 30 per cent.
The formula is complex but its intention is clear: unless the tower is made much higher the amount of apartments that can be built on a site is substantially less.
There is (also) a requirement that one bedroom in each apartment and two bedrooms in a three-bedroom apartment must be made larger to accommodate work from home.”
The article concludes that apartment prices would escalate
But it’s not that simple
When this happens, the effect on land values is more significant.
Land is worth its zoning.
If you suddenly change that zoning reducing what can be constructed on the site, you lower the earnings of the block.
As a result, you also lower value of the land.
That adjustment would happen pretty quickly if the market were only made up of active developers.
But it’s not.
There’s a heap of land bankers out there who purchase with zero intention of constructing – happy to sit on the sites for years and years.
Here's Lendlease’s August 2020 announcement telling investors how they only want to build 1,000-2,000 apartments a year.
That is despite having a “pipeline” of over 53,000 apartments land-banked. (Heads up to Cameron Murray who alerted me to the release.)
Brings back memories of comments made by Apartment billionaire Harry Triguboff at a lunch held by the American Chamber of Commerce in 2014.
He told the audience he was able to pay “very little tax”.
“I keep a lot of my properties.
And if you keep them and there’s capital gain it’s beautiful,” he says “You don’t pay tax. I don’t lease them so I don’t pay tax on the rent, but I get depreciation.”
He paid tax on apartment sales but that’s where the land banking came in. “You have to buy lots of empty land,” he said. “You keep the land and it brings you no income, so you claim it against your tax.”
Never forget that developers control the supply of accommodation that comes to market – and therefore, they also control market prices.
Planning controls can have an effect on that supply – but only in so much as developers will not construct anything, unless they are assured of a healthy profit.
All developers are greedy – and why not?
It’s policy that has to change if we want affordable accommodation, not developer’s mind-sets.
Despite this, many think it’s good that the quality of apartments is being regulated.
(Not that it would need to be if we didn’t live in a monopolistic system that encouraged speculation.)
But no matter what the quality of apartment stock, it doesn’t make apartments in any capital city of Australia a good investment.
At least not if you’re chasing capital growth that is.
I have plenty of examples of well-designed apartments going nowhere in price – for decades.
There’s still only a relatively small demographic that desire living in apartments in Australia.
No one is rushing to downsize into them. The buyer market is basically made up of one demographic – investors.
And in many regions, it’s oversupplied.
Never forget, that the real winners in the apartment market are those that play the game like Harry Triguboff and sit on land.
Not the “mum/dad” investors that purchase off-plan.