An Apocalypse of Melbourne’s Inner-City Real Estate Echoing the 1990s Downturn
Another week and another pitch from a large development company to build more high-rise apartment towers in Melbourne.
This time it comes from Connex Capital, an alliance of property and infrastructure investors.
They want to spend some $25 billion to construct 9,000 apartments above the rail lines between Flinders Street and South Yarra stations.
From The Age:
‘“This is a nation-building project,” the project’s spokesman, Sam Almaliki, said. “It’s a once-in-a-generation opportunity to deliver a significant economic and social benefit, affordable housing and connectivity between Federation Square and Richmond and cultural and sporting hubs.”’
The problem is that Melbourne — once judged the world’s most liveable city — has been decimated by the lockdowns, the state government’s draconian ongoing restrictions, and needless vaccine mandates.
The atmosphere of the city has totally changed from its pre-COVID vibrancy.
One in five CBD shops sit on the market for lease with no demand.
Every second person I talk to these days has a plan to leave Melbourne.
The city is dead, and many of its high-rise towers sit empty of residents. With little demand, high-rise rents and prices have gone backwards.
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Having walked through many CBD apartments in my time in real estate, I can confirm the building quality is appalling.
Back in 2018, Melbourne City Councillor Nick Reece admitted as such. Saying that many of Melbourne’s high-rise monstrosities were ‘crap’, poor quality construction:
‘“We have let too much crap be built,” Melbourne City Council’s planning chair Nick Reece says…
‘“We want to see more buildings that give back to the public realm,” says Cr Reece, who argues that while Melbourne is by far Australia’s most attractive and interesting city, it has been degraded by recent bad architecture and design…
‘“We are seeing low-quality design outcomes”…’
Yet here we are — years later — still building the same ‘crap’.
The Connex Capital tower has not met approval from the government yet. Talks are ongoing.
But the bottom line is that we already have WAY too many apartments scattered across Melbourne — and other CBDs — for that matter.
COVID has made the situation worse, with thousands of commercial offices also sitting empty, and residents no longer placing the same value on locations close to the centre of town.
It’s something I’ve been warning investors about for years.
We uncovered around 60,000 properties sitting vacant over a calendar year in Melbourne in Prosper Australia’s most recent ‘Speculative Vacancies’ report. Properties not for sale, and not for rent.
The only way these ‘dogboxes’ (as they’re commonly called in the industry) can be filled is with a massive immigration influx.
No surprise then that Nick Reece, now Deputy Lord Mayor of Melbourne, is calling for a ‘massive wave of new immigrants to help get the city back on track’:
‘Our city now needs a massive wave of new immigrants to help get the city back on track.
‘The population of Melbourne is projected to be 300,000 less by 2025 compared to where it would have been without the pandemic. While Australia will be almost one million people down.
‘Across Melbourne, businesses are facing acute labour shortages…
‘Australia had an immigration plan to help rebuild after World War II, now we need an immigration plan to help rebuild after the war on COVID…
‘To bring back the buzz in all its glory we need the Commonwealth to come to the party and open the borders to a welcome wave of new arrivals.’
As reported in MacroBusiness recently, it wasn’t so long ago (January 2020) that Nick Reece called for Australia to get out of the ‘houses and holes’ trap that relied on immigration-fuelled growth.
‘Our economy and wages are stagnating, our cities are struggling to manage population growth and congestion, millions of Australians live below the poverty line…
‘The Australian economy needs to get off its dependency on “holes” (mining) and “houses” (population growth fuelled by immigration) and focus on enhancing productivity and building a high wage value-added knowledge economy…’
Still, politicians will do and say anything to save the construction industry and feed their biggest lobbyists.
This isn’t the first time Melbourne has faced an apocalypse of inner-city real estate.
Over a four-year period, between 1989 and 1993, Melbourne added close to 850,000sqm of CBD stock.
If you know your cycle history, this was right into the lead up to the 1990s recession.
Most of this property was speculatively built and flogged to unsuspecting investors — just as occurred in the lead up to the COVID panic.
It flooded the market in the early 1990s.
By 1993, CBD office vacancy rates in Melbourne reached 26%.
Agents shared stories of not being able to sell million-dollar commercial buildings at half the price.
The CBD vacancy rate rose more than 20%, and prime CBD office values fell roughly 50%.
A plan was put in place to convert CBD office blocks into apartments.
Fast-forward 30 years, and Melbourne Lord Mayor, Sally Capp, has put together a task force to do the same. That’s despite urban planners warning that there is simply not enough demand.
30 years is a significant time period to watch for repeats in cycles. The exodus of residents from Melbourne over the last 18 months echoes the same.
Over the past few weeks, Melbourne has seen the greatest increase in stock hitting the property market. This will undoubtedly cool some of the heated demand in the sector we’ve seen of late.
If I were a property investor shopping in Melbourne right now, I’d be sitting on my heels and waiting to see if the atmosphere cools further next year.
Editor, The Daily Reckoning Australia
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.