VIC Excerpt from the 2012 March Market report

Bright spots emerging

Victoria investors eye the low end along with Melbourne’s widening outer ring

Melbourne’s property market certainly could use some good news after a tumultuous 2011. While analysts do forecast some degree of relief for the greater Melbourne market, savvy investors are finding more immediate gems in the low end as well as outer areas that are opening up because of new highway and train lines.

The Real Estate Institute of Australia’s spokesman Robert Larocca sees signs that Melbourne’s recent troubles should be behind it. “The market is coming much more into balance than it was in the past.

“The Victorian market is going to be a much more stable market in the next couple of years than it was in the last couple and that means investors are going to have to be very astute and make good judgments if they are going to profit.”

One bright spot that analysts had been pointing to was the fact that through much of 2011, Melbourne’s rental market had held firm. But the year-end numbers from SQM Research seem to have taken much of the shine off that theory, as the vacancy rate in the capital city peaked in December at 4.4%. That is a full point jump from November’s total, and the highest in six years.

SQM’s data showed rental vacancies on the rise across most Australian capitals, but the group’s managing director Louis Christopher noted that while most could be blamed on seasonal variations, that probably was not the case in the Victorian capital. “Melbourne is looking ominous and we are expecting rental declines for this capital city for 2012.”

With uncertainty clouding Melbourne’s inner market, both analysts point to the outskirts of the capital city, where they see growing activity in regional areas with good access to Melbourne.

CBRE’s Manager of Residential Research Sam Reilly agrees, saying the low end of the market is especially well placed to perform well despite continuing economic uncertainty.

“For the affordable unit stock range in Melbourne, there is still pretty good demand for that. That hasn’t been nearly as badly affected as the premium market has been in Melbourne.”

Reilly says he is not quite yet ready to say the rough patch is over for Melbourne, but he believes the doomsayers are blowing things out of proportion. “I think when we talk about the slowing that has occurred, we need to appreciate that the Victorian property market was outperforming the rest of the Australian market quite considerably. So it needs to be in context of that.

“I mean we haven’t seen big levels of discounting, you know that real stress that we have seen in the other Australian markets like Perth for example where there have been some large capital declines right across the board. Melbourne has certainly ground to a halt, but it hasn’t seen that real property stress that other areas have been experiencing.”

Employment stress is a major issue, Reilly says, as the region is especially reliant on manufacturing jobs that are being squeezed by international competition and the rising dollar.

“The other sort of medium-term trend in the Victorian market is strength in the corridor between Melbourne north and Bendigo along the train line,” REIV’s Brendan Dunn says. Bendigo property values have indeed been one of the rare Victoria bright spots, with several of the suburbs in the area boasting strong growth. In fact, six of the state’s top 10 performing suburbs over the last quarter of 2011 were located along the corridor between Melbourne and Sydney, according to the most recent Residex data.

“Bendigo has been a bit of a sleeper and has come awake over the last couple of years,” says Rod Devlin of the PRD Jens Gaunt office serving Bendigo. “People are realising with the duplication of the highway and what have you, that Melbourne is a lot closer than it traditionally was and they can get good value for money.”

Devlin says investors feel secure with rental vacancy rates at less than 1%. “They are pretty much only vacant between when they move in and move out,” he says. Population growth has been strong, with the region topping 100,000 recently and not showing signs of letting up.

Reilly eyes several other regions that will soon feel a whole lot closer to Melbourne because of transportation improvements. A train line will soon link West Werribee to downtown Melbourne, he points out, “so that is going to obviously provide a good pickup in demand for those areas that are close to that improvement in public transport.”

He also highlights major highway improvements like the construction of the Peninsula Link Road in the south and the improvements to the Western Ring Road linking the outer western and northern suburbs to downtown.

“They are just examples of where you start to see those real estate fundamentals of proximity to good public transport and access to employment hubs being more accessible to people in those areas,” he says.

“And certainly what we have seen in a slowing market is that there is a real flight to quality. People are really focusing on those areas that have access to those important attributes that underpin capital value. So they’re the areas that are certainly well positioned based on what’s happening in Victoria.”