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Quality Residual Apartment Stock Sales Scarce


With the over hung of apartments in Sydney, Melbourne and Brisbane the prospect of securing completed residential apartments at or below cost for a build to rent investment strategy has appealed to several investors, however finding and securing quality assets is difficult.

In May, Altis with the backing of FirstState Super secured a block 61 apartments in Epping from a developer who fell into administration. That acquisition was completed at an average price of $573,000 per unit and a discount to previous market of approx 32%. The Altis strategy employs the NRAS model to obtain tax benefits for leasing stock to eligible tenants at below market value and to hold the stock as an investment for 10 years.

Altis are scouring the market for other deals to add to their portfolio, however few developers are selling.

This week Moelis acquired 54 apartments in one line from Payce for $28.5M ($527,777 per apartment), reflecting a discount to current values of circa 25%. The apartments are all in a single block known as Vision, located within the 779-apartment mixed-use "South Village"project in Sydney's Kirrawee.

Late last year, Consolidated Properties' sold 25 apartments in one line in the high-rise Spire development in the Brisbane CBD at a discount of 20 per cent.

The prevalence of Residual Stock parcels in quality assets is low. There is relatively little distress stock in the market with most developers being able to repay construction debts and holding on to stock rather than coping a 25-35% discount for an in one line sale. The availability of residual debt loans has also kept residual stock sales to a minimum.

The key risk to investors adopting the strategy is in capital growth and liquidity. Whilst there will usually be a market to sell an individual apartment, there is little evidence of a market to sell in one line sales, resulting in most investors currently having to rely on a gradual sell down to return investment capital, a process which is may be more challenging than expected.

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