Property

Letting 150 apartments in 1 – 2 months

The purpose of this article is to consider how the market responds to a large increase in supply and the Residential Tenancy Authority statistics do prove to be useful. The purpose is also to discuss some strategies that have been used in leasing up such volumes.

There is often a sense of excitement with the opening of a new apartment building, everything is fresh and modern and there is plenty of discussion about the property. There can also be some sobering moments when the management consider the leasing up of the property and realise the challenge ahead of themselves. There are a lot of apartments to fill in a short period of time. Some recent examples have been buildings where the on-site letting agents have had up to 250 apartments to lease up as the new apartments in the building settle.

Often there is the taxi driver/hairdresser conversation of: “Where will they find the occupants for that large building?”, and… But history has shown they fill up. Both on-site and out-side agents will experience the same problems with letting up new properties. The modus operandi of a typical residential real estate agent (both sales and leasing) is to expose the property to the market for two weeks and then seek a price reduction, then after another two-week duration seek, a further price reduction, and so on.

In a new apartment building with say 150-200 apartments, a local real estate agent will only have one or two apartments and the strategy of a reduction after two weeks exposure will be effective for them. On the other hand the on-site manager will often have over 120 to lease, and importantly most of these investors do not want a long letting up period.

Balance of the market – One thing often not discussed is the balance of the market and the property economics that relate to it. Often the new supply of apartments is absorbed with demand from tenants. A new apartment building of 200 units will, by virtue of its scale, be a high rise, and all high-rise apartment buildings are concentrated around prominent business hubs where there is typically higher rental demand in these locations.

To analyse this discussion further, consider the opposite, where a high-rise apartment building is located in the urban-rural fringe of one of Australia’s capital cities. Whilst we acknowledge that it would unlikely achieve development approval, it is also likely to be in low rental demand. In contrast an inner city location (like Fortitude Valley in Brisbane or Southbank in Melbourne or Chatswood in Sydney) has a strong rental market and demand necessitates a high rise. Accordingly in the inner city location, the market is in balance. These new buildings also have the ability to attract tenants from outside of the current suburb and generally an increase in supply does not result in a lower market rental.

However when a new building is released on to the market, the supply of apartments for lease spikes in the first month or two and then balances out after month three. The impacts of these releases of large volumes of supply can be seen in the graphs following. Often a lower median rental is achieved when demand is out of balance to the supply in the short term. This changes when the apartments become fully leased and the high volume of supply is eliminated.

Meet the market – As humans, when selling an asset we like to hear the highest price. It is no different from trading in a car or selling a house. We all listen and focus on the highest price discussed. Property investors are the same and will always focus on the rental appraisal letters provided. However as the property stays vacant, the investors will over time start to question and revise down the asking rental.

One of the main ways to lease up the apartments quicker is to offer a rental slightly less than the competing product. The outside agents have a strategy of setting a price and continually dropping until the property is leased and this is effective with one or two apartments in a building. The on-site manager will have a larger letting pool in the building and needs to apply a similar strategy “to meet the market” to lease up the units quickly and compete against outside agents. A key factor not stated is the fact that the on-site letting agent is on-site,and can undertake an inspection at short notice.

In every off-the-plan building we have been involved with there has always been the smart investor who determines the primary asking rental of all available apartments, and then adopts an asking rental for their apartment at 5 per cent lower. This strategy does prove effective as it is usually this apartment that is leased first.

A key strategy is to price the apartments slightly less than the current market and to effectively secure and lease the majority of the enquiry. Another factor is first mover advantage – by that we mean being the first building to be pro-active and the first building to react. We are not just referring to price but first to inspect, first to process the rental application, and have approval to accept an immediate counter offer from a prospective tenant.

The on-site letting agent has the advantage to know the other rental levels in the buildings and will have the ability to show tenants other apartments in the buildings should the one they enquired on now be leased. You will also find when outside agents provide details of a new apartment for lease to a prospective tenant, the tenant will usually drive past the building, and often enquire direct due to on-site management’s signage.

Developer support – Support from the developer of the building is required. This is often in the form of a marketing budget, staff preparing press releases, information packs and the letting appointments and providing human resources to conduct inspections.
Another factor is the developer rental guarantee. The rental guarantee provides the purchaser with some comfort of income in the short term. Developers are aware of the need to partner themselves with the on-site letting agent and this is another reason why management rights are becoming more popular in New South Wales and Victoria.

Rental guarantees can be costly to a developer if they have no control over the letting process. We have witnessed developments where there has been no on-site manager and the developer has “stumped up” the full rental guarantee as the investment owner has sought to keep the apartment new and vacant.

The rental guarantee through an on-site letting agent allows the developer to vary and be aggressive with the asking rentals in order to lease up the apartments, in short, to meet the market. Developer support for a pioneering project is considered necessary, as the success of the project will depend on how quickly the investors receive a return. The pioneering project will often have a shallower depth of market and will subsequently require additional marketing.

The sale of the management rights should not be seen as modern day alchemy but rather as an investment where an investment in support and marketing will return dividends. The claw-back clause in an off-the-plan purchase reinforces this. If the developer does not promote the on-site manager, then the manager will be unlikely to obtain that letting appointment.

Difference between rental and income – We have come across examples where the investment owner have held out to achieve the highest rental, however this strategy can backfire as other investment owners quickly drop their asking price.
This does bring us to the property investment fundamental of rental v income. Rental is the passing rental. Income is the annual amount of rental allowing for vacancy. This is best observed in an example. Do we take $500/week now for 12 months or hold out for six weeks to achieve the target rate of $550/week. The income earnt would be $26,000 v $25,300 respectively.

Consider the data in the graphs following. Reflect back to when there were significant increases in the supply of apartments within specific locations, and observe how the median rental declined in that quarter. For this we have analysed the inner city suburbs of Brisbane and we have consider the one bedroom, two bedroom and three bedroom stock separately.

Historically over the past five years it can be seen that if the median rental (in one of the inner city locations) does drop in one quarter it usually bounces back in the next quarter. The movements observed are short term variations, and the long term focus should be income. In the scenario above, the period of vacancy will often impact more significantly than the rental rate achieved.

Residential Tenancy Authority statistics – In the chart of the one bedroom apartments it can be seen that the increase in supply that occurred in the Brisbane City/Spring Hill region during 2008 through to 2010 did cause the median rental rates to commensurately fall. It can also be seen that some of the increased letting did occur during the March Quarter, which was the period where there is new student activity. It can also been seen that in Bowen Hills/Valley/Newstead region in September 2010 that the increase in supply was accompanied by a reduction in the median rental rate.

It can also been seen from the above graph (for the location of Newfarm/Teneriffe) that the increase in supply can also be accompanied with an increase in the median rental rate.

AN63-2-PROP-Strata Sense-Table-1

The reader should be aware of the statistics used. The bond data represents new leases and therefore contains newly constructed stock and also older stock being leased up again. It does not include lease renewals and therefore does not indicate the size of the market. It therefore provides insight into the volume of letting units in a location. As expected as the market becomes larger, a subsequent large increase in supply can be absorbed – as displayed with the one bedroom apartments within the Brisbane CBD in early 2014.

The impact of the National Rental Affordability Scheme can distort the figure and downplay the rentals. The NRAS rentals are struck at a rate 20% below the prevailing market rate, and the corresponding Bond Lodgement amount is at the lower amount. When large volumes of NRAS stock are released onto the market, the median rental rate can be lower.

AN63-2-PROP-Strata Sense-Table-2

What is noticeable in the two bedroom chart is the spikes in the March supplies, which is further explained by the student lettings, and the amplitude of these spikes are higher in the Auchenflower and Toowong region, a region where a large number of University of Queensland – St Lucia students reside.

Another point to note is the growth in supply in the Brisbane/Spring Hill data in March 2011. The two bedroom supply increased by 70 apartments (from average around 320/quarter) and the median rental in this period fell from $575/week to $540/week (a fall of 6 per cent).

AN63-2-PROP-Strata Sense-Table-3

One of the most noticeable points above in the three bedroom chart is how the supply in March 2013 increased in three of the collection areas (Brisbane/Spring Hill, Highgate Hill/South Brisbane/West End, and Auchenflower/Toowong) and the median rental declined for the corresponding quarter. Also noticeable is the immediate lift in the rentals, often to back to a higher level than the preceeding quarter. It can be seen that some developments are leased up quickly and in order to do that rentals are discounted somewhat until the building is leased. In effect, once the new building is leased, the rentals return to the previous levels, and apartments in other buildings lease up again at normal rates.

Letting up strategies – In the second part of this article we will discuss the strategies of how to quickly lease up the apartments. There are a number of examples where the rental was not decreased and high volumes of apartments were leased. Key factors with this have been a unique product offering and effective marketing.

From early into the new millennium some developers have been pro-active in marketing the apartments for lease. For some large national developers, we have heard of marketing budgets of up to $250,000, others have had budgets of $100,000 and others have had none. Some developers now provide a letting up team to help expedite the letting process

One of the clear strategies that are adopted in the market is to drop the rentals in order to quickly lease up the apartments and this strategy does prove to be very effective.

Over the past few years we have seen the increase in rental guarantees by developers of the major apartment developments. Once the building is complete, the developer effectively pays the difference between the guaranteed rental and the rental struck under the new lease. Developers are keen to reduce their debt exposure and will often instruct the letting manager to accept applications with rentals below the asking rate. As the rental guarantees vest with the developer, it has become a simple mathematical exercise to offer a discount or incentive in the promotion in order to achieve “ramped up” letting period, which in turn reduces the developer’s financial liability to the rental guarantee.

There is a push to accept a lower rental when there is a high volume of supply. When a lower rental is accepted, the letting agent will generally sign the tenant into a six month tenancy agreement with the future intent for the rental to revert back to the market level. The savvy developers often mitigate down their rental guarantee exposure by effective rental marketing expenditure.

In recent times we have seen more discussion on rental incentives, and this is a practice being used in Melbourne with apartment sales and is being adopted for rentals in some mining towns. In the mining towns we have seen the use of free ipads, iphones, and free plasma televisions. Other incentives that have been offered in the mining towns for vacant houses has been a “removalists contribution” of up to $2000.

Incentives and inducements are nothing new in property. They were used in the commercial property markets in the 1990 as a means to fill vacancies in office buildings. Back then holidays and cars were offered, with a common trend to a fitout contribution. These incentives ceased when the market became balanced again. It can be seen that they are a one-off tool used to fill the property.

Some perspective needs to be applied, as often the increase in supply of say 100 x two bedroom apartments for one suburb will be absorbed by residents of surrounding suburbs and from a far, so the impact on a suburb is softened. Another aspect is that once the building has been leased up, the increased supply disappears (or absorbed) and rentals go back to previous levels.

In the above graphs this phenomenon can be observed. If the market rentals do decline after an increase in supply, the rentals invariably rebound to previous or higher levels.

It is likely we will see more incentives being offered when new buildings are released onto the market especially when the developer has an exposure to a rental guarantee. These may be in the form of restaurant or movie vouchers and even ipads. It is likely wireless devices will be offered when some internet infrastructure is not in-situ when the building opens. You can rest assured they will only been short-lived and will occur only when a significant lease up is required.

In some large housing estates and communities we can see the lines blur. Marketing and promotion is used to create the sense of community and being used as an inducement. For example, coffee vouchers to support the local café but landscaping vouchers to lot purchasers are an inducement. Where the community or the estate is being marketed both for sale and rent, we will see further inducements of furniture packages, relocation reimbursements, landscaping, shopping vouchers etc.

All building managers should be aware of this practice. One way to counter this if your building will be exposed to a new release is to be pro-active by offering their tenants with potentially earlier renewals or potentially a 12 month leases until the new development is leased up.

The observed successful marketing strategies we have witnessed are:
• Advanced marketing, ie before the building is complete
• Listing the properties for lease on both the main websites of www.realestate.com.au and www.domain.com.au
• Listing on the developer’s created website
• Localised advertising like signboards and bill boards, local buses
• Community based marketing
• Area networking with joint marketing eg Teneriffe Managers brochure
• DL cards and flyers
• Incentives and inducements by the landlord or developer, eg plasma TV’s, payment towards removalists, ipads
• Increased use of social media

As large apartment buildings are released onto the market for lease, we will continue to see significant marketing campaigns and the further use of inducements. We will see further short-term drops in the median rentals with a corresponding bounce-back in the next quarter.

We expect to see further relationships build between the developer and the purchaser of the management rights. This support will extend beyond the settlement date and developers will view this as an investment into the future for when they showcase their past apartment development to new unit purchasers.

 

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