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Did the buyers of The Block apartments overpay?

Even real estate agents agree that the prices paid for apartments on The Block show were well over fair value.

Jellis Craig’s Andrew McCann has told Fairfax media that the penthouse apartment, which sold for $2.3 million, was valued between $1.5 and $2 million. Labelling the sale “at the premium end” is one way to describe overpaying.

Each of the five apartments were renovated by contestants on Channel Nine’s The Block, with the auction finale broadcast last night. It’s the eleventh season of the show and appears to be losing its lustre. Last night’s finale had the worst ratings in five years.

All five apartments sold well over their reserve prices, with the winning couple pocketing $655,000 over the reserve for the penthouse.

But property investors should disregard the prices paid as an indication of potential prices and high demand for Melbourne units. Fairfax’s Domain says that the prices paid per square metre for the apartments was cheaper than those of The Block’s townhouses in the same suburb sold in April this year.

Buyers paid between $7,700 and $10,200 per square metre (sqm) for the apartments, and between $10,000 and $12,700 sqm for the townhouses.

Of course, a direct comparison is difficult given their different locations, type of building, inclusions such as furniture, and type of buyers. Investors mostly bought the apartments, while it was mainly owner-occupiers who went for the townhouses.

Domain says investors buying the apartments could also claim a minimum of $1.5 million in depreciation deductions and up to $1.9 million, thanks to the amount spent on the renovations. That’s not a direct cash hand back of course, and the actual amount an investor receives back will depend on his or her tax rate.

But buyer’s agent David Morrell has also told the Australian Financial Review, “Anyone who buys a Block apartment is in need of psychiatric help”, saying one apartment had a “petrol station view”.

The Block

Source: Facebook/The Block

Foolish takeaway

Investors will likely have taken a long term view, so probably won’t be too worried about recent falling auction clearance rates in Melbourne, nor the prospect that that often leads to falling apartment values.

What they might be concerned about is if that negatively impacts on rental yields, and whether the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) will lift interest rates on investor mortgages even higher. Falling income and higher expenses are never a good combination, but both are definite possibilities.

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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