The riskiest areas for off-the-plan buyers

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Buyers of off-the-plan apartments in Rouse Hill in Sydney's north-west are among those most at risk of settlement troubles due to falls in valuation as a result of oversupply and weak demand, a RiskWise report shows.

Investors are also facing tighter borrowing conditions and a potentially severe cash flow crunch amid high vacancy and falling rents.

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The high-rise apartment sector remains dangerously oversupplied. Craig Abraham

A total of 1661 apartments are due to settle in Rouse Hill over the next 24 months – more than triple the existing supply in the suburb.

Gosford in NSW's Central Coast is about to be flooded with an additional 1859 apartments – a 72.9 per cent increase to the current stock, while Parramatta is due to add 1553 apartments, increasing supply by 13 per cent.

RiskWise chief executive Doron Peleg said off-the-plan apartments in outer suburbs were particularly risky not just because of oversupply, but also due to the demographics of the area.

"These are areas where houses are more popular than units, so investing in off-the-plan apartments is risky because of low demand. You're essentially asking people to change long-term behaviours in a soft market," Mr Peleg said.

Buyer’s agent and chief executive of propertybuyer.com.au Rich Harvey said buying new apartments in outer suburban areas like Rouse Hill "made no sense".

"While it may be nice to have a shiny new kitchen and bathroom, there is a significant downside price risk as the supply of land for further development is plentiful," he said.

"Some DA-approved sites aren't selling in Rouse Hill because no developer in their right mind would buy it because it would take too long to sell apartments in a house-heavy area."

Investors were also warned against investing in off-the-plan apartments in the Melbourne CBD, Docklands, West End, Adelaide, Darwin and Surfers Paradise due to heightened settlement and cash flow risks.

"Rental markets have been weak for inner-city apartments due to the absence of international students and tourists, so buying into over-supplied areas at a time when the international borders are effectively shut would only serve to compound risks," Mr Peleg said.

Mr Peleg said investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase.

"Even if you plan to hold it over the long term, the prospect of capital gains remains low for off-the-plan apartments in these areas," he said.

"Currently, you have far better alternatives as an investor, by focusing on free-standing houses in the outer areas of Melbourne or in South East Queensland, for example.

"For the same amount of money you spend on an inner city apartment, you can get a house that's most likely to grow in value and give you solid long-term returns."