A new report by BIS Shrapnel forecasts that the current boom in the
inner Sydney apartment market will continue over the next couple of years and
will peak in 2017. The boom is fuelled by buoyant investor demand, underpinned
by low vacancy rates, expectation of further price growth and low interest
Leading industry analyst and economic forecaster, BIS Shrapnel in its Inner
Sydney Apartments 2014 to 2021 report says that high levels of
off-the-plan sales over the next two years will continue, driving further rise
in new inner Sydney apartment completions to a historic peak by 2017. On the
downside, this sustained level of additional stock can potentially tip the
inner Sydney apartment market into oversupply.
Senior manager and report author, Mr Angie Zigomanis explains that investor
demand for inner Sydney apartments was initially driven by attractive yields in
a low interest rate environment, but continues to be encouraged by the
expectation of further capital gains.
According to Zigomanis, investor demand is likely to remain buoyant in
the absence of any negative news in the Sydney residential market. Vacancy
rates will be under pressure in the short term until the upturn in new
construction translates to completions, while low interest rates and low or
volatile returns for other investment classes are expected to continue to
encourage investors into residential property.
There will also be demand from overseas buyers attracted by the stable
economic and political environment of Australia, as well as its transparent
property market. Zigomanis observes that the inner Sydney apartment market is catching
up after almost a decade of weak demand for new apartments and limited price
growth. However, the current surge in off-the-plan demand is likely to see the
market get ahead of itself again as pre-sold new apartment projects commence
and progressively work their way through to completion.
BIS Shrapnel estimates around 5,800 apartments in inner Sydney are
currently under construction with further projects currently marketing, or
likely to go ahead, expected to result in 11,500 new apartments being completed
over the next three years. While the anticipated peak of 4,500 apartment
completions by 2016/17 is expected to be on par with the previous 1999/2000
peak, the average supply forecast of just over 3,800 apartments per year will
be above any previous three-year period.
Highlights of the Inner Sydney
Apartments 2014 to 2021 report
Overseas student enrolments are increasing for the first time since
peaking over 2009/2010, and growth in long term overseas visitor arrivals has
also returned, while professional employment growth in inner Sydney is also
expected to be relatively robust. With most inner Sydney apartments purchased
by investors, these groups will contribute to rising tenant demand and help to
fill up the new apartment stock.
Rising inner and middle ring Sydney house prices will encourage some
tenants to upgrade to a larger apartment in inner Sydney as an owner occupier, while
empty nesters and retirees may more easily trade down from their existing house
to an apartment.
While declining rental yields are sustainable in the current low
interest rate environment where the gap between rental income and mortgage
repayments is relatively narrow, weaker purchaser demand and prices are
anticipated to emerge once interest rate policy enters a tightening phase. BIS
Shrapnel forecasts the first rise in interest rates by the end of 2015, and
further rises over 2016 and into 2017.
Zigomanis observes that landlords of new apartments will have to be more
competitive to attract tenants over existing stock, while owners of older
apartments may have to lower rents to attract tenants from neighbouring suburbs.
The decreasing gap between rental returns and mortgage servicing costs will
reduce the amount purchasers are willing to pay for an apartment; many owners
who bought at, or close to the top of the market could experience losses if
they sold into the downturn.
However, the forecast downturn from 2016/17 will be relatively shallow,
with vacancy rates not expected to reach the levels of the mid-2000s downturn
following the last apartment market boom.
Demand in the short term for inner Sydney apartments is expected to
remain buoyant, with low vacancy and interest rates helping to fuel the market
and drive median price growth averaging around six per cent per annum over
2014/15 and 2015/16. This level of growth is expected to be ahead of the
magnitude of decline in prices anticipated over the following two years. As a
result, total price growth of around 21 per cent, or just below three per cent
per annum, is forecast through to 2021.