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    Brisbane offices and inner city apartments competing for developer dollar

    BIS Shrapnel

    Demand for inner Brisbane apartments has exceeded new apartment supply in recent years, and rents and prices have subsequently grown strongly, according to leading industry analyst and economic forecaster, BIS Shrapnel.

    Despite this, new apartment completions for residential use fell from 2,200 dwellings in 2005/06 to 1,300 in 2006/07, according to BIS Shrapnel.

    This drop was due to lower off-the-plan sales from investors, competition for sites from a booming office sector, and a buoyant hotel market which has encouraged investors to hold their apartments back from residential rental for use as serviced apartments.

    The escalating deficiency in apartment stock is forecast to lead to further strong rises in rents across the inner Brisbane area in the next two years.

    BIS Shrapnel expects the resulting rise in rental yields will finally start to lure investors away from the serviced apartment and developers away from the commercial property activity from 2009/10, leading to higher apartment construction, according to company’s Inner Brisbane Apartments, 2007 to 2012 report.

    Senior project manager and study author, Angie Zigomanis, says a significant 1,832 newly completed apartments were held back from the residential rental market between 2003/04 and 2006/07 and set aside for short stay rental as serviced apartments catering to the tourist sector, this equates to 23% of total inner Brisbane apartment completions over this period.

    In 2003/04 Zigomanis estimates 433 apartments were released into the serviced apartment market in the inner Brisbane area, followed by 418 in 2004/05, 204 in 2005/06 and 777 in 2006/07.

    Rising occupancy rates and strong growth in room rates in the tourism accommodation sector has meant apartment investors have opted to lease to serviced apartment operators who can offer a better return, despite a healthy 64% rise in the median rent for inner Brisbane apartments since 2001, robust tenant demand from young apartment dwellers and empty nesters and strong population growth.

    The inner Brisbane apartment market has had a shortfall of rental stock since 1999, reaching a deficiency of just under 1,000 dwellings as at June 2007, according to BIS Shrapnel.

    Though the deficiency of rental stock has so far supported strong rental growth, Zigomanis believes rises in excess of 10% per annum (as seen in recent years) are not sustainable indefinitely and subsequently forecasts rental growth will ease back to be more in line with income growth by 2011/12.

    “Rising room rates have meant serviced apartments have provided investors with better returns than residential rents for inner city apartments. In addition, fewer new apartment projects are being marketed as the booming office sector draws developers to commercial uses for their sites,” said Zigomanis.

    “We are forecasting the price of inner city apartments will grow 36% in the next five years, though in the coming two years offices will provide developers with a much better return. We also expect investors will reap better returns on serviced apartments than residential apartments over the same period,” said Zigomanis.

    Better earnings for developers and investors will mean the booming office and serviced apartment markets will continue to constrain new apartment supply during the next two years, according to Zigomanis.

    Strong demand for office space from a booming Queensland resources sector, together with delays in new construction, has led to historically low vacancy rates in the Brisbane office market, according to BIS Shrapnel senior project manager, Christian Schilling.

    “In the Brisbane CBD, effective rents have more than doubled in the past two years, while capital values have shot up by 150%,” said Schilling. “With employment growth persisting and a large amount of pent-up demand still in the market, the office space currently under construction will only go some way to alleviating the short-fall in space.

    “Accordingly, we expect strong rental and value growth will persist in the near term, promising exceptionally strong returns and driving up the price of land beyond the reach of either residential or hotel development.

    “Alas, the boom cannot last forever and the Brisbane office market will eventually bust. We’re forecasting an oversupply will start to emerge in the first half of next decade.”

    The inner Brisbane apartment market’s vacancy rate will remain tight out to 2012 as new apartments slowly become available.

    Subsequently, Zigomanis forecasts rents to grow 37% over the five years to 2011/12, or an average of 6.5% per annum with growth strongest in 2007/08 and 2008/09.

    BIS Shrapnel forecasts apartment completions will remain around 1,200 dwellings in 2007/08 and 2008/09 before a moderate increase in off-the-plan activity results in a higher number of completions in 2009/10 (1,500), 2010/11 (1,700) and 2011/12 (1,800).

    The time-lag between off-the-plan purchase and apartment completion means new apartment supply is likely to peak around 2013-2014, according to Zigomanis.

    New apartment construction will pick up more significantly as returns start to slow, with Zigomanis believing developers will become less interested in the office market and re-consider apartment development for their sites.

    Similarly, as more purely hotel projects come to the market going forward the need to operate residential apartments for the tourism sector will be reduced and more newly completed apartments will remain available for traditional residential rental.

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