Sydney building activity vs. demand

In the ultimate twist, could Sydney, a city so famed for its shortage of housing, be in danger of becoming oversupplied with units?

Midway through last year, one of Sydney’s largest developers decided to make a critical switch, one that says a lot about where the city’s property market is at the moment.

A consortium made up of Frasers Property and Sekishui House was in the process of constructing Central Park – a new $2bn “urban village” at the old Carlton Breweries site in Broadway – but changed the concept for one of the buildings at the last minute to take advantage of some changing conditions in the NSW property market.

The building had originally been planned to house office space, but the developer put in an application to change the building to residential space. The idea was that the purpose of the building would go from accommodating commercial tenants to accommodating students.

 

There were some initial reservations about the idea. The change in plan would increase the number of students in the area from roughly 370 to over 1,100. Existing residents worried that this would turn the streets of Broadway into a haven for drunken revellers, but the plan eventually got the nod from local council.

In the end, the change meant that the 870 proposed new student dwellings would supplement Central Park’s other residential buildings, which are estimated to include close to 1,500 new apartments – a significant amount in any housing market.

The fact that the developer was willing to downgrade its commercial offering and increase its residential stock showed how much of a gamble it was willing to take on the Sydney housing market. The official reason for the change was that the developer believed, in spite of the massive increase in housing stock it had produced, that it would still be easier to find residential buyers over commercial ones.

But what’s a couple of extra houses got to do with anything investing may be asking?

In itself, the incident wouldn’t have held much significance, except that similar events have been happening all over the city. And the numbers prove it. Current residential building activity is at a level that hasn’t been seen in almost 20 years.

Housing Industry Association (HIA) figures indicate an 8.6% increase in new dwelling commencements between the September and June quarters of last year and association chief economist Harley Dale says this could become something of a theme for Sydney and NSW at large.

Dale adds that over the 12 months to September there were 163,250 new homes commenced in all of Australia (the biggest spike in building activity since 2004, outside of the GFC-related stimulus) and the majority of these commencements came from NSW and WA.

“The overall recovery in new dwelling commencements since the trough [in activity] in March 2012 is being driven by New South Wales and Western Australia… but the recovery is also being driven primarily by other dwellings (multi units) rather than detached housing,” Dale says.

He adds that both housing segments are growing, but annual commencements for detached houses are 9% below their 20 year average while commencements of multi-units are running 35% above their 20 year average.

Supply backlogs

While the current scale of building activity is high, BIS Shrapnel researcher Angie Zigomanis warns that there are only a few areas in Sydney that stand any real chance of becoming oversupplied with new properties, but it may take many years for this to happen because so many markets remain undersupplied – and heavily so.

“In that Sydney airport corridor is probably where the most supply is coming onto the market and it has the greatest potential for new supply, but there are probably other pockets where there are some constraints on the release of new supply that can help keep demand up in that corridor,” Zigomanis says.

RP Data’s Cameron Kusher agrees and says that current building activity, while at record highs, has been well overdue.

“There’s definitely still pent up demand in Sydney and that’s because the lack of new dwelling construction has been far greater in Sydney than it has been in other capital cities. Dwelling construction is increasing but there is 10 to 15 years of catch up that needs to be done.”

Kusher points out, however, that the challenge for the city’s property market will be whether developers can release new apartments into the market at an affordable price. The city may be short of property, but Sydney’s high purchase prices continue to be a deterrent for a lot of would be buyers.

Suburb to watch

Surry Hills

CPM Realty’s Sam Elbanna explains how Surry Hills’ continual transformation is creating investment opportunities

Selling points: Surry Hills is an area of endless possibilities. On one hand it is becoming a more sophisticated area with expensive cars and people in suits; on the other there is still a popular art scene and a trendy bohemian feel to the area.  You also can’t beat the location in terms of proximity to the CBD, transport and amenities.

Most sought-after properties: These tend to be new luxury apartments. The revitalisation of the suburb over recent years has led to more young professionals and property investors buying up the modern complexes. This is in contrast to a few years ago when the most common properties were lower end, cheaper houses and apartments.

Top amenities: Due to its amazing location, nothing is ever too far away and there is easy access to all forms of transport as well as banks, a hospital, sports grounds and Sydney University. Surry Hills also has great nightlife, cafes, trendy shops and independent retailers. Plenty of professional businesses have set up shop to take advantage of the changing atmosphere and culture.

Recent changes: In the past, Surry Hills was associated with drugs and crime; but the combination of cheap living and prime location proved too tempting and the area was flooded with young residents and a return of cashed-up professionals.