Melbourne apartments predicted to be oversupplied

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Property investors have been warned that the inner Melbourne apartment market is heading into oversupply, and won’t tip back in the favour of landlords for some time to come.

According to BIS Shrapnel’s Inner Melbourne Apartments 2012 to 2019 report, while the GFC created something of an upturn in Melbourne’s inner-city unit market – leading to improved rents and yields in the immediate aftermath – the tide has well and truly turned.

BIS Shrapnel senior manager, Mr Angie Zigomanis, said that as the economic outlook improved over 2009/10, and alternative investment forms such as equities remained weak, rising yields and a pick up in price growth saw investors begin to flood the inner Melbourne apartment market.

However, supply is now beginning to outstrip demand in the city centre, he warned, with the pipeline of construction in inner Melbourne now pointing to “record levels of supply”, and a big question mark hangs over whether there will be sufficient demand to occupy this rise in the supply of apartments once they are completed.

According to BIS Shrapnel’s analysis, the population profile of inner city apartment occupants in Melbourne indicates that the large majority can be divided into three categories:

  • Students, with the growth mainly coming from overseas students;
  • young professionals, who are typically employed in white collar occupations in the CBD or CBD fringe locations; and
  • empty nesters, such as older singles or couples without children living in the family home.

The first two groups, say BIS Shrapnel, largely drive the demand for rental apartments, while empty nesters are typically owner-occupiers.

“Apartment rent demand from young professionals experienced a setback during the GFC as employment in the financial sector declined. While this rebounded briefly as the recovery came through, growth has again slowed in line with the economy,” said Zigomanis.

“Student demand has also weakened, although most of the reduction in overseas student numbers has taken place in the vocational education sector compared to the university sector, and with major university institutions located close to the Melbourne CBD, the softening in student demand has been less pronounced. As a result, tenant demand has softened.”

As Melbourne’s tight rental market and strong price growth driving up the demand for inner-city apartments in 2009/10, BIS Shrapnel noted that off-the-plan sales in the city were much stronger than those of east coast rival Sydney.

Rental apartment completions are now forecast to increase from 1,800 in 2011/12 to an average of 2,800 per annum over 2013/14 to 2015/16. This compares with an average 1,600 rental apartments completed annually over the last decade and a forecast tenant demand of 1,500 apartments per annum in this period.

“The record levels of new apartment supply in inner Melbourne over 2013/14 to 2015/16 will push the market into oversupply and vacancy rates will rise,” said Zigomanis. “The high level of competing stock means that landlords will be unable to command the premiums that are traditionally available for new apartments, while owners of older established apartments will have to discount the asking rent on their apartments in order to compete”

Lower rents will also mean lower returns for potential investors, predicted BIS Shrapnel, forecasting that prices for inner Melbourne apartments will remain flat while sales volumes fall – until the excess supply is absorbed. It is predicted that many owners will experience a decline in prices should they decide to sell their apartment before the market comes back into balance.

Do you own an inner-city Melbourne apartment? What’s your strategy? Tell your story by commenting below or logging onto our property investment forum.

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