What does the future hold for inner Sydney’s apartment market?

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Curious about the future of inner Sydney’s apartment market?

Investors who are wondering just how long the boom times can continue should find the forecast in a just-released report, by industry analyst BIS Shrapnel, interesting reading.

According to the Inner Sydney Apartments 2014 to 2021 report, the inner Sydney apartment market boom is set to continue – with median price growth of 6% over 2014/15 and 2015/16 - for a few years.

This is due to buoyant investor demand, which is underpinned by low vacancy rates, the expectation of further price growth and low interest rates.

High levels of off-the-plan sales over the next two years will drive further rises in new apartment completions to an historic peak by 2017.

This sustained level of additional stock has the potential to tip the inner Sydney apartment market into oversupply, report author Angie Zigomanis said.

However, in the absence of any negative news in relation to the Sydney residential market, investor demand was likely to remain buoyant, he added.

“Vacancy rates will remain relatively tight in the short term until the upturn in new construction translates to completions.

“Low interest rates and low or volatile returns for other investment classes are expected to continue to encourage investors into residential property.”

In inner Sydney, there are around 5,800 apartments currently under construction with further projects likely to go ahead, according to the report.

This is 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.

Zigomanis said that, to some extent, the market is playing “catch 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 progressively work their way through to completion.”
While demand from investors and owner occupiers is expected to remain strong, it is unlikely to keep pace with the record level of new apartments due for completion over the next three years.

As a result, the report forecast that vacancy rates will rise in the coming years, while rental growth will slow and rental yields will decline.

Zigomanis said this meant that landlords of newly-completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments might have to discount to attract tenants from neighbouring suburbs.

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, he added.

“Therefore, any underlying excess supply should be mopped up relatively quickly, with an underlying deficiency re-emerging towards the end of the decade to underpin the next upturn in the cycle.”

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