Sydney's apartment construction boom: What does it mean for investors?

If you live or work in inner Sydney, you'll only be too aware that the city is now well into a dwelling construction boom.

In particular, the inner city is seeing the building a new apartments aplenty.

The Reserve Bank will certainly be well pleased to see this, for part of their grand plan was for low interest rates to stimulate dwelling construction as the mining investment boom passes its peak and tails off.

And after years of weak supply, Sydney certainly needs the dwellings: the city's population is increasing by more than 60,000 persons per annum.

In the inner city and in parts of the inner south, at times it almost feels as though every available block is under construction.

This will lead, no doubt, to a spate of articles citing a forthcoming oversupply and a "major shake-out" coming.

And in certain sectors of the market, this may indeed be true.

In the central business district (CBD), Sydney tallest residential tower will soon appear. At Barangaroo, a whole new suburb is in the process of springing out of the ground, albeit with much of the space allocated for commercial ventures and parkland, in addition to a number of luxury apartments.

In the city's inner south, a huge amount of development is underway.

If you are a home buyer looking to stay put for a reasonably long period of time, then these new developments may suit you fine.

However, from an investors point of view, there is far better value and potential capital growth to be found elsewhere, in established stock within certain suburbs located a little way from the city.

For some there may be a time and a place for buying expensive apartments 'off-the-plan', but now is probably not that time.

Instead investors should look towards some of the favourably-located leafy suburbs which are located within easy striking distance of the CBD, but not in the CBD itself (where there are few height restrictions on building and there exists an oversupply risk).

Look to suburbs where there is no land available for release and where tall tower blocks will not be granted development approval, thus capping the population growth.

A small amount of redevelopment in a suburb can be a good thing, for the price of new stock can underpin existing dwelling prices, and a six pack of units where a house once stood is not going to suddenly cause an oversupply in a city with a population growth as strong as that of Sydney.

Over the last few years, relatively high vacancy rates in Melbourne led a number of bearish market commentators to predict a major correction in  the city's wider housing market.

But while in certain high rise developments and suburbs prices may have stagnated, established stock in supply-constrained suburbs have defied the gloomy predictions and continued to demonstrate impressive rates of growth.

We'll likely see similar trends unfolding in Sydney. The city is not into a very strong growth cycle as I anticipated long ago, but capital growth does not continue forever.

When the next cyclical downturn arrives - be it in 2016 or 2015, or whenever - investors who hold well located stock close to the median price range in supply-constrained suburbs will be thankful. Those who own over-priced high-rise stock where vacancy rates are higher, will not.


Pete Wargent is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

 

His new book 'Four Green Houses and a Red Hotel' is out now.

 


Pete Wargent

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.

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