BIS Shrapnel forecasts 6% annual inner Sydney apartment price growth over next two years

BIS Shrapnel has forecast inner Sydney ­new apartment completions are set to peak in 2017.

Its report, Inner Sydney Apartments 2014 to 2021, showed around 5,800 apartments were under construction around inner Sydney and 11,500 apartments would be finished over the next three years.

The anticipated peak of 4,500 apartment completions by 2016/17 is expected to be on par with the previous 1999/2000 peak, the BIS Shrapnel report author, Angie Zigomanis said.

Source: BIS Shrapnel

Total price growth of around 21%, or just under three percent per annum, is forecast through to 2021.

The report warns landlords of newly completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to discount to attract tenants from neighbouring suburbs,

Zigomanis said declining rental yields will be ­sustainable while interest rates remain low, and the gap between rental income and mortgage repayments is relatively narrow.

But weak purchaser demand and prices will emerge once interest rates lift, with BIS Shrapnel expecting a rate rise by the end of 2015, and further rises in 2016 and into 2017.

But in the man time short-term demand for inner Sydney apartments is expected to remain buoyant and BIS Shrapnel expects median price growth about 6% per annually over 2014-15 and 2015-16.

The downturn is expected in 2016-17.

Zigomanis said Sydney was still catching up after years of ­under-development and weak demand for new apartments.

He pinpointed three demographics that will assist rental demand including overseas student enrolments increasing for the first time since peaking over 2009–2010; growth in long term overseas visitor arrivals, and professional employment growth in inner Sydney expected to be relatively robust. 

"With most inner Sydney apartments purchased by investors, these groups will contribute to rising tenant demand and help to fill up the new apartment stock," Zigomanis said.

"Owner occupier demand is also likely to grow, with rising inner and middle ring Sydney house prices encouraging some tenants to instead upgrade to a larger apartment in inner Sydney as an owner occupier, while also encouraging empty nesters and retirees to more easily trade down from their existing house to an apartment."

Nevertheless, says Zigomanis, this strengthening in occupier demand is not anticipated to be sufficient to keep pace with the record level of new apartments expected to be completed over the next three years, with vacancy rates forecast to rise in the coming years.