Inner Sydney's apartment constraints: BIS Shrapnel's Angie Zigomanis
GUEST OBSERVER
The Inner Sydney apartment market has experienced a rise in demand for off–the–plan apartments in recent years, which has resulted in new supply reaching its highest annual total in fifteen years of 3,350 apartments in 2014/15.
In particular, development in Inner Sydney has been dominated by large scale and high rise development in the following locations:
- City Core, including Quay (1), City Centre (2) and City South (3)
- Pyrmont/Ultimo (4),
- East Sydney (5),
- Surry Hills (6)
- South Dowling (7)
- North Sydney (8)
APARTMENT PROFILE
Rental apartments account for 55% of total apartments in the ISA area, considerably higher than the 28% share across all Greater Sydney dwellings. This highlights the preference of investors to purchase low maintenance dwellings such as apartments, as well as properties close to good transport links and major commercial, retail and entertainment centres, such as a Central Business District, where tenant demand is likely to be greatest.
Owner occupied dwellings represented 34% of ISA area stock, with a greater share of these having a mortgage (being purchased). Conversely, an Inner Sydney apartment area significantly higher 65% of all Greater Sydney dwellings were owner occupied.
In addition, unoccupied dwellings—those that are held as second homes or kept empty as a speculative investment—comprise 11% of total apartment stock in the ISA area, compared to 8% across Greater Sydney. Despite relatively high new apartment supply in 2014/15 being forecast to continue through to 2018/19, unoccupied apartments share of total ISA area dwellings is not expected to substantially increase. Given the current deficiency of rental stock in the ISA area, the majority of investor purchased apartments are likely to be made available for rental.
Rents, Prices and Yields
Table 2 outlines the weighted median two bedroom (the most common type of unit) rent and weighted median unit price of the ISA area post codes, along with an indicative yield representing the rent divided by the price.
Tight vacancy rates of below 2% in Inner Sydney during the second half of the 2000s decade resulted in solid unit rental growth and the indicative yield in the ISA area improving to a high of 5.93% at June 2009.
Unit rental yields remained relative attractive over the following four years to June 2013, at above 5.5%. However, an easing trend emerged in 2012/13, as interest rate cuts from late 2011 started to lift purchaser demand, which drove solid unit price growth of 7.4% in 2012/13.
The low interest rate environment has persisted, strengthening investor demand, which has resulted in solid unit price growth of 10.2% in 2013/14 and an estimated 9.5% in 2014/15. Relatively low borrowing costs also reduced cash outflows for investors and diminished the necessity for landlords to seek a higher rental return, leading to rental growth of less than 1% in 2013/14 and a similar expected rise in 2014/15. Consequently, the indicative unit yield in the ISA area has diminished to an estimated 4.65% at June 2015, and slightly below the previous low 2003–2004 levels.
Angie Zigomanis is senior manager, BIS Shrapnel and can be contacted here.