New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report
New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

The Inner Melbourne Apartment (IMA) market has undergone a boom in new residential activity since 2012/13, being underpinned by the upturn in off-the-plan sales that commenced in 2009/10 following the Global Financial Crisis, according to BIS Shrapnel's Inner Melbourne Apartment Market Brief. 

In particular, development in Inner Melbourne has been dominated by large scale and high rise development in the following locations: Melbourne CBD; Southbank; Docklands; St Kilda Rd/Queens Rd; Carlton; Port Melbourne; St Kilda and South Yarra.

APARTMENT PROFILE DEMAND PROFILE

Private rental apartments account for 58% of all apartments in the IMA area, considerably higher than the 25% share across all Greater Melbourne. This highlights the preference of investors to purchase properties close to good transport links and major commercial, retail and entertainment centres, where tenant demand is likely to be greatest.

Owner occupied dwellings represented only 28% of IMA area apartments, with both fully owned and being purchased dwellings in lower proportions than the Greater Melbourne average. Unoccupied dwellings— those that are held as second homes or kept empty as a speculative investment—comprise a high 14% of total apartment stock in the IMA area, (9% in Greater Melbourne). This level may have even increased since 2011, given the higher incidence of overseas buyers and expectation that many will not find their way to the rental market.

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

DEMAND PROFILE

The age profile of apartment residents suggests that people first rent when moving into the IMA area (52% of occupants in rental households aged 20 to 29 years old). There is a higher propensity to purchase an apartment for those aged beyond 30 years of age.

Households with a mortgage are mostly younger, with 51% of people occupying an apartment being purchased aged 30 to 54 years old. Within fully occupied apartments, the largest age cohorts are 55 to 69 years old and 20 to 24 years old.

The high prevalence of 20 to 24 years olds suggests that the older households are likely to contain adult children. Alternatively, these young adults may be living by themselves in fully owned apartments – i.e. perhaps in a dwelling owned by their parents or other family.

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

DEMAND DRIVERS 

The age profile of apartment residents suggests three main groups driving occupier demand: students, young adults, and older empty nesters.

Students account for 21% of the Inner Melbourne Apartment population, with 85% being overseas students. Overseas students create instant demand, typically opting to reside close to their place of study. The decline in overseas student enrolments from their 2009–2010 peak was not felt as greatly in Inner Melbourne, as most (around 80%) were in higher education courses, where enrolments had not dropped as far as other education sectors. Moreover, after beginning to recover in 2013, growth in overseas student enrolment has been strong in 2014 and 2015, which should lead to stronger tenant demand.

The young adult apartment population is typified by those in white collar management or professional positions working in the inner city. This segment comprised 74% of the non-student demand for apartments in the IMA area at the 2011 Census.

Empty nesters are classified as those aged 45 years old and over, being either singles or couples without children. Empty nesters comprised 26% of the non-student adult population in the IMA area at 2011 Census.

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report 

INVESTMENT

Rental Vacancy Rates

Vacancy rates in Inner Melbourne (indicated by a six month average which is used to iron out monthly variations due to lumpy stock additions) have steadily risen since bottoming out at 1% in 2008.

Vacancies rose above the balanced 3% rate over 2012/13, with the rate in the Inner Melbourne 0-4km area increasing to 3.8% (and remaining relatively high at 3.5% since). This reflects the rise in apartment completions in this time and time required for the market to digest. With the apartment supply to remain around peak levels in the medium term, vacancy rates in the Inner Melbourne 0-4km area are likely to remain above the balanced rate of 3% for some time, restraining both rental and price growth.

New apartment supply in Inner Melbourne at record levels: BIS Shrapnel report

Rents, Prices and Yields

Table 1 (main picture) outlines the weighted median two bedroom (the most common type of unit) rent and weighted median unit price of the IMA area post codes, along with an indicative yield representing the rent divided by the price.

Unit rental yields peaked at 5.55% at June 2009 after strong rent growth over the prior three years outpaced price rises. Together with low interest rates, this helped to trigger the 17% post–GFC rebound in median prices over 2009/10, causing yields to fall below 5%, although remaining above the levels of the early 2000s.

A correction in prices in 2011/12 saw yields rise to 5.35%. This level of yield supported the modest price growth in 2012/13 and 2013/14, which was also underpinned by the low interest rate environment during this period. Since then median prices have corrected downwards in 2014/15, continuing in 2015/16.

Competition from new apartments has also negatively impacted rents, with median rents showing almost no change over the last four years. In light of the fall in prices, the indicative yield for a two bedroom apartment in the IMA area is expected to have risen slightly to 5.1% at June 2016.

SUPPLY PIPELINE

New apartment supply in the IMA area is at record levels, averaging around 6,000 apartments per annum in the four years to 2015/16. off-the-plan investor demand has been strong since 2009/10, buoyed by attractive yields, low interest rates and uncertainty in other investment markets.

Although rent and price growth has been flat in this period, any weakening in domestic investors in response to the rising new supply has been offset by elevated demand from overseas investors (primarily from Asia), who have sustained another round of apartment pre–sales and construction activity since 2011. Overseas buyer demand is being supported by low borrowing costs, relatively buoyant economic conditions in their home country, and a preference to invest in a more transparent and stable political environment.

Demand for apartments by overseas investors shows little signs of abating despite further increases to supply. A lower Australian dollar is making apartment prices attractive to overseas buyers despite the fundamentals becoming more adverse. Over 24,000 apartments, or nearly 8,000 per annum, are on track to be completed within the IMA area over the three years to 2018/19—more than triple the long term average of 2,563 apartments per annum in the sixteen years to 2011/12. Around 15,700 apartments are in projects already ‘locked in’ and under construction, with many currently marketing also likely to go ahead.

The Melbourne CBD precinct will be the main source of new apartments in the IMA area over the three years to 2018/19, accounting for 40% of total new apartment supply. Apartment completions as a proportion of the total IMA area is expected to be next greatest in the Docklands (18%) and Southbank

(15%).The Carlton, South Yarra and St Kilda Rd precincts are projected to account for 9%, 8% and 8%, respectively, of new apartment supply in the IMA area, while minimal new apartment supply is expected in both the St Kilda and Port Melbourne precincts.

 

 

 

 

 

Tags: 
Melbourne Apartment Boom

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