The Sydney Inner City Apartment Boom Has A Couple More Years To Run: BIS Shrapnel

Apartments at the exclusive Woolloomooloo Finger Wharf. Patrick Riviere/Getty Images .

The boom in Sydney inner city apartments is expected to run for another two years on the back of investor demand, price growth expectations and low interest rates, according to analyst and economic forecaster BIS Shrapnel.

High levels of off-the-plan sales in the next year to two years will continue and drive rises in new inner Sydney apartment completions to an historic peak by 2017.

However, this sustained level of additional stock has the potential to tip the inner Sydney apartment market into oversupply.

Angie Zigomanis, the author of the report Inner Sydney Apartments, says investor demand for inner Sydney apartments was initially driven by attractive yields in a low interest rate environment but is continuing to be encouraged by the expectation of more capital gains.

“In the absence of any negative news in relation to the Sydney residential market, investor demand is likely to remain buoyant,” says Zigomanis.

“Vacancy rates will remain relatively tight in the short term until the upturn in new construction translates to completions, while low interest rates and low or volatile returns for other investment classes are expected to continue to encourage investors into residential property.”

Demand from overseas investors attracted by the stable economic and political environment of Australia is also expected to remain strong.

Measures to cool the property markets in their home countries, such as in China or Singapore, by restricting local investment are also encouraging this flow of funds.

“To some extent, the inner Sydney apartment market is playing catch up after almost a decade of weak demand for new apartments and limited price growth,” says Zigomanis.

“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 commence and progressively work their way through to completion.”

BIS Shrapnel estimates around 5,800 apartments in inner Sydney are currently under construction with further projects currently marketing, or likely to go ahead, 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 notes that occupier demand will also be recovering over this period.

Overseas student enrolments are increasing for the first time since peaking over 2009–2010, growth in long term overseas visitor arrivals has also returned, while professional employment growth in inner Sydney is also expected to be relatively robust.

Owner occupier demand is also likely to grow, with rising inner and middle ring Sydney house prices encouraging some tenants to 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.

Rental growth is likely to slow, but with further momentum expected in prices, rental yields will decline.

While declining rental yields are sustainable in the current low interest rate environment where the gap between rental income and mortgage repayments is relatively narrow, weaker purchaser demand and prices are anticipated to emerge once interest rate policy enters a tightening phase.

BIS Shrapnel forecasts the first rise in interest rates by the end of 2015, and further rises over 2016 and into 2017.

Demand in the short term for inner Sydney apartments is expected to remain buoyant, with low vacancy rates and low interest rates helping to fuel the market and drive median price growth averaging around 6% a year over 2014/15 and 2015/16.

This level of growth is expected to be ahead of the magnitude of decline in prices anticipated over the following two years, with the decline clawed back over the subsequent years as the market tightens again.

As a result, total price growth of around 21%, or just under 3% a year, is forecast through to 2021.

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