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What's the outlook for Sydney apartments?

What's the outlook for Sydney apartments?

Sydney's middle-ring suburbs are seeing an increase in apartment numbers, with implications for both capital growth and rental yield.

Sydney's middle-ring suburbs are seeing an increase in apartment numbers, a report from industry analysts BIS Shrapnel has found, with implications for both potential growth and yield.

Construction commenced on 19,450 Sydney apartments in buildings of four storeys or higher in the 2014/15 financial year, the report found – a 134% increase on the 8,300 commenced in 2010/11.

And where middle-ring suburbs accounted for around 37% of all apartment building approvals in FY11, four years later they comprised 55% of approved apartment stock.

Angie Zigomanis, BIS Shrapnel’s senior manager of residential property, said that as Sydney slowly moves towards industry and employment decentralisation, so too is the construction of new apartments.

“Plenty of people are commuting to and working in the hubs of Parramatta and Macquarie Park, for example, so those areas are being re-zoned for higher-density living,” he said.

“They’re becoming more attractive as the inner suburbs are slowly exhausted of residential development space.”

Sydney buyers’ agent Simon Cohen from Cohen Handler recently referenced Parramatta as a good example of a middle-ring suburb offering transport and lifestyle factors similar to blue-chip inner suburbs that’s likely to appeal to investors looking for more affordable options.

Vacancy rates still tight

The BIS Shrapnel report found that although dwelling completions exceeded underlying demand for the first time in FY15, migration activity in NSW has sustained Sydney’s deficiency despite rising supply.

“Given the estimated deficiency of 42,300 dwellings at June 2015, it will take some time for the market to return to balance, and this should still support an elevated level of new dwelling activity,” the report predicts.

BIS Shrapnel also expects this deficiency will ensure rental vacancy rates remain “tight in the short term”. Rates were around 1.5% in June, well below the typically balanced market rate of 3%.

“Occupancy [has been] underpinned by strong population growth over overseas migration, with many migrants’ first accommodation being rental dwellings,” the report says.

The ongoing yield dilemma

With weekly rents growing at their slowest rate on record last year, investors have had to cope with struggling rental yields in all the capitals, including Sydney.

But BIS Shrapnel argues that “lower borrowing costs have reduced cash outflows for investors, making a lower yield more viable, while a larger dwelling deficiency is also in place, suggesting less downside compared to the middle of last decade”.

Yields are likely, however, to also be vulnerable to stalling capital growth as Sydney’s exuberant property prices finally start to moderate.

“The past three boom years of the Sydney property market are definitely over,” said Zigomanis. “Price growth has slowed and yields have dropped. And not only will growth continue to slow this year, prices could even go backwards in 2017 and 2018.

CoreLogic RP Data reports that although median Sydney apartment prices went up 11.3% last year – by far the best performer of all the capitals – they were down 0.2% and 0.7% for the month and quarter respectively to 31 January.

“Investors cannot expect to ‘flip’ a Sydney apartment for a quick profit as easily as they may have been able to do in recent times,” Zigomanis said.

Where to next?

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.