Sydney rent market

Worse to Come for Sydney's Rental Market - PCA

23 February 2007

The inner Sydney market has seen waves of investors retreat causing pre-sale figures to drop and expected new apartment completions to dry-up, according to a report released by BIS Shrapnel.

The Inner Sydney Apartments, 2006 to 2011 report reviewed the apartment markets in Sydney from 2003 to 2006 to predict future trends.

It found vacancy rates blew out in 2003/04 after a period of softer tenant demand (following the 'Tech Wreck') and apartment completions peaked. Since then, lower completions and growing tenant demand have absorbed the oversupply in apartments, with the market almost in balance by June 2006.

The forecasting firm's senior project manager and author of the report, Mr. Angie Zigomanis says the result created a dramatic decline in apartment completions

"A peak in vacancy rates lead to static rents and low rental returns which caused investors to beat a retreat.

"Since investors have left the market, pre-sales which trigger construction have fallen away and new apartment completions have been drying up. Consequently, we expect new apartment completions will show a dramatic decline over 2006/07," he said.

BIS Shrapnel forecasts apartment rents to rise 42 per cent over the five years to June 2011, or an average of 7.3 per cent per annum.

Zigomanis says the deficiency in rental stock will have a dramatic impact on the rental market with the scene now set for strong rent rises through 2007, but this will not be encouraging for investors who were scared off.

"Investors will have to wait longer to see a better return in prices. The period of weak rental growth and strong price rises has taken yields to long term low levels, and two to three years of rental growth is required before yields improve to sufficient levels to draw investors back to the apartment market," he said.

Looking to the future, BIS Shrapnel forecasted the current static or declining prices to give way to price growth in 2008/08 as interest rates drop and the economy rallies and improved affordability and investment fundamentals drive demand.

Total price growth for owner occupier apartments is forecast to reach 17 per cent over the five years to June 2011, with slightly modest growth of 13 per cent expected for investment in the apartment market over the same time.

Source: Property Council of Australia