Inner Sydney Apartment market sees rise in off the plan

The demand for off the plan apartments, particularly within the Inner Sydney Apartment (ISA) market has increased over the years and has never been so high. During 2014-15, there were 3,350 new apartments, the highest annual supply total in 15 years.

In light of this, BIS Shrapnel have released their Inner Sydney Apartments Market Brief for July 2015 which brings to attention many key findings.

Firstly, most of the off the plan apartment developments occurring within Inner Sydney are high rise and large scale developments, particularly in the City Core, Pyrmont and Ultimo, East Sydney; Surry Hills, South Dowling and North Sydney.

Unsurprisingly, the majority of apartments are rented, accounting for 55% of the total apartments within the ISA area. In comparison, the total number of rental apartments across Greater Sydney accounts for just 28%.  Investors seem to prefer to purchase an investment property that is close to amenities such as public transport options, retail and entertainment, whilst own a property that is low maintenance and conveniently located to the city.

Just 34% of dwellings in the ISA area are owner occupied dwellings, compared to the Greater Sydney dwellings that are owned by 65%. Interestingly, 11% of the total apartment stock in the ISA is made up of unoccupied dwellings (second homes or speculative investments). Even though a high supply of new off the plan apartments is forecast through until 2018-19, the number of unoccupied dwellings is not expected to increase too much. Instead, they are much more likely to be put on the rental market due to the high demand for new apartments in these areas.

Population Growth

Within the Inner Sydney Apartment Market, the average population growth has grown by 3.7% per annum, compared to the 1.2% growth per annum across Greater Sydney over the 23 years to 2013-14. In spite of this, population growth in the ISA area has slowed down more recently to 2.6% per annum during the eight years to 2013-14. There is a trend that population growth occurs in line with off the plan apartment completions.

Age of Apartment Occupants

62% of the ISA occupants in rental apartments are between 20 and 34 years old. Above 34 years of age, there is a higher tendency for these people to buy an apartment in this ISA area. In comparison, households with a mortgage tend to be owned by the majority of people aged between 30 and 54 years old (55%). Unsurprisingly, fully owned apartments are owned by an older demographic, with 47% of occupants aged 55 years old and over.

This relates to the life cycle and our mentality where the trend is that we will first rent an apartment when we move out of home, then as we get older we want to own our own home so we will buy and have a mortgage, and as we get older we would have paid the mortgage off and now fully own the property.

What are the 3 key demand drivers?

Typically, there are three main demand drivers that are driving occupier demand of off the plan apartments. These are students, younger adults and older empty nester adults.

1) Students
14% of the ISA population is made up of students, of which 68% of these are overseas students. Students typically want to live close to their educational institution and be close to their peers. During the 2014 calendar year, there has been good growth in enrolments for overseas students which should help create strong tenant demand in the ISA area.

2) Young adults
Young adults are classified as those in professional and managerial roles who tend to work within the inner city areas. They want to live in close proximity of their workplace and transport. Even though demand declined by 1% during the two years to May 2014, the strengthening economic conditions has increased business confidence which increased employment by 2.7% to May 2015.

3) Older empty nesters
In this report, older empty nesters are those aged 45 years and older. They tend to either be singles or couples without children. They account for 33% of the non-student adult population at the 2011 Census. Those Baby Boomers who are now just starting to enter retirement are much more likely to want to live in an Inner Sydney apartment, but this all comes down to downsizing their home at a time when prices growth for houses is strong.

Rental Vacancy Rates

Currently, the vacancy rates have remained below 2% for Inner, Middle and Outer Sydney due to the lack of supply of dwellings where construction is not meeting demand. Inner Sydney saw a drop in vacancy rates from 2.2% in June 2013 to 1.7% in April 2015. The increase in student enrolments in 2014 might have a part to play in this.

Property Price Growth

Two bedroom apartments in the ISA area tend to be the most common type of apartment. Price growth for apartments has increased which is helped by investors taking advantage of the low interest rate environment and having low borrowing costs. In 2013-14, unit price growth was 10.2%, and dipped slightly in 2014-15.

Future Supply

Over the next three years to 2017-2018, the supply for off the plan new apartments in the Inner Sydney Apartment market remains strong, with an estimated 3,000 apartment completions per annum expected. 74% of these apartments in projects are already under construction at June 2015, whilst the others are pre-selling to reach their pre-sales targets before construction can begin.

During this time period, the South Dowling precinct will be the main contributor of new apartments in the ISA area. This will account for 49% of the total apartment supply, whilst the North Sydney precinct will account for 23%, followed by City South (10%).

Due to the Australian dollar falling in value, apartment prices are looking much more attractive for overseas buyers, alongside the more stable political environment and this is thought to help strengthen the off the plan apartment demand within the ISA.

Other factors include low borrowing costs due to the low interest rate environment and strengthening economic conditions which will also encourage purchaser demand of off the plan apartments in the Inner Sydney apartment market over the next few years.
Published on 4th of August 2015 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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