A two-speed economy has resulted in a two-tiered residential property market in Australia. So says Angie Zigomanis, residential property senior manager at BIS Shrapnel.
While NSW and the resource rich states of Western Australia, Queensland and the Northern Territory are showing signs of recovery, other residential markets are dampened by under-performing economies and an excess of supply, he says. A lack of development in cities like Sydney and Brisbane over the past few years will only strengthen their supply and demand fundamentals, Zigomanis says.
Ariel Pollard, residential research director at Colliers International, says the level of demand in Sydney is such that supply will continue to dwindle, despite the fact that 14 new projects currently underway within the Sydney CBD and surrounding suburbs will provide an additional 2186 apartments.
Zigomanis says Brisbane is in a similar situation. “There has been strong growth in local economic conditions and there’s an accelerating rise in employment in the inner city areas,” he says. “But there’s not necessarily the same rise in the construction of apartments to accommodate them.”
Perth has not seen the same levels of demand as in Brisbane and Sydney, but huge population growth and recently announced infrastructure and urban redevelopment plans mean the outlook for inner city Perth is very bright, says James Limnios, CEO of Limnios Property Group.
Limnios says new investment by the WA Government in projects such as the City Link railway line and the Perth Foreshore redevelopment will be a major catalyst for change.
“We will effectively see hundreds of millions of dollars invested in new infrastructure in the inner city area of Perth over the next five years,” he says.
Melbourne has already seen massive urban redevelopment and Zigomanis says it has been the strongest market over the past few years. However, a threat of oversupply means it has the weakest outlook. BIS Shrapnel’s most recent Inner Melbourne Apartments report reveals that rental apartment completions are forecast to increase from 1800 in 2011/12 to an average of 2800 per annum over 2013/14 to 2015/16. This compares to an average 1600 rental apartments completed annually over the past decade and a forecast tenant demand of 1500 apartments per annum over the same period.
Phil Leahy, managing director of Brookfield Residential Properties, says Melbourne has performed so well that a slowdown is inevitable. “But it’s certainly not a crash by any stretch of the imagination,” he says.
Leahy says that an excess of about 5000 units that are DA-approved or that will become DA-approved in the next 12 months, coupled with a rise in construction costs, means that developers are rushing to get stock to market so that they can achieve their costing and profit assumptions.
“The difficulty is when you have multiple developers rushing stock to the market as quickly as possible, in a market that is slowing down, you will start to get a bit of oversupply,” he says.
Sarah Bloom, Australand development director (built form), agrees that oversupply in Melbourne is a risk. “But the question is whether all the projects in the pipeline will actually be constructed and delivered to the market,” she says. “There are a lot of projects being marketed, but it is questionable whether all of these projects will be able to secure the presales that then underpin the funding to get them off the ground.”
Leahy says the requirements imposed on developers once funding is secured are much more stringent these days and Pollard says she has heard of cases where lenders have demanded up to 100 per cent presale commitments.
Canberra is another city where there is a risk of mild oversupply as a series of apartment developments near completion and as people become more concerned about unemployment due to the Federal Government’s push to keep its budget surplus promise, says Zigomanis.
The latest Colliers International Canberra Apartments report identified 55 developments in the supply pipeline within the inner and outer precincts of Canberra. Some 31 projects comprising 3959 apartments are expected to be completed over the 2013 calendar year. However, the report noted that Canberra’s market is supported by strong demand in the medium term, from investors as well as owner-occupiers, due to interest rate cuts, low vacancy rates and the highest average weekly wage in the nation.
Despite having a more positive outlook, Zigomanis says that even Brisbane and Sydney’s markets will have their challenges and growth expectations will not be as great as people have come to expect.
Colliers International’s latest Inner Brisbane apartments report showed that, while on an annualised basis the number of unconditional sales increased by 9 percent over the first quarter of 2012, buyers are still cautious and increasingly price sensitive.
The report also noted that although absorption rates of new apartments has been good in the previous two quarters, the elevated level of future supply, should all of the 22 projects totalling 4779 apartments come on to the market in the next 12 to 18 months, could present a challenge.
Changing trends
According to the latest RP Data-Rismark June Hedonic Daily Home Value Index, prices in all main cities were down year-on-year, with the exception of Darwin and Canberra. Yet RP Data senior research analyst Cameron Kusher notes that unit prices have been more resilient, with demand driven by affordability, higher rental yields as well as units tending to have better access to infrastructure and amenities.
Australand’s Bloom says the market is challenging and agrees that for developers affordability is a key issue.
“You’ve got to make sure that you are delivering a product that is attractive and people see as good value,” she says. “People will buy in all cycles if they see good value in the product that you’re offering.”
Lifestyle is also becoming more important and developers and analysts have noticed a shift in trend that is not only dictated by market conditions. The quarter acre block in the suburbs is no longer an aspiration of a younger generation, says Pollard.
“It is reflection of the lack of infrastructure, time delays and costs of using public transport,” she says. “But it is also a reflection of a younger generation that wants to be close to the city and close to the action.”
Mark Jewell, FKP Property Group executive director, agrees that one of the major drivers of inner city development is changing social trends and demographics.
“It kind of started with TV programs like Friends and Seinfeld where you saw people living a city lifestyle, and I think that trend has continued,” he says.
Jewell does not believe that it is just part of a generational cycle. “Once people get used to that sort of living, they don’t want to give it up,” he says.
In Perth this lifestyle shift is perhaps more surprising because it does not just involve younger generations. Limnios says more people want to work and live near the Perth CBD, but there is also a growing trend of baby boomers looking to downsize to quality apartments in the inner city. Herron Todd White’s latest owner/occupier report revealed that while Perth’s fly-in-fly-out population is a main driver behind residential development in or close to the CBD, empty nesters are increasingly favouring the city for that lock-up and leave lifestyle.
