Even though tenant demand is rising for Sydney units, it will still not be sufficient to keep pace with the record level of new apartments expected to be completed over the next three years, according to a new report by BIS Shrapnel.
Senior manager and report author Angie Zigomanis said that 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 further capital gains.
“In the absence of any negative news in relation to the Sydney residential market, investor demand is likely to remain buoyant,” he said.
Nevertheless, Mr Zigomanis said the strengthening in occupier demand is not anticipated to be sufficient to keep pace with the record level of new apartments expected to be completed over the next three years, with vacancy rates forecast to rise in the coming years.
“Landlords of newly-completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to discount to attract tenants from neighbouring suburbs,” he said.
“The decline in rental returns and increase in mortgage servicing costs will reduce the amount the purchasers will be willing to pay for an apartment and many owners who bought at, or close to, the top of the market could experience losses if they sold into the downturn.”
Mr Zigomanis said the forecast downturn from 2016/2017 will be relatively shallow, with vacancy rates not expected to reach the levels of the mid-2000s downturn, following the last apartment market boom.
However, 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 six per cent per annum over 2014/2015 and 2015/2016.