Residential Commentary –
Sydney Apartment Market
March 2016
Executive Summary
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It has been a good year for the NSW economy. State Final
Demand (SFD) increased 3.0% in 2015, as compared to an
average of 2.2% growth in the previous four years.
Key Market Indicators
(Greater Sydney)
Apartment approvals
12 months to:
In the Inner Ring alone, 45,800 units could be built by 2020,
with supply peaking over 2017 – 2018. Beyond that the
pipeline is less certain as only a small share currently have
development approval. There is flexibility for projects to be
scaled back if demand falls in the interim.
Sales volumes have continued to trend down. The market
hit a peak in 4Q13 with 13,450 sales settled in the quarter.
In comparison, sales volumes were 43.2% lower in 4Q15,
at just 7,640 settled sales.
Residential development sites in Sydney CBD continued to
exceed prices across the rest of the Inner Ring, reaching
prices as high as $850,000 per unit.
There was no growth in rents in the Inner Ring in 4Q15,
staying at a median price of $650 per week. Across Sydney,
yields have continued to tighten, moving from 4.1% in 3Q15
to 4.0% in 4Q2015.
Supply (Inner Ring):
% change
Y-Y
4Q15
28,650
2016 - 20
Under construction
12,900
Marketing commenced
5,200
Plans approved
6,650
Plans submitted
15,450
Proposed
5,600
Sales volumes*
12 months to:
Median unit price
38.2%
4Q15
36,130
-16.9
4Q15
$680,000
10.6
4Q15
$520
$650
4.0
1.6
4Q15
4.0%
- 0.3 pps
Median rental value
(Inner Ring):
1-Bedroom
2-Bedroom
Gross rental yield
Source: JLL Research, CoreLogic RP Data, Housing NSW, ABS
*Refers to existing market, as opposed to off-the-plan purchases
Sydney Apartment Market Commentary – March 2016
1
Economic Overview
State Final Demand (SFD) increased by 3.0% in NSW over
2015, with growth of 1.1% recorded in 4Q15 q-q. SFDis a good
measure of momentum in the domestic economy. New dwelling
construciton grew 14.6% over the year with flow-on effects to
household consumption in furnishings and household
equipment which was up 7.6% y-y. Non-dwelling investment
was weaker at 2.9% growth y-y. SFD has averaged 2.2% y-y
over the previous four years.
In the NSW job market, unemployment has come down from
5.5% in January 2016 to 5.3% as of February. NSW has been
faring better than the rest of the country where the national
average unemployment rate in February 2016 was 5.8%. In
November 2015 the size of the NSW labour force was at a
record high at 4 million, although that has fallen 0.5% since then.
The population in NSW grew by 1.4% over the twelve months to
June 2015, which is in line with the national average. However,
Can the new Sydney metro train station at
Waterloo soften oversupply in the Inner South?
the rate of natural population increase, net overseas migration
and net overseas migration all slowed in the year to June 2015.
Deteriorating housing affordability levels in Sydney may drive
some residents away.
The NSW economy is expected to improve, with SFD forecast
to grow by 2.1% and 3.1% in 2016 and 2017 respectively (DAE).
Private housing investment and infrastructure investment will
drive a lot of this growth.
Supply
If all recorded projects go ahead in the Inner Ring, 45,800 new
units could be built by 2020. The Inner Ring is an area covering
a 10 kilometre radius around the CBD (see map on pg.5). This
volume of supply gives weight to predictions of a short term
oversupply in Sydney.
Supply is set to peak over 2017 – 2018, which follows a record
number of approvals in 2015, assuming a two year construction
period. Beyond that the pipeline is more uncertain as many
projects are merely proposed or have a development application
submitted but not approved. There is flexibility for these projects
to be scaled back or cancelled if demand falls before
construction is set to begin.
In the previous report, JLL identified the Inner South of Sydney
as being an area at risk of oversupply. The announcement of a
new train station at Waterloo should help support demand,
easing concerns of oversupply (See box to the left).
Source: Transport NSW
Waterloo has been chosen as the new train station to sit
between Central Station and Sydenham on the Sydney Metro
line and is due to be fully operational by 2024. JLL sees this
news as benefitting developers and investors if it translates
into more demand for apartments.
Another factor is that projects to complete in 2016 began
construction from 2014 – 2015 and these units presold at lower
prices than where the market is now. This will help mitigate
settlement risk in the market, because those buyers have
smaller loans which they are more likely to service than buyers
exchanging at today’s prices.
Figure 1: New apartment supply pipeline
Inner Ring, expected completion year and current status
16,000
There are 17,400 units to complete in the Inner South by
2020, with 2,600 of those in Waterloo. To put this in context,
that is a quarter of all dwellings in Waterloo at last count in
the 2011 census.
In addition to apartment supply, the NSW Minister of
Planning, Rob Stokes MP, has said “Waterloo metro station
will be the catalyst for the delivery of an additional 10,000
homes and thousands of new jobs in the precinct for families
who live in the area.”
With eight years until the new station is completed, any
positive impacts on buyer appetitie for the area will be minor
in the short term. Over the long term, supply could still
overshoot, but a new train station could help entice buyers to
an area that needs more demand to meet supply.
Number of units
But will it be enough to limit oversupply risk in the Inner
South?
12,000
8,000
4,000
0
2016
2017
2018
2019
2020
Expected completion year
Under construction
Plans approved
Proposed
Marketing commenced
Plans submitted
Source: JLL Research
*Projects with fifty units or more
Sydney Apartment Market Commentary- March 2016
2
Demand
5.1% in 4Q12 to 4.0% in 4Q153. This is another sign that the
pace of price increases has slowed.
7,640 units settled in 4Q15, 26.7% less than a year ago and
43.2% less than the peak in 4Q13. Sales volumes are typically
lower in 4Q and 1Q, yet sales volumes have not been this low
since 1Q12 and 1Q06 before that, making it a significant event.
Figure 2: Average time on market and vendor
discount
0%
-2%
100
-4%
-6%
50
-8%
0
-10%
Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Pre-sales are classed as units sold before construction begins
and apply to off-the-plan apartment sales.
Average vendor discount
For off-the-plan apartment pre-sales, 40% of enquiries came
from investors, with the balance being owner-occupiers1. This is
in line with January 2016 figures from the RBA which showed
that 36% of all home loans were for investment purposes.
150
No. of days
While the sales volume figures reflect a slowdown in activity, it
is important to note that pre-sales in Q4 will not be reflected in
sales volumes figures until settlement which typically occurs
18-24 months after exchange.
Greater Sydney, units, 2005 - 2015
Average time on market (LHS)
Average vendor discount (RHS)
For projects marketed in 2015, on average 51.1% of total units
in these projects pre-sold within the first month of marketing
commencing2. The slowest selling projects still managed to presell 10% of the total units in a project in the first month. Some
projects were successful enough to pre-sell all available units
before a single brick was laid.
Source: JLL Research, Corelogic RP Data
Major Development: The Revy
However, pre-sale rates are down from 2014 levels. Across the
same sized sample in 2014, on average 87.7% of total units in
those project pre-sold within the first month of pre-sales. More
projects sold out within the first month in 2014 than in 2015.
Pricing
Unit prices in Greater Sydney rose 10.6% over the year to
December 2015. Despite a strong year, prices only grew 1.5%
between 3Q15 and 4Q15. Comparatively, between 3Q14 and
4Q14 that change was 4.5%. This is a sign that capital growth
is on the wane.
In the Inner Ring, the list of areas where prices fell between
4Q15 q-q is extensive. This includes areas where we have seen
some key apartment projects complete or begin construction:
Rosebery (-19.0%), Sydney CBD (-12%), Potts Point (-9.0%),
Ashfield (-4.0%), North Sydney (-2.0%) and Lane Cove (-1.2%).
However, comparing prices in 4Q14 to 4Q15, four out of the six
mentioned suburbs still achieved double digit price growth. The
exceptions were Potts Point with 9.3% growth and Lane Cove
with 5.2%. It remains to be seen whether the 4Q15 price data is
the sign of a turning point in the market or a one-off event.
The Inner Ring areas where prices did rise this quarter are those
where growth was strong throughout the whole year. LGAs in
this list include Chippendale, where prices rose 12.3% in 4Q15
q-q and 25.8% over the year. Increased restaurant and retail
amenity have helped this area grow.
Another indicator of price is the average vendor discount, which
is the percentage difference between the price at which an
apartment lists, versus the sale price. Sydney as a sellers’
market has traditionally had negative vendor discounts,
meaning that units actually sell for more than they were listed.
Over the course of this cycle, this premium has shrunk from
1
2
Source: JLL Residential Project Marketing, projects marketed in 2015.
Source: JLL Valuations & Advisory, projects marketed in 2015.
Sydney Apartment Market Commentary- March 2016
Details
Sales Commenced: December 2015
Address: 6-8 Darling Island Road, Pyrmont
Developer: Aqualand
Floors: 7
Units: 46
Status: DA Approved
Expected Completion Year: 2018
Source: JLL, Cordells
The Revy was a key development in 2015 because of the
reported $45,000/m² it achieved as a project maximum at
the end of the year. How it achieved this price offers
guidance for developers going into 2016.
The Revy has heritage appeal, being an old naval building.
It also has water views and views of the city and is minutes
from the CBD. It is near the entertainment precincts of The
Star and Darling Harbour.
A quick look at the sites left for sale on the market shows
that developers may need to adopt other strategies to
achieve similar prices. A big theme in 2016 will be that
developers should build close to upcoming transport
networks to gain uplift for themselves and their customers.
3 Corelogic RP Data
3
In the Inner Ring of Sydney rents were stable in 4Q15 q-q. Over
the year, rent growth in the Inner Ring was low at 1.6% as
compared to a Greater Sydney average of 4.0% 4. In some
LGAs in the Inner Ring, rents fell or did not move. In the
apartment-heavy LGA of Botany Bay, rents were down 3.1%
q-q. In the North Sydney LGA rents were stable.
Considering that Sydney LGA is expected to have the largest
amount of supply in all of Greater Sydney from 2016 – 2020, this
flags the Sydney LGA as an area where rents may come under
downward pressure in future due to increased competition for
tenants. Sydney LGA includes apartment-heavy suburbs such
as Waterloo, Potts Point, Chippendale and Sydney CBD.
Figure 3: Annual rent growth & median weekly rent
Greater Sydney, 2005 - 2015
15.0%
$600
$500
10.0%
$400
$300
5.0%
value, considering the number of urban activation programs that
the State Government have planned along Parramatta Road.
Prices in the Inner East and Inner North were similar, averaging
$315,000 and $290,000 per unit respectively. Both of these
areas have water and city views but are not as central as the
CBD which commands the highest prices.
Figure 4: Residential development site price
ranges
Inner Ring, rate per unit, 2015
900
Rate Per Unit ($'000)
Rental Rates
600
300
$200
$100
0.0%
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
$0
Dec-15
0
Inner
East
Weekly median rent (LHS)
Rental growth (RHS)
Inner
North
Inner
South
Inner
West
Sydney
City
Source: JLL Research
*Sites with equivalent unit yield of fifty units or more.
Source: JLL Research, Housing NSW
Gross Rental Yields
Outlook
Over the course of this property cycle which began in 2012,
capital growth for units across Greater Sydney has well
outpaced rental growth, resulting in tighter rental yields. Average
gross rental yields fell from 4.3% in 4Q14 to 4.0% in 4Q15
(Corelogic RP Data).
The big story in 2016 will be all about prices – where will capital
growth go?
In particular, yields fell in populated Inner Ring LGAs such as
Botany Bay (4.4% to 4.1%), North Sydney (4.3% to 3.6%) and
Sydney CBD (4.9% to 4.5%).
In 2016, there are some early indicators showing that a
slowdown in capital growth may result in yields rising, although
that is reliant on rent price expectations.
Site Sales
In Sydney City, sites sold at rates of $315,000 - $860,000 per
unit, meaning that even the cheapest Sydney City site would
cost more than an average site in the rest of the Inner Ring.
Moving away from the CBD to the Inner West, sites sold at an
average price of $225,000 per unit. The Inner West had some
of the cheapest sites in the Inner Ring, with some sites selling
under $200,000 per unit. These sites can be considered good
4
It is unlikely that 2016 will be a repeat of 2015 in Sydney. 2015
was a good year for many developers, with strong sale rates and
increasing prices. In comparison, 2016 will be more difficult.
With affordability squeezed, JLL expects lower price growth.
Lower price growth is likely to create a favourable market for
projects that are affordable, well located and sufficiently
differentiated from the competition. At the luxury end,
developers of prime residential projects will aim to maintain their
momentum from 2015. It is those developers operating in the
price points in between these two markets that will need a point
of differentiation to succeed in 2016.
Supply in the inner ring will peak over 2017 – 2018 and a
substantial proportion of that supply is either under construction
or marketing has commenced. Beyond that, there is scope for
supply to adjust should demand weaken, implying that there is
some flexibility in the market.
On the foreign investor front, Chinese investor activity is likely to
reflect economic and political factors in their domestic economy.
For many of these investors the Sydney residential market is
likely to remain attractive as a vehicle for wealth diversification.
Source: Housing NSW
Sydney Apartment Market Commentary- March 2016
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Map of Sydney Inner Ring Apartment Market
For further information, please contact
Carol Hodgson
Director
Inner North
Strategic Research
Tel: +61 7 3231 1445
[email protected]
Sydney City
Inner West
Inner East
Vince De Zoysa
Inner South
Analyst
Strategic Research
Tel: +61 2 9220 8513
[email protected]
JLL Sydney
Level 25, 420 George Street
Sydney NSW 2000
Australia
+61 2 9220 8500
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solely as a general guide and does not constitute advice. Whilst the
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document. Jones Lang LaSalle accepts no liability for damages suffered by
any party resulting from their use of this document.
www.jll.com.au
Sydney Apartment Market Commentary- March 2016
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