Sydney Apartment Market Indicators November 2015 Executive Summary As many as 61,000 new units* will complete between 2015 2017, compared to 44,500 completions between 2012 2014**. JLL adjusts supply numbers based on the likelihood of each project completing and expects a more realistic 46,500* units in that time, on trend with previous years. Solid demand for residential development sites in the inner ring 10 km around the CBD are now causing a convergence of prices for sites with development approval. Parramatta s share in new apartment supply is closing in on Sydney City. Sydney LGA had 18% of new apartment supply between 2012 2014** as compared to 9% in the Parramatta LGA. By 2017 this gap of 9% will reduce to 7%. Proposed Strata Law changes will make it easier for schemes to be terminated and replaced with higher density dwellings. This will have a positive impact on affordability due to increased supply lowering prices. *Based on projects with fifty units or more. 2015 data as of August. **NSW Department of Planning MDP, multi-unit net completions. Our View The Sydney residential market continues deep into the eleventh hour of a housing upturn as sellers take advantage of continued capital growth and buyers look for opportunities in a market offering plenty of choice in housing stock. Interest rates have remained stable and this reflects the general wait and see approach that investors are taking. Median weekly rents in the inner ring 10 kilometres around the CBD have risen for 1 bedroom units and stayed the same for 2 bedroom units. In the middle ring rents have stayed the same across both 1 and 2 bedroom units while there has been a minor reduction in rental rates in the outer ring where rental markets are smaller (see Figure 10 for precinct map). Based on our projections of the apartment supply pipeline, our view is that supply in the new apartment market will continue to meet buyer demand for multi-unit dwellings until at least the end of FY2016. An undersupply in the Sydney market since even before the turn of the decade will not be corrected overnight. 1
Economic Overview Following a long period of relatively subdued growth the NSW economy rebounded in 2014 with State Final Demand (SFD) growing by 3.9% y-y. Following a weaker start to the year, growth picked up again in 2Q15 with SFD recording 3.3% y-y growth, well above the ten-year average of 2.5%. The labour market in NSW has improved throughout 2015 with the number of people employed increasing by 3.3% since the start of the year. Additionally the participation rate has moved up to 64%. The unemployment rate was recorded at 5.9% in September below the national average of 6.2%. Low interest rates and robust growth in the housing market should help to support the NSW economy in the short term. Overall, the outlook for the NSW economy is positive but with slower growth expected over the medium to long term as the consequences of strong house price growth filter through. Deloitte Access Economics forecast NSW Gross State Product will grow by 2.0% in 2015 before picking up 2.5% in 2016. New Apartments In a perfect world where every development comes off without a hitch, the Greater Sydney region will see as many as 61,000 new units* completed 2015-2017. JLL s probability weighted supply numbers adjust this number based on the likelihood of each project completing on a scale of proposed to under construction. A more realistic 46,500 units* are indicated by our probability weighted figures, which is in line with the 44,500 multi-unit completions** in Greater Sydney 2012 2014. Figure 1: New Apartment Supply By Status Greater Sydney 2015 2017* (Non-Probability Weighted) Units ('000) 40 30 20 10 0 2015 2016 2017 Expected Completion Year Under Construction Plans Submitted Plans Approved Proposed This is a strong and sustained reaction in a market that has typically been under-built, but then again, a lot of traditional ground has been broken in recent times in the Sydney residential market. Long term traditions will continue to be defied as Parramatta increasingly becomes a destination of choice for apartment buyers ahead of the Sydney CBD, and that is indicated in the supply numbers. From 2015 to 2017 the Parramatta LGA will account for 8% of new apartment supply, 7% short of the share going to City of Sydney LGA. This gap is slowly closing considering that between 2012 to 2014, 18% of new apartments were completed in City of Sydney LGA as opposed to Parramatta LGA s share of 9%, meaning a gap of 9% has closed to 7% and we expect this trend to continue. Various pockets of new apartment supply are picking up all over the Greater Sydney region, as the likes of The Hills Shire, Auburn, Hornsby, Blacktown and Rockdale LGAs all steal a piece of the pie from the traditional stronghold of apartment stock in Sydney. Each has its own reason for the increase, although most share common themes of affordability, proximity to transport nodes, rising supply and increased infrastructure. Figure 2: New Apartment Supply by LGA Top Ten LGAs 2015 2017* Sydney The Hills Shire Parramatta Auburn Canterbury Hornsby Blacktown Rockdale Ku-Ring-Gai Ryde 0 2,000 4,000 6,000 8,000 10,000 Number of Units *Data based on projects fifty units or more **NSW MDP multi-unit net completions 2
Figure 3: Average New Apartment Prices Ring Precincts*, 2015** Precinct 1 Bed ($) 2 Bed ($) 3 Bed ($) Sydney City 1,020,000 1,630,000 2,800,000 North 690,000 1,000,000 1,740,000 East 710,000 1,130,000 1,920,000 South 760,000 1,060,000 1,550,000 West 680,000 1,010,000 1,640,000 *Data based on projects with fifty units or more. **2015 data as of August. East based on 2014 prices. In line with residential development sites, prices continue to be strongest in the Sydney City and East precincts which have the advantage of both city and water views. A convergence of prices at a 1 bedroom level shows (with the exception of Sydney City) that developers are competing on introductory 1 bed price points to lure lone person households at affordable rates. Gross Rental Yields In the period between 2010 and 2015, Sydney and Melbourne yields for units both trended to their lowest levels in over five years as at June 2015, a result of continued growth in capital values. Yields for units in Sydney were at 4.2% and Melbourne at 4.1% as of June 2015, with Sydney a whole percentage below Brisbane at 5.1% while the Gold Coast sat even higher at 5.5%. The lower yields story is not so damning when put in context, considering Sydney is experiencing the second highest annual rent growth across the major cities in the unit market. Yields at this time speak more of the impressive capital growth we have seen rather than being a function of rent price growth. Rental Rates Interest rates have typically been a strong determinant of rent growth, given the choice that Sydney-siders face between the cost of renting and the cost of borrowing for a mortgage. With the cash rate declining over five years from 4.5% in June 2010 to 2% in June 2015, the expected outcome would be that rental growth would also decline given the lower cost of borrowing. That has not been the case however, and rents have grown at an average rate of 4% per annum in that time. A lower vacancy rate would often explain this phenomenon, but given NSW is in a strong building phase, vacancies have actually increased to 2.1% in June 2015 from 1.3% in June 2010. As seen in Figure 4, the net effect of all these movements on rent price growth is positive across the various unit types in Greater Sydney in the last five years. Negative gearing is another aspect of the market highly relevant to rent price performance, particularly with talks of reform from both state and federal governments. An argument could be made that rents have been kept artificially low given the benefits of negative gearing, and in Sydney this is more likely to be occurring given strong investor interest. Figure 4: Rental Growth Rents by Ring and Unit Type, June 2010 June 2015 Median Weekly Rent ($) 650 600 550 500 450 400 350 300 250 200, Housing NSW See Figure 10 for precinct map. Housing NSW rings marginally differ from map. Site Sales Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Ring (2 Bed) Outer Ring (2 Bed) Middle Ring (1 Bed) Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Waterloo, North Sydney, Botany and Surry Hills - these suburbs in the inner ring within 10 km from the CBD have recorded the highest number of residential development sites purchased in 2015 to August. At a macro level however, a more interesting trend that is developing are the corridors of activity emerging across the Greater Sydney metropolitan, driven by upcoming and existing transport projects. As per Figure 6, where darker shades indicate a high number of site sale transactions, distinct concentrations of site sales are appearing across major transport lines; UrbanGrowth s Central to Eveleigh corridor, the Northern and Western Line linking St Leonards through to Hornsby, Stage 1 of WestConnex between Parramatta and Haberfield and the North West Rail Jun-15 Middle Ring (2 Bed) Ring (1 Bed) Outer Ring (1 Bed) 3
link as a part of The Hills Corridor Strategy by the NSW Department of Planning & Environment. In terms of pricing this year, again it revolves around location. With the combination of city and water views, sites in the Sydney CBD and East commanded the highest average rate per unit for sites with planning approval. At an average $750,000 per unit in the CBD and $360,000 in the East, the two precincts sit well above the others in the inner ring. Outside of these two, there is a convergence of average prices at a rate per unit in the inner ring, with the North, South and West all falling in the $200,000 - $300,000 per unit range. In the CBD itself the range in prices extends from $250,000 to $1,250,000 at a rate per unit basis, purely because of the trading of blue-chip sites with the potential for prime residential in the $500,000+ rate per unit range. Figure 5: Residential Development Site With Planning Approval Prices Rate Per Unit by Precinct, 2015* Rate Per Unit ($'000) 1,400 1,200 1,000 800 600 400 200 0 East North * East data from 2014. 2015 data until August. South West Sydney City Figure 6: Annotated Site Sales Heat Map Residential Development Sites Sold 2013-2015 1 2 4 3 In clockwise order: 1. North West Rail Link, 2. Northern & Western Train Line, 3. Central to Eveleigh Corridor, 4. WestConnex Stage 1 4
Strata Title Legislation has passed through both houses of parliament for much needed changes to strata law in NSW. There are some real wins all round as owners benefit from less red tape and the removal of archaic regulations but concerns do exist in other areas: The bill includes the following: 75% of owners can agree to terminate a scheme. Owners won t need permission to make minor refurbishments. Votes can be made electronically including email. Limit the practise of collating votes, known as proxy farming. 2% bond as security for developers to fix any defective work. Large tenants can attend owner s corporation meetings (but cannot vote) Winners: Developers looking for apartment development sites close to existing transport nodes can take advantage of terminated schemes. Any increase in apartment stock will have a positive impact on affordability. NSW Government to collect extra stamp duty revenue if owners relocate and buy elsewhere. Losers: Tenants forced to vacate their premises based on a 75% vote. Negative effect on supply if terminated sites are replaced with a lower density form of dwelling. Proxy farming limited, but not removed. Owners still need to gain 50% vote on lasting renovations and 75% vote on any externally visible changes Figure 7: Precincts Map Greater Sydney - Ring For further information, please contact: For more information, please contact: 5
For further information, please contact: Rupa Ganguli Associate Director Strategic Research Residential Markets +61 2 9220 8496 rupa.ganguli@ap.jll.com Vince De Zoysa Analyst Strategic Research NSW Residential Markets t: +61 2 9220 8513 vince.dezoysa@ap.jll.com JLL Offices: Sydney Level 25 420 George Street Sydney NSW tel + 61 2 9220 8500 www.jll.com.au COPYRIGHT JONES LANG LASALLE 2015. All rights reserved. For further details or to unsubscribe, please email joneslanglasalle.research@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however, no representation or warranty is made to the accuracy thereof. Melbourne CBD Office Market Update 3Q2015 6