Residential Commentary Sydney Apartment Market

Transcription

1 Residential Commentary Sydney Apartment Market March 216 Executive Summary It has been a good year for the NSW economy. State Final Demand (SFD) increased 3.% in 215, as compared to an average of 2.2% growth in the previous four years. In the Ring alone, 45,8 units could be built by 22, with supply peaking over 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 13,45 sales settled in the quarter. In comparison, sales volumes were 43.2% lower in 4Q15, at just 7,64 settled sales. Residential development sites in Sydney CBD continued to exceed prices across the rest of the Ring, reaching prices as high as $85, per unit. There was no growth in rents in the Ring in 4Q15, staying at a median price of $65 per week. Across Sydney, yields have continued to tighten, moving from 4.1% in 3Q15 to 4.% in 4Q215. Key Market Indicators (Greater Sydney) Apartment approvals 12 months to: Supply ( Ring): Under construction Marketing commenced Plans approved Plans submitted Proposed Sales volumes* 12 months to: % change Y-Y 4Q15 28, % ,9 5,2 6,65 15,45 5,6 4Q15 36, Median unit price 4Q15 $68, 1.6 Median rental value ( Ring): 1-Bedroom 2-Bedroom 4Q15 $52 $ Gross rental yield 4Q15 4.% -.3 pps 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 216 1

2 Number of units Economic Overview State Final Demand (SFD) increased by 3.% in NSW over 215, 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 216 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 216 was 5.8%. In November 215 the size of the NSW labour force was at a record high at 4 million, although that has fallen.5% since then. The population in NSW grew by 1.4% over the twelve months to June 215, which is in line with the national average. However, Can the new Sydney metro train station at Waterloo soften oversupply in the South? the rate of natural population increase, net overseas migration and net overseas migration all slowed in the year to June 215. 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 216 and 217 respectively (DAE). Private housing investment and infrastructure investment will drive a lot of this growth. Supply If all recorded projects go ahead in the Ring, 45,8 new units could be built by 22. The Ring is an area covering a 1 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 , which follows a record number of approvals in 215, 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 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 224. JLL sees this news as benefitting developers and investors if it translates into more demand for apartments. But will it be enough to limit oversupply risk in the South? Another factor is that projects to complete in 216 began construction from 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 Ring, expected completion year and current status 16, There are 17,4 units to complete in the South by 22, with 2,6 of those in Waterloo. To put this in context, that is a quarter of all dwellings in Waterloo at last count in the 211 census. 12, 8, 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 1, homes and thousands of new jobs in the precinct for families who live in the area. 4, Expected completion year 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. Under construction Plans approved Proposed Marketing commenced Plans submitted Source: JLL Research *Projects with fifty units or more Sydney Apartment Market Commentary- March 216 2

3 No. of days Average vendor discount Demand 7,64 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 1Q6 before that, making it a significant event. 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 months after exchange. For off-the-plan apartment pre-sales, 4% of enquiries came from investors, with the balance being owner-occupiers 1. This is in line with January 216 figures from the RBA which showed that 36% of all home loans were for investment purposes. Pre-sales are classed as units sold before construction begins and apply to off-the-plan apartment sales. For projects marketed in 215, on average 51.1% of total units in these projects pre-sold within the first month of marketing commencing 2. The slowest selling projects still managed to presell 1% 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. However, pre-sale rates are down from 214 levels. Across the same sized sample in 214, 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 214 than in 215. Pricing Unit prices in Greater Sydney rose 1.6% over the year to December 215. 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 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.%), Sydney CBD (-12%), Potts Point (-9.%), Ashfield (-4.%), North Sydney (-2.%) 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 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 5.1% in 4Q12 to 4.% in 4Q15 3. This is another sign that the pace of price increases has slowed. Figure 2: Average time on market and vendor discount Greater Sydney, units, % -2% -4% -6% -8% -1% Dec-5 Dec-7 Dec-9 Dec-11 Dec-13 Dec-15 Average time on market (LHS) Average vendor discount (RHS) Source: JLL Research, Corelogic RP Data Major Development: The Revy Details Sales Commenced: December 215 Address: 6-8 Darling Island Road, Pyrmont Developer: Aqualand Floors: 7 Units: 46 Status: DA Approved Expected Completion Year: 218 Source: JLL, Cordells The Revy was a key development in 215 because of the reported $45,/m² it achieved as a project maximum at the end of the year. How it achieved this price offers guidance for developers going into 216. 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 216 will be that developers should build close to upcoming transport networks to gain uplift for themselves and their customers. 1 Source: JLL Residential Project Marketing, projects marketed in Source: JLL Valuations & Advisory, projects marketed in Corelogic RP Data Sydney Apartment Market Commentary- March 216 3

4 Rate Per Unit ($') Rental Rates In the Ring of Sydney rents were stable in 4Q15 q-q. Over the year, rent growth in the Ring was low at 1.6% as compared to a Greater Sydney average of 4.% 4. In some LGAs in the 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 , 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, % 1.% 5.%.% $ Dec-5 Dec-7 Dec-9 Dec-11 Dec-13 Dec-15 Gross Rental Yields Source: JLL Research, Housing NSW Over the course of this property cycle which began in 212, 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.% in 4Q15 (Corelogic RP Data). In particular, yields fell in populated 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 216, 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 Weekly median rent (LHS) Rental growth (RHS) $6 $5 $4 $3 $2 $1 In Sydney City, sites sold at rates of $315, - $86, per unit, meaning that even the cheapest Sydney City site would cost more than an average site in the rest of the Ring. Moving away from the CBD to the West, sites sold at an average price of $225, per unit. The West had some of the cheapest sites in the Ring, with some sites selling under $2, per unit. These sites can be considered good value, considering the number of urban activation programs that the State Government have planned along Parramatta Road. Prices in the East and North were similar, averaging $315, and $29, 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 Ring, rate per unit, Outlook East North South West Sydney City Source: JLL Research *Sites with equivalent unit yield of fifty units or more. The big story in 216 will be all about prices where will capital growth go? It is unlikely that 216 will be a repeat of 215 in Sydney. 215 was a good year for many developers, with strong sale rates and increasing prices. In comparison, 216 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 215. It is those developers operating in the price points in between these two markets that will need a point of differentiation to succeed in 216. Supply in the inner ring will peak over 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. 4 Source: Housing NSW Sydney Apartment Market Commentary- March 216 4

5 Map of Sydney Ring Apartment Market For further information, please contact Carol Hodgson Director Strategic Research Tel: carol.hodgson@ap.jll.com Vince De Zoysa Analyst Strategic Research Tel: vince.dezoysa@ap.jll.com West North Sydney City East South JLL Sydney Level 25, 42 George Street Sydney NSW 2 Australia This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. Sydney Apartment Market Commentary- March 216 5