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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 5 August 2015

Apartment supply

Apartment supply response

There's a lot of drivel written about the supply response in Sydney causing a serious property market correction.

It really depends on what property type and locations you're talking about.

Sure, I don't doubt that some of those buying new apartments off the plan in parts of the inner south will see prices fall.

That's more or less certain to happen when the downturn phase of the cycle ticks around. 

There are some other areas where the market will be flooded by new apartments too, such as around parts of North Sydney.

There's nothing new or surprising about this.

But as an owner of property in a suburb like Pyrmont - where the supply of new sites has been totally depleted - it's hard to get too excited by the babble in the media.

Prices in these parts will only be materially impacted by a lack of capacity to pay, which means very high interest rates (nah) or high unemployment (the unemployment rate in Pyrmont-Ultimo has increased from 2.8 per cent to 2.9 per cent over the past year).

A fair proportion of units are investor owned, of course, but in the current low interest rate environment cash flows are strong, while vacancy rates remain very low.

Capped supply

To be quite blunt, it has long been obvious that property prices in Pyrmont would soar. 

With the population of Greater Sydney increasing by around 84,200 or so persons per annum - give or take - the demand side of the equation more or less takes care of itself in such a prime location suburb. 

As for new supply...well, there isn't any. 

There is none, because there is nowhere left to build.

Actually, strictly speaking that's not quite true.

A DA was lodged to develop a few dozen apartments at 97 Pyrmont Bridge Road back in May 2013.

And down the road in the adjacent suburb of Ultimo there was a development application lodged in 2014 to build 50 apartments on Harris Street.

So, there might be a very slight trickle of new supply in the area.

But even though Harris Street is a pretty busy thoroughfare, land prices in these parts have been exploding higher over recent years, and ultimately the price of property is a derivative of the land that sits thereunder.

The 485 Harris development fetched some $63 million, equating to a price per apartment of more than $1.25 million (in Ultimo!..on Harris Street!).

So, no, I can't say I worry too much about the supply of apartments causing a price correction in Pyrmont.

Now the South Dowling precinct on the other hand...the latest inner apartments report from BIS Shrapnel sums it up rather nicely.

Source: BIS Shrapnel

Demand for apartments in Sydney from overseas investors in particular shows "little sign of abating", but there is plenty of supply due to come online in suburbs such as Zetland, Waterloo, Rosebery, Alexandria...and for that matter Mascot, Green Square et al.

Apartment completions

Inner Sydney apartment should average around 3,100 per annum over the next few years to 2018 per BIS Shrapnel.

But the new supply of apartments in Sydney will be very much skewed towards the inner south and the old urban wastelands around Sydney airport.

49 per cent of the new inner Sydney apartments will be in the South Dowling precinct, as compared to just 1 per cent in Pyrmont.

Or, to put that graphically:
Much of property investment is about common sense. 

Invest in the areas where people really want to live but where there is nowhere left to build new supply. 

Unfortunately too many people do precisely the opposite by investing in areas where people don't really want to live and where there are stacks of sites on which to build.

Same applies in Brisbane by the way!

Check out the full BIS Shrapnel report here