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Monday, 13 August 2018

Inner city apartment construction halves

Apartment construction drops

Handy stuff from the Bliebster at the AFR today, citing JLL's latest market report on apartment construction. 

In Sydney the number of inner city apartments under construction more than halved from 16,143 by the end of the June 2018 quarter from 39,621 a year earlier, he reports. 

In Brisbane the equivalent drop has been from 11,048 inner city apartments under construction to 6,877, which also comes as little surprise to readers here. 

This was always going to happen, but in the event it came about a few months later than I'd expected...c'est la vie.

As I noted in a recent free market report, only Melbourne of the eastern seaboard capitals has the requisite dynamics to sustain high levels of apartment construction at the present time.

In fact, Melbourne apartments under construction jumped 23 per cent in the June quarter according to the JLL figures, underscoring the point.

The latest ABS available figures relate all the way back to the beginning of the calendar year, so given that we're now in mid-August these are very dated, although they did confirm that the glut of unit completions was beginning to rain in for Sydney and Brisbane early in the year. 

Temporary spike in rental vacancies

This great rush of completions in H1 2018 has already been reflected in the surge in Sydney's vacancy rate to 2.8 per cent as the new stock is absorbed. 

The city itself will grapple with congestion issues as the new residents get bedded in, leading ever more Sydneysiders towards the use of public transport as the population approaches 5.2 million. 

On the plus side, this represents a huge stamp duty windfall for the Office of State Revenue NSW as all these apartments settle.

Supply issues not fixed

Contrary to what some people think, Sydney doesn't have 'too many' physical dwellings, as well demonstrated in work done by the Grattan Institute and others. 

As the 2016 Census night showed, the number of vacant properties was remarkably low for such a large city.

Instead the rising vacancy rate represents a great swathe of many similar property types - mainly small apartments - completing at the same time, with a record number of investors in recent years adding to the rental supply, combined with a seasonally soft winter rental market (this will change a good deal in summer). 

But with the harbour city now at full employment and its population still growing at a powerful ~100,000 per annum the new supply will be absorbed comfortably enough over the next 6 or 7 months. 

In the meantime, watch out for rising settlement default risks and more failed apartment projects. 

In Brisbane the rental vacancy rate reported by all data providers has now been trending down for months, as confirmed by the Reserve Bank in its Statement on Monetary Policy last week. 

That's good news for Brisbane landlords after a tough couple of years for the rental market.