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December 18, 2017

Despite the anticipated short-term slowdown, Sydney’s apartment market will continue to show resilience, as strong fundamentals temper investor concerns.

While the market is currently in the throes of a significant injection of stock, this should only have a temporary effect, according to JLL’s Vince De Zoysa.

A considerable amount of supply is expected, following a decade of undersupply with JLL figures projecting as many as 20,600 unit completions over the next couple of years.

But De Zoysa believes the market is unlikely to collapse as a result of the current period of intense supply, instead saying the market is still close to balance and will remain relatively favourable for investors over the medium term.

“Resilience will be a surprise to some investors and developers, given we’ve had such strong supply recently,” he says. “A strong supply boom doesn’t necessarily translate into over-supply every time, and the reality is that Sydney has gone through a lost decade of under-supply following the 2000 Olympics.”

On the demand side, Sydney has seen total housing loans fall over the past year as a result of both softer buyer demand and tighter credit conditions. On the supply side, banks have been restricting lending to developers as well, reducing the total amount they will lend on multifamily construction loans and also increasing the amount of cover required for those loans.

In essence, the supply pipeline is self-regulating. The combination of slower sales and tighter lending restrictions on developers means pre-sale hurdles are not being met and fewer new projects are proceeding from planning to construction. This tempering of supply will support medium-term market balance strongly.

Finance availability has been a significant factor in the current market. Australia’s financial regulator, the Australian Prudential Regulation Authority (APRA), has reacted to speculation in the housing markets, acting to slow investor demand.

“Major financiers, particularly banks, will continue to be cautious as the market is tested by the current supply boom,” De Zoysa says. While local investor demand has waned, the decline has been at a gradual pace and will be contained by the underlying level of demand for owner-occupied housing in Sydney.

On the supply side, financiers will continue to work only with trusted developers with prime sites, which may dampen future supply.

Risks and rewards

Although the outlook for Sydney’s apartment market remains reasonably favourable, De Zoysa cautions the risk of a larger downturn does still need to be monitored, particularly a sharper than expected pullback in demand that would lead to prices coming under greater downward pressure.

In particular, investors should recognise that a sharper slowdown in foreign demand is still a possibility, particularly given tighter capital controls in China and the fact offshore investors are finding access to finance from the major Australian banks much tighter. There are alternative lenders filling this gap and, to date, there has been no widespread settlement issues as a result of these issues.

“Over the short term, a pullback in demand will put downward pressure on pricing for investors who cash out now. However, those holding their investments into future cycles should see a relatively quick recovery and benefit from the strong long-term prospects of demand in the Sydney market after the initial supply bump.”

De Zoysa anticipates demand will continue to weaken over the next 24 months, continuing the trend of the past two years. Accordingly, price growth is likely to moderate further in the short-term, with the potential for moderate price falls in pockets in 2018.

Demand will only pick up once affordability improves, or when foreign buyer demand increases, he says, adding that JLL does not anticipate an increase in domestic demand at current prices.

Foreign demand could increase if, for example, there was an exogenous shock in China, which would drive capital flows into more stable markets such as Australia.”

However, despite a flat outlook for the short term, Sydney’s apartment market should remain on the radar for investors, says De Zoysa, explaining slowing supply for 2017-18 as a ‘blip’.

“Pent-up demand from a decade of undersupply is supportive of a minor price fall, rather than a more substantial downturn. Prices will stabilise over the long term as market balance is restored.”

Furthermore, Sydney’s position as king of Australia’s residential apartment market is unlikely to be challenged anytime soon.

Sydney continues to boast strong long-term fundamentals as Australia’s gateway city, De Zoysa says, pointing to strong population growth despite competition from Melbourne. An AU$73 billion dollar infrastructure pipeline in NSW is helping to increase connectivity within Sydney, which has flow-on benefits to developments near future transport nodes that will increase in value.

“Given Sydney’s resilience to what has become an East-Coast supply boom, Sydney’s medium-term outlook appears relatively more positive than Melbourne or Brisbane.”

Learn more about investment in Australia’s residential sector.

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Vince De Zoysa

JLL Research, Residential | Economics | Alternatives

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