This article is from the Australian Property Journal archive
THE construction boom sparked by the federal government’s HomeBuilder package will be picked up by the apartment sector in the coming years, driven by new public transport links, public housing renewal programs and the emerging build-to-rent sector.
The outlook for the apartment sector has brightened over 2021, according to BIS Oxford Economics, which is forecasting high-density residential activity to record strong growth in FY2023 of 20%, increasing to further 25% growth in FY2024, with commencements reaching near 50,000 dwellings.
“The outlook for the apartment sector has brightened over 2021,” BIS Oxford Economics economist Maree Kilroy said.
“Backed by low interest rates, price gains and government incentives, both buyers and developers have become increasingly confident. Further support is coming from the impending completion of major new public transport links across Australia’s major cities, public housing renewal programs and an emergent build-to-rent sector.”
“Whilst headwinds remain, evident in lockdown restrictions returning, the strength of the latest data leads and the diversity of demand drivers imply risk is tilted to the upside.”
Apartments were the biggest driver of the previous national residential construction upturn, with local and foreign investor demand pushing starts above 60,000 annually over the four years to FY2018, before additional taxes, stricter lending practices and oversupplies in some markets dragged on activity.
High-density dwelling approvals were up 15% on the same period the year prior. Kilroy said the latest building approvals data for apartments has exceeded expectation, with the trough now appearing to have passed.
“With a series of demand channels firming, this recovery is expected to be sustained.”
It took lockdowns in New South Wales and Victoria to put the brakes on Australia’s construction industry recovery, with the industry falling into contraction in July for the first time since September last year. Still, 2021 is shaping up to be a record year for detached housing construction.
Investors return
The performance of the apartments market has temped investors back to residential property. The inner Sydney and Melbourne rental markets have been hit hardest by the collapse in overseas migration but had recently stabilised. Almost all other major markets have tightened, with rental vacancy rates dipping below 1% for most cities.
That has flowed through to higher rents, with Perth and Darwin being the standouts, up 15% and 20% year on year respectively in July. Regional markets have also tightened materially, a function of growing demand met with limited supply.
This is acting to sustain yields. National gross unit rental yields have held firm between 4% and 5% for more than a decade.
Developer confidence on the up
“Although being tested by renewed lockdowns, business confidence has improved sharply over the past six months,” Kilroy said.
“Australia’s economic rebound to date has exceed expectation with the unemployment rate now below the pre-pandemic level. For residential developers, this is being further boosted by momentum in rents and prices.”
“Access to credit has not dried up as observed following the GFC. Borrowing costs are very low, with the corporate interest rates near 2% per annum. Pre-sale thresholds have softened on a year ago and we do not expect the first RBA rate rise until mid-2023, sustaining an accommodative borrowing environment for developers. “
Kilroy said the volume of new apartment projects currently marketing across Australia is gaining traction, with search and enquiry indexes for new apartments lifting.
“This move is in sync with the return of investors to the market and increased property turnover that churns more upgraders and downsizers into new apartments.
“The impact of lockdowns on demand is expected to prove transitory, with pre-sale interest expected to record further trend improvement, ultimately feeding the next apartment construction upswing.”
Incentive boost
Victoria and the Australian Capital Territory have introduced stamp duty exemptions for owner-occupiers purchasing off-the-plan apartments in their state budgets, following a similar policy by the Western Australian government last year. Victoria also waived stamp duty on new apartments within Melbourne City Council that have not sold for 12 months or more aiding the ability of developers to clear idle stock and finance the next round of projects.
Kilroy said the policy response to the pandemic has played to the favour of residential build-to-rent investment in Australia. Record low interest rates and favourable legislative and planning changes at the state level have caused the yields on offer from build-to-rent developments to look increasingly attractive. New South Wales and Victoria both announced 50% land tax concessions out to 2040 for eligible build-to-rent projects last year, with South Australia following suit in its latest state budget.
Social housing is being increasingly backed by states, most notably the boost from Victoria’s $5.3 billion Big Housing Build initiative that is targeting commencement of 5,000 homes in both FY2022 and FY2023.
Meanwhile, a boom in commuter rail investment is underway, with a series of transformative projects scheduled to come online over the next five years, including the Sydney Metro Cross River Rail in Brisbane and the Melbourne Metro Tunnel Project.
Such projects are set to draw out increased infill residential investment, including above station developments.
“By boosting convenience and connectivity, new public transport nodes typically increase property values and rents, providing significant incentive for developers to press forward with developments in surrounding areas.”
The recovery of apartment approvals in 2021 has been focused in middle and outer ring capital city areas and regional centres, with net internal migration to regional areas reaching a series high in the March, with centres in close proximity to capital cities such as Newcastle, Wollongong, Geelong, Gold Coast and Sunshine Coast key benefactors.
“A shift in demand towards lifestyle locations, the normalisation of working from home and relatively favourable affordability underpins this trend which we expect to hold for the coming years.”
