Sydney Apartment Market Indicators - November 2015 1

Sydney Apartment Market

Indicators November 2015

Executive Summary

• As many as 61,000 new units* will complete between 2015

– 2017, compared to 44,500 completions between 2012 –

2014**. JLL adjusts supply numbers based on the

likelihood of each project completing and expects a more

realistic 46,500* units in that time, on trend with previous

years.

• Solid demand for residential development sites in the inner

ring 10 km around the CBD are now causing a convergence

of prices for sites with development approval.

• Parramatta’s share in new apartment supply is closing in

on Sydney City. Sydney LGA had 18% of new apartment

supply between 2012 – 2014** as compared to 9% in the

Parramatta LGA. By 2017 this gap of 9% will reduce to 7%.

• Proposed Strata Law changes will make it easier for

schemes to be terminated and replaced with higher density

dwellings. This will have a positive impact on affordability

due to increased supply lowering prices.

*Based on projects with fifty units or more. 2015 data as of August.

**NSW Department of Planning MDP, multi-unit net completions.

Our View

The Sydney residential market continues deep into the eleventh

hour of a housing upturn as sellers take advantage of continued

capital growth and buyers look for opportunities in a market

offering plenty of choice in housing stock. Interest rates have

remained stable and this reflects the general ‘wait and see’

approach that investors are taking.

Median weekly rents in the inner ring 10 kilometres around the

CBD have risen for 1 bedroom units and stayed the same for 2

bedroom units. In the middle ring rents have stayed the same

across both 1 and 2 bedroom units while there has been a minor

reduction in rental rates in the outer ring where rental markets

are smaller (see Figure 10 for precinct map).

Based on our projections of the apartment supply pipeline, our

view is that supply in the new apartment market will continue to

meet buyer demand for multi-unit dwellings until at least the end

of FY2016. An undersupply in the Sydney market since even

before the turn of the decade will not be corrected overnight.

Sydney Apartment Market Indicators - November 2015 2

Economic Overview

Following a long period of relatively subdued growth the NSW

economy rebounded in 2014 with State Final Demand (SFD)

growing by 3.9% y-y. Following a weaker start to the year,

growth picked up again in 2Q15 with SFD recording 3.3% y-y

growth, well above the ten-year average of 2.5%.

The labour market in NSW has improved throughout 2015 with

the number of people employed increasing by 3.3% since the

start of the year. Additionally the participation rate has moved

up to 64%. The unemployment rate was recorded at 5.9% in

September below the national average of 6.2%.

Low interest rates and robust growth in the housing market

should help to support the NSW economy in the short term.

Overall, the outlook for the NSW economy is positive but with

slower growth expected over the medium to long term as the

consequences of strong house price growth filter through.

Deloitte Access Economics forecast NSW Gross State Product

will grow by 2.0% in 2015 before picking up 2.5% in 2016.

New Apartments

In a perfect world where every development comes off without

a hitch, the Greater Sydney region will see as many as 61,000

new units* completed 2015 - 2017. JLL’s probability weighted

supply numbers adjust this number based on the likelihood of

each project completing on a scale of “proposed” to “under

construction”. A more realistic 46,500 units* are indicated by

our probability weighted figures, which is in line with the 44,500

multi-unit completions** in Greater Sydney 2012 – 2014.

Figure 1: New Apartment Supply By Status Greater Sydney 2015 – 2017* (Non-Probability Weighted)

Source: JLL Research

This is a strong and sustained reaction in a market that has

typically been under-built, but then again, a lot of traditional

ground has been broken in recent times in the Sydney

residential market.

Long term traditions will continue to be defied as Parramatta

increasingly becomes a destination of choice for apartment

buyers ahead of the Sydney CBD, and that is indicated in the

supply numbers. From 2015 to 2017 the Parramatta LGA will

account for 8% of new apartment supply, 7% short of the share

going to City of Sydney LGA. This gap is slowly closing

considering that between 2012 to 2014, 18% of new

apartments were completed in City of Sydney LGA as opposed

to Parramatta LGA’s share of 9%, meaning a gap of 9% has

closed to 7% and we expect this trend to continue.

Various pockets of new apartment supply are picking up all

over the Greater Sydney region, as the likes of The Hills Shire,

Auburn, Hornsby, Blacktown and Rockdale LGAs all steal a

piece of the pie from the traditional stronghold of apartment

stock in Inner Sydney. Each has its own reason for the

increase, although most share common themes of affordability,

proximity to transport nodes, rising supply and increased

infrastructure.

Figure 2: New Apartment Supply by LGA Top Ten LGAs 2015 – 2017*

0

10

20

30

40

2015 2016 2017

Uni

ts (

'000

)

Expected Completion Year

Under Construction Plans Approved

Plans Submitted Proposed

Ryde

Ku-Ring-Gai

Rockdale

Blacktown

Hornsby

Canterbury

Auburn

Parramatta

The Hills Shire

Sydney

0 2,000 4,000 6,000 8,000 10,000

Number of Units

Source: JLL Research

*Data based on projects fifty units or more

**NSW MDP multi-unit net completions

Sydney Apartment Market Indicators - November 2015 3

Figure 3: Average New Apartment Prices Inner Ring Precincts*, 2015**

In line with residential development sites, prices continue to be

strongest in the Sydney City and Inner East precincts which

have the advantage of both city and water views. A

convergence of prices at a 1 bedroom level shows (with the

exception of Sydney City) that developers are competing on

introductory 1 bed price points to lure lone person households

at affordable rates.

Gross Rental Yields

In the period between 2010 and 2015, Sydney and Melbourne

yields for units both trended to their lowest levels in over five

years as at June 2015, a result of continued growth in capital

values. Yields for units in Sydney were at 4.2% and Melbourne

at 4.1% as of June 2015, with Sydney a whole percentage

below Brisbane at 5.1% while the Gold Coast sat even higher

at 5.5%.

The lower yields story is not so damning when put in context,

considering Sydney is experiencing the second highest annual

rent growth across the major cities in the unit market. Yields at

this time speak more of the impressive capital growth we have

seen rather than being a function of rent price growth.

Rental Rates

Interest rates have typically been a strong determinant of rent

growth, given the choice that Sydney-siders face between the

cost of renting and the cost of borrowing for a mortgage. With

the cash rate declining over five years from 4.5% in June 2010

to 2% in June 2015, the expected outcome would be that rental

growth would also decline given the lower cost of borrowing.

That has not been the case however, and rents have grown at

an average rate of 4% per annum in that time. A lower vacancy

rate would often explain this phenomenon, but given NSW is in

a strong building phase, vacancies have actually increased to

2.1% in June 2015 from 1.3% in June 2010. As seen in Figure

4, the net effect of all these movements on rent price growth is

positive across the various unit types in Greater Sydney in the

last five years.

Negative gearing is another aspect of the market highly

relevant to rent price performance, particularly with talks of

reform from both state and federal governments. An argument

could be made that rents have been kept artificially low given

the benefits of negative gearing, and in Sydney this is more

likely to be occurring given strong investor interest.

Figure 4: Rental Growth Rents by Ring and Unit Type, June 2010 – June 2015

Source: JLL Research, Housing NSW

See Figure 10 for precinct map. Housing NSW rings marginally differ from map.

Site Sales

Waterloo, North Sydney, Botany and Surry Hills - these

suburbs in the inner ring within 10 km from the CBD have

recorded the highest number of residential development sites

purchased in 2015 to August. At a macro level however, a

more interesting trend that is developing are the corridors of

activity emerging across the Greater Sydney metropolitan,

driven by upcoming and existing transport projects. As per

Figure 6, where darker shades indicate a high number of site

sale transactions, distinct concentrations of site sales are

appearing across major transport lines; UrbanGrowth’s Central

to Eveleigh corridor, the Northern and Western Line linking St

Leonards through to Hornsby, Stage 1 of WestConnex

between Parramatta and Haberfield and the North West Rail

200

250

300

350

400

450

500

550

600

650

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Med

ian

Wee

kly

Ren

t ($)

Inner Ring (2 Bed) Middle Ring (2 Bed)Outer Ring (2 Bed) Inner Ring (1 Bed)Middle Ring (1 Bed) Outer Ring (1 Bed)

Precinct 1 Bed ($) 2 Bed ($) 3 Bed ($)

Sydney City 1,020,000 1,630,000 2,800,000

Inner North 690,000 1,000,000 1,740,000

Inner East 710,000 1,130,000 1,920,000

Inner South 760,000 1,060,000 1,550,000

Inner West 680,000 1,010,000 1,640,000

Source: JLL Research *Data based on projects with fifty units or more.

**2015 data as of August. Inner East based on

2014 prices.

Sydney Apartment Market Indicators - November 2015 4

link as a part of The Hills Corridor Strategy by the NSW

Department of Planning & Environment.

In terms of pricing this year, again it revolves around location.

With the combination of city and water views, sites in the

Sydney CBD and Inner East commanded the highest average

rate per unit for sites with planning approval. At an average

$750,000 per unit in the CBD and $360,000 in the Inner East,

the two precincts sit well above the others in the inner ring.

Outside of these two, there is a convergence of average prices

at a rate per unit in the inner ring, with the Inner North, South

and West all falling in the $200,000 - $300,000 per unit range.

In the CBD itself the range in prices extends from $250,000 to

$1,250,000 at a rate per unit basis, purely because of the

trading of “blue-chip sites” with the potential for prime

residential in the $500,000+ rate per unit range.

Figure 5: Residential Development Site With Planning

Approval Prices Rate Per Unit by Precinct, 2015*

Figure 6: Annotated Site Sales Heat Map Residential Development Sites Sold 2013 - 2015

0

200

400

600

800

1,000

1,200

1,400

InnerEast

InnerNorth

InnerSouth

InnerWest

SydneyCity

Rat

e P

er U

nit (

$'00

0)

In clockwise order: 1. North West Rail Link, 2. Northern & Western Train Line, 3. Central to Eveleigh Corridor, 4. WestConnex Stage 1

3 4

2

1

*Inner East data from 2014. 2015 data

until August. Source: JLL Research

Sydney Apartment Market Indicators - November 2015 5

Strata Title

Legislation has passed through both houses of parliament for

much needed changes to strata law in NSW. There are some

real wins all round as owners benefit from less red tape and the

removal of archaic regulations but concerns do exist in other

areas:

The bill includes the following:

• 75% of owners can agree to terminate a scheme.

• Owners won’t need permission to make minor

refurbishments.

• Votes can be made electronically including email.

• Limit the practise of collating votes, known as proxy

farming.

• 2% bond as security for developers to fix any defective

work.

• Large tenants can attend owner’s corporation meetings

(but cannot vote)

Winners:

• Developers looking for apartment development sites close

to existing transport nodes can take advantage of

terminated schemes.

• Any increase in apartment stock will have a positive

impact on affordability.

• NSW Government to collect extra stamp duty revenue if

owners relocate and buy elsewhere.

Losers:

• Tenants forced to vacate their premises based on a 75%

vote.

• Negative effect on supply if terminated sites are replaced

with a lower density form of dwelling.

• Proxy farming limited, but not removed.

• Owners still need to gain 50% vote on lasting renovations

and 75% vote on any externally visible changes

Figure 7: Precincts Map Greater Sydney - Inner Ring

For more information, please contact:

For further information, please contact:

Melbourne CBD Office Market Update • 3Q2015 6

For further information, please contact:

Rupa Ganguli Associate Director Strategic Research – Residential Markets +61 2 9220 8496 rupa.ganguli@ap.jll.com

Vince De Zoysa Analyst Strategic Research – NSW Residential Markets t: +61 2 9220 8513 vince.dezoysa@ap.jll.com

JLL Offices: Sydney Level 25 420 George Street Sydney NSW tel + 61 2 9220 8500

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