Apartment supply to fall even further
But the shock to population growth means under-supply for Australia’s residential apartment markets will now be some time off.
AUSTRALIA, 13 May 2020 – The Australian apartment supply pipeline has contracted sharply over the past 18 months and just as developer confidence about the next cycle was starting to grow, the COVID-19 shock is likely to see even more projects delayed or abandoned.
Nevertheless, over the next two years, this further decline in new supply is likely to be offset by a bigger temporary decline in population growth. As a result, Australia’s move into housing under-supply is likely to be put back a couple of years, according to JLL’s latest 1Q 2020 Apartment Market Reports.
According to JLL data, the amount of inner-city apartments under construction across the major capital cities fell a further 5% in 1Q 2020 and is now 30% below its mid-2018 peak. Meanwhile, the number of apartments being actively marketed fell a further 11% in 1Q20 to be 73% below its mid-2017 peak.
JLL’s Head of Residential Research - Australia, Leigh Warner said, “The fall in the number of projects being marketed has been telling us for quite some time that we would have lower levels of new supply over the next few years. Completions in 2020 will be about 37% below 2017 levels and fall further in 2021 to be almost 60% below the peak.”
“We have been expecting that this drop in supply would tip the apartment market back into under-supply over this period, but now the impact of COVID-19 will also see underlying demand fall sharply on the back of lower population growth.
“The numbers we are using suggest total population growth, and therefore our underlying housing demand growth, almost halves in 2020 and declines a further 25% in 2021.
“We will still eventually move into a position of under-supply. However, it will just take at least a couple of years longer to get there.
“Pre-COVID-19 there was clearly a little more optimism amongst developers on the back of improving buyer sentiment and recovering prices and we would have expected the supply pipeline beyond 2021 to start to slowly pick up. However, the current uncertainty is going to make it difficult for buyers to commit to a project several years away from completion and we are now likely to see more projects delayed or abandoned and supply stay at very low levels in 2022 and 2023.
“We will see population growth and demand improve significantly over this period and this is when we now could tip back into under-supply – a couple of years later than expected,” said Mr Warner.
JLL’s Apartment Market Reports suggest that current data is not showing much of an impact of COVID-19 to date. There have been sharp falls in auction clearance rates due to restrictions on physical auctions and open houses. But as sale volumes have dropped off, these clearance rates have risen. Price growth has slowed in April, but as yet there is no significant evidence of widespread falls.
Mr Warner said, “At the moment in the existing market it appears there are still some buyers around and the withdrawal of stock has left willing buyers with much less to choose from and this is supporting prices. It appears the true test for prices is still to come as restrictions are eased and more stock becomes available.”
Within the rental market, data is not yet showing much rise in vacancy to date, but anecdotally there has been an increase in availability. Data is showing some softening in asking rents, but to date this has been moderate for apartments and less than 5%.
“We do expect some further softening of the rental market over the next two quarters or so and short-term accommodation stock entering the long-term rental pool will be just as important as demand in driving this,” said Mr Warner.
“However, after the initial softening in 2020, the rental market should steadily tighten over the medium-term. Many young renters that initially fled back to their parents will slowly come back as employment recovers, while many aspiring buyers may choose or be forced to stay in the rental market much longer than they otherwise would. At the same time, new rental supply will be limited and some stock will transition back to short-term accommodation as travel restrictions lift,” said Mr Warner.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion, operations in over 80 countries and a global workforce of more than 94,000 as of March 31, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.