Melbourne apartment market is weathering the storm, as supply reaches a peak

Melbourne market remains resilient as as it processes the large volume of apartment completions due in 2017

October 25, 2017

​JLL's October Melbourne Apartment Market Indicators Report highlights the resilience of the Melbourne market as it processes the large volume of apartment completions due in 2017.

This year, 9,000 apartments have completed in Inner-Melbourne to date, with 79% of these completions occurring in the Melbourne City precinct. In 3Q17 alone, three major towers completed and added over 1,600 apartments to the CBD precinct. A further 9,100 apartments are under construction in Melbourne City, equating to 61% of all Inner-Melbourne apartments under construction.

JLL's Head of Residential Research – Australia, Leigh Warner said, "Despite increased Chinese capital controls and tighter investor lending conditions from local banks, minimal settlement issues have been reported in recent completions. Further, rents and apartment prices are still growing and the market is showing remarkable resilience to all these headwinds at present.

"While Melbourne is in the eye of this storm right now as supply peaks, there is a substantial amount of supply still due to complete in this cycle and we do expect re-sale prices and rental growth to remain under downward pressure in the short-term.  

"But Melbourne's strong population growth is its biggest asset in soaking up any over-supply of space and we still expect any price falls to be moderate," said Mr Warner.

The JLL Report showed that apartment sales volumes (new and existing) in Inner-Melbourne continued to decline in 3Q17, reflecting slowing investor demand. However, this reduced investor demand is already helping to self-regulate the supply pipeline, with many developers unable to obtain the continued high pre-sale requirements of banks to commence construction. In 3Q17, no projects commenced construction in the Melbourne City precinct, but several smaller-scale fringe projects were still able to commence.

Mr Warner commented that, "The focus of developers has undoubtedly shifted. While investor demand remains subdued, attention has turned to projects much more oriented to owner-occupiers. Strong population growth is still supporting robust demand from owner occupiers."

JLL anticipates many inner-city developers will increasingly look to take advantage of a slowing market and try to land-bank strategically positioned sites until the next development cycle, or re-configure approved projects to adapt to the new balance of demand. This will involve reducing the number of apartments, increasing occupier amenity and potentially expanding or adding a mixed-use component.

Highlighting the market's resilience, the JLL Report shows that annual apartment price-growth picked back up to 2.0% in 2Q17, after slowing in the second half of 2016. Additionally, the rental market remains tight. Inner Melbourne rental vacancy fell to 1.9% in August 2017, down from 2.3% in August 2016. 

Apartment rents across Greater Melbourne also continued to grow in the 12-months to 2Q17. Two-bedroom apartments experienced the strongest annual growth of 5.0% over the year to 2Q17, above their five-year average of 2.6%.