National apartment supply pipeline approaches cyclical peak

Financing constraints will ensure less projects progress to the construction phase and that 2017 will be the peak of apartment completions

August 15, 2017

Latest apartment supply figures from JLL show that strong levels of completions are expected over the remainder of the year that will see 2017 supply exceed 2016 levels. However, financing constraints in many markets continue to limit the number of new projects starting construction and is likely to see the level of completions fall substantially over the next few years according to JLL.

JLL's Australian Head of Residential Research, Leigh Warner said, "The supply pipeline is already shrinking in those markets where supply fears have been of greatest concern. In particular, the number of apartments under construction fell in 2Q17 in Brisbane, Melbourne and Perth. Banks are certainly imposing much tighter lending conditions on developers in these markets and it is clear that in a more subdued demand environment, less projects are able to proceed to construction."

"In contrast, Sydney is the market where the longer-term supply-demand balance remains healthiest and the number of apartments both under construction and being marketed rose in the quarter. At this point, this remains a positive for a low-vacancy market starved of product for such an extended period and where demand remains robust, albeit slower than the recent cyclical peaks," he said.

At a national level, there was around 52,200 apartments under construction at the end of 2Q16 in the inner city areas monitored by JLL across Sydney, Melbourne, Brisbane, Adelaide, Perth and Canberra. That was 1.7% higher than last quarter, but most of this increase was due to a rise in Sydney construction levels (from 11,806 to 14,192) and increases in the smaller Adelaide and Canberra markets that are slightly less progressed in the current cycle. The amount of supply under construction in Brisbane fell 9% in the quarter, while Melbourne fell 3% and Perth by a third after a large quarter of completions.

"We do expect further reductions in the number of projects commencing from this point forward, which will see construction levels peak in 2017. Development finance is now being rationed to those developers with the strongest track records and, even where finance is available, slower sales rates have meant it is taking longer to reach pre-sale hurdles. This is definitely making it harder for larger projects to start and we are seeing a clear shift to smaller owner-occupier focused projects as regulators' measures to slow investor demand continue to bite" said Mr Warner.

While most apartment markets are now 'late cycle' and moderating, market conditions do vary widely in terms of the position in the cycle according to JLL.

"The Perth market is a little further through the cycle than other markets. The combination of slower population growth and a weak economy post-mining boom, plus relatively strong supply, have seen prices continue to fall over the past year, but prices appear to be edging closer to a point of stabilisation. A positive for the market is that the price point in the Perth market is low relative to many other markets and this is definitely attracting the attention of some east coast counter-cyclical investors," said Mr Warner.

"The major East Coast capital city markets are all slowing, with Brisbane's relatively large supply pipeline for its size having tipped it into moderate price decline. We expect further moderate pricing pressure in near term within inner Brisbane and inner Melbourne as the market absorbs the substantial completions due over the remainder of the year. Supply issues are expected to be relatively localised and have limited spill-over effects to the broader housing markets in these two cities. In Sydney, the market balance remains slightly healthier and we expect further moderation in price growth in the short-term, before a stabilisation in 2018."