Not back to ‘game on’ for new apartments just yet
Despite the rebound in housing market activity and existing dwelling prices seen over recent months, we should not be expecting a sudden rebound in the new construction apartment market and conditions will remain tough for developers
AUSTRALIA, 5 NOVEMBER 2019 – Despite the rebound in housing market activity and existing dwelling prices seen over recent months, we should not be expecting a sudden rebound in the new construction apartment market and conditions will remain tough for developers in the short-term, particularly in Sydney and Melbourne as the tail end of the last construction cycle is absorbed.
Nevertheless, these challenges will see supply continue to fall sharply over the next few years and will see the major markets move into under-supply progressively over the next 12-24 months, according to JLL’s latest 3Q 2019 Apartment Market Reports.
JLL’s Head of Residential Research - Australia, Leigh Warner said, “The recovery in existing property demand and prices is great for confidence in the broader market. However, this is likely to level out a little over the next couple of quarters, as more vendors are attracted back into the market. The recovery in investor demand is also likely to stay more muted than for owner occupiers and this remains an important source of demand for the new apartment market.
“Demand for new apartments will improve somewhat, but pre-sales rates will stay relatively slow. Developers are still competing against residual un-sold stock in recently completed projects, which in many cases are heavily discounted or offering other incentives to buyers,” said Mr Warner.
“The good news is that with strong population growth and new completions still falling sharply, the process of consuming this residual stock will be reasonably quick. The timing of this process will be slightly different in each market due to all having slightly different construction cycles, but by mid-2021 we expect all the major markets to be either back in, or very close to, a position of under-supply again,” he said.
JLL data showed that the number of apartments under construction in the inner-city regions of Australia’s six major capital cities fell a further 5% in 3Q19 to 37,500 apartments and was down 23% over the past year and over 30% from its peak.
However, perhaps the strongest sign of the decline that is still to come in apartment construction is the decline in the number of apartments being actively marketed. This fell a further 19% in 3Q19, to be 42% below a year ago and around 63% below its peak level. This decline has been felt across all monitored markets, but has been most severe in Sydney where it has fallen 54% over the past year and 80% from its peak level.
According to Mr Warner, Brisbane is likely to be first into the next cycle. “Brisbane supply peaked way back in 2016 and is more advanced in the process of absorbing residual stock. Construction will be particularly low in 2020 and 2021. At the same time, underlying demand continues to pick up as regional population growth increases and some large inner city infrastructure projects boost economic activity and lure construction workers to the region. A tightening of the market is already evident in the rental market, where upward pressure on rents have already re-emerged.”
Melbourne and Sydney are likely to take a little longer to tighten up. “Melbourne’s very strong population growth will help with consumption of stock, but construction has been very concentrated in and around the CBD and there are some very large projects recently completed or soon to complete that still have a large amount of stock to be absorbed first,” said Mr Warner.
“In comparison, Sydney’s construction cycle was much more decentralised and only reached a peak much more recently. As such, residual stock to be absorbed is more spread across the entire Greater Sydney area and will take a little longer to work through. The recent building defect issues have also affected buyer confidence in the market. With a lot more choice in the market, we think buyers will gravitate to both the best locations and to projects with more widely recognised developers and builders.
“Perth’s housing market remains soft, but there is increasing optimism that better times are ahead. Improved local economic and population growth over the next few years should boost underlying demand growth, while lower interest rates and easier credit should also lure some buyers out of the rental market that have been holding off for prices to stabilise. Similarly, apartment prices are lower than they were a decade ago in Perth and this affordability and improving market outlook may attract a little more investor interest,” said Mr Warner.
“Neither Adelaide nor Canberra have historically had significant apartment markets, but apartment living has started to take off in both markets over recent years. Supply levels remain elevated in both markets, which will put some moderate pressure on pricing ahead, but solid economic prospects and improved market sentiment after the interest rate cuts and easing of credit constraints is likely to mean a shallow downturn for Adelaide and Canberra. Further, smaller owner-occupier focused stock is likely to continue to hold up well,” said Mr Warner.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.