As residential construction in Sydney’s CBD is expected to remain high through to 2017, a leading research firm has predicted the apartment sector may begin to weaken in coming years.
A new report by BIS Shrapnel estimates there are 5,800 apartments currently under construction in inner Sydney.
Over the next three years, they estimate 11,500 new apartments will become available, with completions reaching a peak in 2016/2017.
BIS Shrapnel senior manager Angie Zigomanis says the market may begin to tip towards an oversupply.
“To some extent, the inner-Sydney apartment market is playing ‘catch-up’ after almost a decade of weak demand for new apartments and limited price growth,” Mr Zigomanis said.
“However, the current surge in off-the-plan demand is likely to see the market get ahead of itself again as pre-sold new apartment projects commence and progressively work their way through to completion.”
According to the report, higher stock levels will lead to slow rental growth and falling yields. As interest rates rise, these factors may lead to weaker buyer demand and slowing price growth.
BIS Shrapnel estimates interest rates will begin to climb by the end of 2015, and rise further over 2016 and 2017.
Mr Zigomanis believes the apartment sector is likely to soften as a result.
“Landlords of newly-completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to discount to attract tenants from neighbouring suburbs,” Mr Zigomanis said.
“The decline in rental returns and increase in mortgage servicing costs will reduce the amount the purchasers will be willing to pay for an apartment and many owners who bought at, or close to, the top of the market could experience losses if they sold into the downturn.”
However, he said this downturn would be relatively shallow, with excess stock absorbed quickly and growth picking up again towards the end of the decade.
Total price growth of 21 per cent, or three per cent per annum on average, is forecast through to 2021.