Inner Brisbane apartment market ripe for investors: Angie Zigomanis

GUEST OBSERVER

The Inner Brisbane Apartment (IBA) market has experienced a surge in demand for off the plan apartments since 2013/14, which will result in record new apartment supply in 2014/15, with completions set to escalate further in 2015/16 and 2016/17.

In particular, development in Inner Brisbane has been dominated by large scale and high rise development in the following locations (shown on map):

• CBD/Spring Hill 
• Inner East 
• Inner North 
• West End 
• Toowong 
• Woolloongabba 
• Hamilton 

Rental Vacancy Rates

Vacancy rates in Inner Brisbane remained below the balanced market rate of 3% from June 2004 through to June 2013, except at June 2009, when a rapid reduction in standard variable rates and the introduction of boosted incentives to first home buyers during 2008/09 encouraged existing and potential tenants to become owner occupiers.

Unlike Middle and Outer Brisbane, vacancy rates inInner Brisbane have increased since 2013/14, reaching 3.8% at December 2014. While some of thisrise may reflect the rate of new stock coming to the market and the time required to fill the stock, the steady rise in vacancy rates through 2014 nevertheless suggests that an excess of rental stock is emerging within Inner Brisbane.

Rents, Prices and Yields

Table 2 outlines the weighted median two bedroom (the most common type of unit) rent and weighted median unit price of the IBA area post codes, along with an indicative yield representing the rent divided by the price.

Unit rental yields increased to a peak of 5.52% at June 2012, and remained at a similar high level over the following year. Combined with the low interest rate environment, investor demand strengthened and drove solid unit price growth of 6.8% in 2013/14.

Relatively low borrowing costs also reduced cash outflows for investors and diminished the necessity for landlords to increase asking rents, in particular with subsequent attractive affordability encouraging tenant demand to shift to owner occupation. As a result, rental growth remained below 1% in 2013/14 and unit yields eased to 5.15% at June 2014.

Rising vacancy rates will limit rental growth in 2014/15 to an estimated 1.7%. Moreover, momentum in unit prices is expected to come to a halt, as the record level of apartment completions in 2014/15 creates increased competition from new apartments and has a negative impacted prices. The indicative yield for a two bedroom apartment in the IBA area will subsequently improve to 5.25% at June 2015.

SUPPLY PIPELINE

Apartment demand within the IBA area has escalated from 2013, attributed to improving economic conditions, attractive yields and low interest rates. The subsequent boost to off–the–plan sales allowed a greater number of projects to reach sufficient pre–commitment levels to obtain finance and begin construction. As a result, the IBA area experienced relatively high completions in 2013/14, and new supply will reach a record level in 2014/15, at approximately 2,880 apartments.

Demand for Inner City apartments from investors currently shows little signs of abating despite the potential impact on rents and prices of further sizeable new additions to the rental stock across Inner Brisbane. Relatively less expensive apartment prices, and more attractive rental yields compared to their respective home markets, is likely to lead to heightened demand for Inner Brisbane apartments from Sydney and Melbourne investors.

Moreover, this should also see overseas investors increasingly favour the Inner Brisbane apartment market over Sydney and Melbourne, with demand from these investors also being underpinned by low borrowing costs, buoyant economic conditions locally in their home country, a preference to invest in a more transparent and stable political environment, and recent falls in the Australian dollar making apartment prices more attractive.

Consequently, IBA area completions are on track to surpass their record level in 2014/15, increasing to 3,610 apartments in 2015/16 and peaking at 4,040 apartments in 2016/17.

An estimated 81% of apartments expected to be completed in 2015/16 and 2016/17 are in buildings currently under construction, with the remainder currently pre-selling and likely to shortly achieve a sufficient level of pre–sales to begin construction.

Within the IBA area precincts, during the three years to 2016/17:

The Inner North precinct will be the main source of new apartments in the IBA area, accounting for 43% of total new apartment supply, followed by the West End precinct with a 26% share.

Toowong precinct is projected to account for 13% of new apartment supply in the IBA area, with a further 7% occurring in the Hamilton precinct and 6% in the Inner East precinct.

Apartment completions as a proportion of the total IBA area is expected to be minimal in the Woolloongabba (3%) and CBD/Spring Hill (2%) precincts.

 Angie Zigomanis is Senior Manager of Residential Property for BIS Shrapnel. You can contact Angie here.