Rental and price growth to drive more investors to Sydney inner city apartment market: BIS Shrapnel's Angie Zigomanis

"Not many of Sydney's design professionals seem at ease with the current prognosis for Pyrmont. It would seem that this may become an urban opportunity sacrificed to developers' profits, perhaps destined to become the slum of the next century.” 

Those in the property industry in the early 1990s would be familiar with the above sentiment outlined in “Tale of Two Cities: Planning a Great or Wasted Sydney” by Rollin Schlicht.

The article appeared in the Sydney Morning Herald in 1994 just as the inner Sydney apartment boom was taking off, and highlighted concerns about the depth of the market at the time.  It’s been around 20 years since the apartment boom first took off—enough time to see how closely this early prognosis for the Pyrmont market has eventuated.

BIS Shrapnel have been tracking the inner Sydney apartment market since its first study in 1997, when the start of the apartment construction market boom was well underway. Our most recent study, 'Inner Sydney Apartments 2013 to 2020', uses the latest 2011 Census data to profile the area. 

While the Pyrmont apartment market has gone through typical cycles in this time, Pyrmont (and the inner Sydney apartment market overall) has on average experienced solid overall demand in the last twenty years. Indeed, demand for apartments has broadened in this time.

The 1996 Census revealed that only 20% of apartments in Pyrmont were owner occupied (with the remainder largely investor owned), compared to 36% of apartments being owner occupied at the 2011 Census.

Nevertheless, the population profile of apartment residents in Pyrmont remains fairly narrow, and is concentrated among the young adult, typically professional, population.

In 1996, just over half (51.5%) of the population was aged 20 to 34 years old, and this was unchanged in 2011 (52.3%) – the major difference being that more are likely to remain in the inner city, given the rising percentage of owner occupiers. 

Median household incomes in Pyrmont have risen by 5.8% per annum between 1996 and 2011; similar to total Metropolitan Sydney – far from what you would expect from a “slum of the next century”. 

Meanwhile, the Pyrmont residential market itself has moved more or less in line with the Metropolitan Sydney market, with rents and prices showing solid long term rises. 

 Apartment rents in Pyrmont have averaged above inflation growth of 4.5% per annum between 1996 and the end of 2012, a little below the 5.2% per annum growth for total Sydney. 

Pyrmont’s median unit price has risen from $221,200 in 1995/96 to a preliminary $664,000 in 2012/13, a rise of 6.8% per annum, and just above growth in the Sydney median unit price of 6.6% per annum in the same period. 

Contrary to perceptions at the start of the apartment construction boom in the mid 1990s, the positive performance of the Pyrmont and inner Sydney apartment market has been driven by various factors that were not immediately apparent at the time:

The rise in overseas student enrolments at Australian universities; globalisation of employment that has resulted in growth in overseas professionals employed in our cities; and changing lifestyle and dwelling preferences  that have seen the younger adult population more willing to live in smaller dwellings closer to employment and entertainment options. 

The result has been a growing population that has a preference for living in inner Sydney apartments, which has been able to sustain apartment occupancy despite the sizeable increase in the apartment stock.

Pyrmont has experienced a fourfold increase in its apartment stock from 2,300 apartments in 1996, to 9,500 apartments by 2013, while still maintaining solid occupancy and positive rent and price growth through this period. 

Although there will continue to be cycles, these drivers are expected to continue to underpin long term demand for inner Sydney apartments in the future.

In the short term the underbuilding of apartments in inner Sydney since the middle of the last decade has resulted in an underlying deficiency of apartments that is not expected to be fully eroded in the near future, despite the solid upturn we are now seeing in new apartment construction. 

The resulting rental growth will continue to attract more investors to the market.

This in turn should drive further solid price growth over the next two to three years, which in turn will drive greater off-the-plan purchases and additional supply. 

After averaging 2,500 apartment completions per annum over 1996/97 to 2005/06, apartment supply has fallen to around 1,600 new apartments per annum over 2006/07 to 2012/13.

While completions have picked up in 2012/13 and we expect them to average 2,800 per annum over the four years to 2016/17, there is still expected to be a small underlying deficiency by the end of this current round of construction.

Angie Zigomanis is senior manager of BIS Shrapnel.