BIS Shrapnel have released bullish forecasts for Sydney apartment construction, which it claims will be the biggest on record driven by: a decade of undersupply; strong population growth; strong capital growth; and growing investor interest both domestically and from abroad. From the AFR:
Kim Hawtrey, associate director at forecaster BIS Shrapnel, said new apartment approvals were almost on par with the last peak, in 2003, when annual approvals hit 23,000 in NSW. “We’re close to exceeding that and will easily go beyond it next year. We think it will peak at 25,000 in 2016,” he said.
Australia’s attractiveness to Asian-backed developers and individual investors has also boosted construction levels. The money flowing in from Asian groups, and Australian-born Chinese, sets this upturn in unit construction apart from previous spikes.
Developer Australand’s NSW residential division general manager Nigel Edgar said buyers were also owner-occupiers wanting to live near the central business district but were priced out of the housing market, plus first-home buyers encouraged by state government grants for new dwellings.
The apartment boom will reshape the CBD as more office blocks are converted to apartments and others knocked down and replaced by new apartment towers. New stock is also changing inner suburbs where industrial sites were rezoned, such as Mascot, Zetland and Waterloo…
A challenge for developers is to keep up demand when potential sites are limited. Mr Edgar said the NSW government’s planning reforms would help in obtaining further supply.
A quick examination of the ABS’ dwelling construction data shows an ongoing shift towards apartments in Sydney, with units and apartments now accounting for nearly 70% of dwelling approvals (see next chart).
However, while the proportion of apartments is on the rise in Sydney, the actual number of units constructed per 1000 head of population has declined quite sharply over the past 15 to 20 years, suggesting that there is an inherent undersupply (the trend is even worse for detached houses):
In the short-term at least, the outlook for Sydney apartment and unit construction is good. In addition to rising prices, which encourages buyers to “get in now” before they miss out, and increased first home buyer incentives, finance commitments for newly constructed dwellings has trended up strongly over the past year (see next chart).
Apartments are also relatively more attractive in Sydney due to the city’s exorbitant land prices, whereby fringe lots typically cost around $300,000, which makes new house and land packages relatively less attractive. Such exorbitant fringe lot prices will likely persist as long as the state government continues to restrict land release, levy hefty charges on new developments, and under fund infrastructure.
