The Sydney apartment market in conversation with Blake Schulze

This I’m recounting a Q&A conversation with Blake Schulze, Director Residential with our Sydney Residential team.

Question

Given that we are amidst a ‘once in a century social, health and economic event’ what do you think are the main factors driving the market to its current record levels of activity?

Answer

I’d suggest that the most accurate way to describe Sydney’s residential market, and that includes apartments, can be easily captured in just two words – ‘fast paced’. The market has shifted so much, and with such pace, that a comparison of activity between March/April 2020 and March/April 2021 looks completely implausible.

Even in the face of the Covid-19 pandemic over the last 12-months, all areas of the market have been positive. The housing market has been outstanding however, at a more even pace we’ve also seen all areas of the apartment market perform beyond expectations.

And while the pace of demand may not be uniform, completed stock has been leading sales and now off-the-plan (OTP) is gaining support. This is partly being driven by house prices that are starting to look beyond the capacity of some buyers.

Apartments are increasingly seen as representing good value and I expect that trend to gain momentum over the next 6-12 months.

A lot of activity is being driven by buyers capitalising upon the equity in their existing homes, competition from downsize buyers, very low interest rates and low levels of future supply.

All of this comes together to support positive market sentiment which is just getting stronger, and the impact of positive sentiment is difficult to overstate. We’re seeing improved apartment sentiment grow week to week.

Question

Are we approaching an asset bubble (and that includes property)?

Answer

No, I do not think property is in, or approaching a bubble. I say that as many factors are driving demand, this is not a one-horse-race, driven by one factor that could easily fall over. While existing houses have clearly been the big drivers of higher prices, there are early signs indicating that trend might be peaking, and the appeal of OTP apartment projects is gaining popularity.

This is a real opportunity and I’ll expand on this point. As house prices increase, some buyers will be priced out of the market or see apartments as a great option and this I suggest, will see a larger market share of apartment sales. This will also include OTP and that trend is already evident, and apartment prices are still attractive.

Where people wish to budget and plan with known prices, OTP is also appealing. We are also seeing a greater volume of sales at project launches and this includes strong demand from owner-occupiers.

Question

What sort of mood do you encounter among your buyers?

Answer

There’s a more positive vibe among apartment buyers and there’s an interesting knock-on from the pressure some buyers are feeling from the very competitive housing market.

OTP offers buyers more time to plan and aligned to the trend where quality is ‘king’ we’re seeing marked numbers of buyers purchase adjoining apartments to create larger properties. That’s a key advantage of OTP alongside the ability to lock-in prices, again it’s certainty that’s important.

There’s also a level-headed approach to prices aligned to a firm view that in the long-term apartment prices will recover. Two factors add credibility to that view, the first is falling supply and the belief that once our international borders re-open migration will quickly recover.

Question

How are investors reacting?

Answer

Sydney investors are clearly starting to see renewed value in the market, and the limit of future supply is also seen as a further up-side that will be increasingly evident over the next few years.

The figures we see show that in 2020 owner-occupiers were accounting for 80% of our enquiry and investors 20%. Now that has moved and currently owner-occupiers account for 60% and investor interest has doubled to 40%.

However, it’s worth making the point that both owner-occupiers and investors are looking for the same quality of apartments. Quality is important both in terms of the actual apartments, but also location and rental trends reflect the positive contribution of both factors.

Question

What sort of apartment features are buyers looking for?

Answer

With many more owner-occupiers taking a long-term view of their move to a new apartment there’s a strong trend towards bigger apartments. That applies equally to 1-bedroom and 2-bedroom apartments as it does to the 3 and 4-bedroom buyer.

What’s important is that space is flexible; a 1 or 2-bedroom apartment, in fact most apartments, need to have a dedicated workspace or a media room, so that apartments are designed to be future proof. It’s what I’d call a ‘plus-one’ apartment. That is the set number of traditional bedrooms plus one flexible room. Designs that are flexible are in high-demand and they represent the future.

Parking is another important consideration. Buyers want parking and that’s amplified when we are dealing with larger apartments and that’s regardless of location.

The other market reality is that all buyers are now very aware of how floor plans work. They are alert to good design and well-thought out floor plans.

This is a quote I’ve heard repeated, and I think it’s a good summary: “Apartment buildings are getting smaller, apartments are getting bigger, demand for parking and quality are all increasing and for apartments that deliver these qualities, prices are just going to keep increasing.”

However, I’d add flexibility via my ‘plus-one’ suggestion and infrastructure (including the appeal of the CBD) to this description.

Question

Interest rates: what areas are sensitive to interest rates and are people expressing any concerns that rates might rise?

Answer

The short answer is no, but having said that, the full answer is a little more complicated. Every potential buyer is naturally very aware that rates are at record lows, and with OTP buyers generally, they have anticipated that rates might rise before apartments are finished and settled.

Low interest rates are seen as an added positive at a time when apartment markets look stable, and this gives apartment buyers more buying power or equity. I also think there’s a direct link between interest rate stability and the strength of the local economy. The improving outlook for the economy drives positive sentiment.

Question

It might be a good time to sell, but is it also a good time to buy (including off-the-plan) and why?

Answer

It is a good time to buy into the Sydney apartment market. Overall, the market is very stable, and supply is low and falling. We’ve also seen a lot of new infrastructure either completed or soon to be in popular areas.

The Metro is one big example and that’s going to re-shape demand in many areas. The trend is already apparent in the north and parts of the CBD and south will soon follow with the Metro crossing under the harbour.

The other factor is that new projects are delivering pronounced quality. A few years ago, it was the Melbourne apartment market that delivered better quality and more creative projects, however now Sydney is delivering projects that are exciting and inspired.

Question

Migration is a big issue (lack of migration) – do you see an up-side when our borders open again?

Answer

I agree that closed borders are a big issue and new arrivals will be very important however, the potential I’d suggest is not yet reflected in many of the current trends.

Given how well we’ve done during COVID-19, reason suggests that the potential of a big in-flow of migrants is very real. Along with international tourists and students pressure is building for people keen to come to come here.

In the UK and Canada, we see those governments actively planning to seek and attract more migrants. Over the past 18-months we’ve seen a huge drop in new migrants. When our borders reopen there’s evidence that any increase, let alone a big increase in new arrivals, will have a marked and rapid influence on the local residential market.

Australia was already seen as a desirable destination, now we will be seen as a safe haven, I’ve seen glowing reports about Perth for example in the international press. Australia’s lifestyle is bound to take on added appeal.

I’d suggest that demand might be 20% higher than we’ve seen in the past. We have already seen strong demand from Hong Kong. Buyers are split 50/50 between those with already established family here, and new buyers who do virtual tours and complete a purchase very quickly.

What I’d expect is that soon after borders start to relax, that the rental market will be quickly impacted pushing up rents. The demand for apartment purchases will also see an immediate and I think very quick spike in demand. However as other countries gain much more progress with vaccine roll-outs, Australia will need to do the same.

Question

Do you see any connection between working from home (WFH) and the changing work habits impacting CBD areas and the demand for apartments in the inner city and immediate surrounding areas?

Answer

Asking this question 12-months ago when Sydney was in lockdown and the CBD empty perhaps you could be forgiven for thinking that because of WFH the CBD was doomed. But that’s not true and many of the comments I see I think are over-stated. The pandemic has with the aid of technology increased the pace of change, that’s true but longer term the CBD will and is adapting. There’s an energy that people like and miss.

The CBD is also a creative environment and a hub for employment that creates optimism. These qualities will re-bound and will continue to attract a big workforce, that will be more flexible. Again, I see flexibility as key aligned with technology and good transport connections.

The Metro is just one example that will make access to the Sydney and indeed other CBD areas easier and quicker, and that in reality also enables WFH.

Sydney can now respond with quality and innovation and that will also continue to appeal to residents as the CBD re-invents itself as a desirable place to work and live. Cities have been resilient for a very long time.

Question

What are the unique characteristics of your local market?

Answer

Sydney is a very big and complex apartment market. It’s also now a much more mature market. However, for the immediate future supply is going to be restricted, and as Sydney has great appeal to migrants, demand will ramp-up as our borders open.

Sydney’s big infrastructure projects are now either complete or well underway. There’s also a strong pipeline of private investment taking place, cities never stand still and that certainly applies to Sydney. Quality is responding, we’re seeing new apartment projects of international standard and the market is ever more exciting.