LANDLORDS who own a Melbourne apartment face the prospect of falling rents over the next three years as the market moves into oversupply, analysts say.
This financial year, 7700 apartments are expected to be completed. Over the next three years, a further surge in supply may squeeze rents by up to 15 per cent, economic forecaster BIS Shrapnel said.
"Anyone who has an established apartment will have to discount their rental to be competitive against the new stock that is coming online," BIS senior analyst Angie Zigomanis said.
Melbourne's overall vacancy rate in April was 3.1 per cent. A year ago, during the same month, it was 2.7 per cent, according to SQM Research.
In the CBD, the vacancy rate has almost doubled (4.9 per cent) from a low of 2.6 per cent in the same month in 2006.
Southbank and Docklands have similar high rates, 4.2 and 4.5 per cent respectively.
A vacancy rate of 3 per cent is considered a "balanced" market.
"Definitely at 4.9 per cent, that would make it a tenants' market," SQM's Louis Christopher said.
In nearby, trendy inner suburbs Richmond, Fitzroy and North Melbourne vacancy rates are between 1.3 and 1.7 per cent.
After the 2008 global financial crisis, apartments were a more attractive investment option than stocks, which resulted in investors flooding the inner Melbourne market, BIS Shrapnel's Apartments 2012 to 2019 report says.
Record numbers of new apartments were being built and "a question mark remains on whether there will be sufficient demand to occupy this rise in the supply," BIS says.
Melbourne's apartment prices were forecast to remain flat until the excess stock was absorbed, Mr Zigomanis said.
Sydney was also facing an upswing in apartment building but would not be able to satisfy demand.
"[We] anticipate a modest deficiency of apartments in inner Sydney will still be in place by 2016," BIS said.
A number of factors have driven Melbourne's demand:
Melbourne apartment yields after the GFC were more attractive than in Sydney.
The strong Victorian economy and residential market compared to weak conditions in Sydney reduced expectations of capital gains for inner Sydney apartments.
And a greater availability of cheaper sites in inner Melbourne meant prices were lower and the pool of potential purchasers larger.
A City of Melbourne report released last week found falling consumer confidence and higher levels of construction were impacting on prices.
"Purchasing a unit or apartment has become more affordable . . . with the median price decreasing 7.1 per cent in the 12 months to December 2011, to $471,000," the council's annual Property Watch report said.
Frequently Asked Questions about this Article…
Are Melbourne apartment rents likely to fall in the next few years?
Yes. Analysts including BIS Shrapnel say a surge in new apartment supply could push Melbourne apartment rents down over the next three years, with rental pressure potentially squeezing rents by up to about 15% as the market moves into oversupply.
How much new apartment supply is arriving in Melbourne and how might that affect rent?
Around 7,700 apartments were expected to be completed this financial year, and a further supply surge over the next three years may create excess stock. BIS Shrapnel warns that this new supply will make landlords of established apartments discount rents to stay competitive.
What are the current vacancy rates in Melbourne and what do they mean for renters and investors?
According to SQM Research, Melbourne's overall vacancy rate was 3.1% in April (up from 2.7% a year earlier). A 3% vacancy rate is considered a 'balanced' market, so a higher rate—such as the CBD's 4.9%—shifts power toward tenants and signals softer rental conditions for investors.
Which Melbourne precincts have the highest and lowest apartment vacancy rates?
The CBD had one of the highest vacancy rates at 4.9%, with Southbank and Docklands at about 4.2% and 4.5% respectively. Trendy inner suburbs like Richmond, Fitzroy and North Melbourne had much tighter vacancy rates—between 1.3% and 1.7%.
How could oversupply affect apartment prices and investment returns in Melbourne?
BIS Shrapnel forecasts apartment prices in Melbourne are likely to remain flat until excess stock is absorbed. With more new apartments coming online and vacancy rates rising, rental yields and capital growth prospects could be weaker in the short term for inner-city investors.
Why did so many investors target Melbourne apartments after the global financial crisis?
After the GFC, apartments offered more attractive yields than stocks for many investors. That, combined with a strong Victorian economy and availability of cheaper inner-city sites, attracted record numbers of new apartments and investor demand into inner Melbourne.
How does the apartment outlook in Sydney compare to Melbourne?
Both cities have experienced an upswing in apartment building, but BIS Shrapnel said Sydney is unlikely to be oversupplied in the same way—anticipating a modest deficiency of inner Sydney apartments to remain by 2016—whereas Melbourne faces a higher risk of oversupply.
What did the City of Melbourne report say about apartment prices and buyer sentiment?
The City of Melbourne reported that falling consumer confidence and higher levels of construction were impacting prices. Its Property Watch noted the median apartment price fell 7.1% in the 12 months to December 2011, to $471,000, reflecting affordability and market pressure.
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