Why Sydney won't mirror Melbourne's apartment glut

The apartment markets in Australia's two largest cities have diverged and it looks as if Melbourne prices could be headed for a fall following a flood of investment.

Australia’s two largest inner city apartment markets are developing in vastly different directions. Melbourne has achieved what Sydney has always wanted to achieve but is about to discover what actually happens when a city gets what it wants.

While in Sydney, market moves are making it increasingly less likely that Harry Triguboff’s Meriton will be sold to the Chinese.

In Sydney, the complex web of councils, government bodies and various other organisations has always made gaining approval to undertake economic apartment developments in the inner city and suburbs very difficult.

The advent of the Coalition government and other changes has made it easier to get approvals and undertake developments but it is still an extremely difficult process -- a bureaucratic nightmare.

As a result, although there are many developments that have managed to get through, the bureaucracy that makes approvals difficult has stopped a glut of new developments. Demand is strong, driven by the combination of Chinese/Asian buyers, Australian investors and those wanting to own an apartment to reside. Chinese and Australian banks are providing the funding.

As a result of the Sydney scarcity factor, the low interest rates and the abundance of funds, the price of inner city apartments has risen by about 15 to 20 per cent over the last 18 months.

In Melbourne, the combination of Chinese/Asian buyers, Australian investors and those wanting to own an apartment in which to reside is also fueling very strong demand. Chinese and Australian banks also have cash at the ready. But again, similar to Sydney, gaining approval has historically been a nightmare.

But that’s where the similarity ends. In the last two years the combination of a Coalition planning minister Matthew Guy (now opposition leader) and a refining of the approval process to encourage developments, has seen the number of new high-rise apartment approvals explode.

So in Melbourne, while demand is strong, the market is being flooded with one- and two-bedroom apartments, led by an avalanche of Chinese-funded and purchased developments.

You don't need to be a Rhodes Scholar to know what will happen in a couple of years. The looming high vacancy rates are likely to depress prices and that will have an effect on overall dwelling values. That is unless Chinese investors are happy to keep buying apartments that are vacant. 

It is ironic that Melbourne achieved what Sydney has always hoped for -- a relatively smooth approval process -- but that process coincided with an abundance of capital in the market and it has caused a flood.

That said, Sydney also has some underlying problems.

While the price of apartments has risen by 15 to 20 per cent, rents have not risen. A $1 million apartment in, say Alexandria would probably be leased for about $700 a week or $36,400 a year, providing a 3.6 per cent gross yield.

Once you take out rates and other outgoings plus small periods of vacancy, the yield gets down below 3 per cent. That is not a level that can sustain continued increases in value. But with so many Sydney salaries close to frozen and national income falling, it’s hard to increase rents.

The Chinese came very close to buying out Sydney's largest apartment owner and developer Harry Triguboff and his Meriton Apartments empire. But the rising apartment values and his extensive land holdings caused him to lift the price (Mystery Meriton suitor revealed, November 5)

A sale might still happen but the odds are now against it.

It was always big a bite for the Chinese and part of Meriton’s value is in Triguboff’s personal ability to convert his Sydney land holdings to approvals. 

If the large Meriton portfolio of apartments were sold up it would trigger a huge tax bill. Triguboff prefers to collect the rent, albeit that the yields on market values are low.

If Sydney rents don’t increase, eventually apartment buyers will think twice about bidding up prices. But at least there is no looming glut as is happening in Melbourne.

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