The global financial crisis is setting the scene for the next upturn in the inner city Melbourne apartment market, according to economic forecaster, BIS Shrapnel.

Low interest rates and very low rental vacancy rates are driving rising rents and high rental yields which should entice investors back into the market from late 2009.

According to BIS Shrapnel’s Inner Melbourne Apartments, 2009 to 2016 report, sharp reductions in interest rates over to less than six per cent has seen the gap between rental income and mortgage repayments narrow and improving the equation for investors.

BIS Shrapnel senior project manager Angie Zigomanis says a deficiency of rental apartments has emerged since the apartment boom from the start of the decade levelled out in 2006.

The vacancy rate is now hovering at around one per cent, which has underpinned rental growth of, on average, 10 per cent per annum over the past three years, outpacing price growth and resulting in improved yields for investors.

“Despite these conditions, investors currently remain reluctant to re-enter the market and purchase off-the-plan apartments,” Zigomanis says.

“Residential prices declined over 2008 and, although there have been signs of stabilisation in 2009, we believe that investors need to be confident that prices have bottomed out and growth is returning before they dip their toe into the apartment pool.” 

BIS Shrapnel forecasts strong rental growth in Melbourne will continue. New apartment completions fell from a peak of just under 4,000 in 2005/06, to less than 1,000 in 2007/08. The credit crisis has constrained the availability of funds for developers to start new projects, which will limit any quick turnaround in apartment construction.

“We are forecasting an average of 1,500 apartments per annum to be completed over the three years to 2011,” says Zigomanis. “This is well below the previous ten year average of 2,650 apartments per annum, with the shortfall likely to lock in further rises in rents of between five and ten per cent per annum.”
BIS Shrapnel expects price growth in the short-term will be limited due to the current economic downturn.

However, this will underpin increasingly attractive rental yields stemming from strong rental growth.
“While interest rates remain low the purchase equation is becoming more appealing to investors,” says Zigomanis.

“Low rates and rising rents are closing the gap between rental income and mortgage repayments. For investors buying a new apartment, the additional tax deductions available will likely result in some apartments  being cash flow positive on an after tax basis.” 

Meanwhile, a Colliers International Brisbane Unit report says the Queensland capital’s new apartments are overpriced which is pushing buyers to purchase established apartments which have already depreciated.
Brisbane’s CBD has had only 30 new apartment sales in the last six months, with prices about half of what they were in the peak during June 2008.

 

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Tags: Apartments, Brisbane, Investor, Melbourne, Mortgage, Rent, Research

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