Sydney apartment market "jumping a full cycle": Charter Keck Cramer State of the Market Report

Property advisory firm Charter Keck Cramer believe the Sydney off the plan apartment market is in the process of recalibrating and “jumping” ahead by a full cycle.

Suggesting there's been challenges in Sydney's apartment market over the last 12 to 18 months given the RBA's tightening cycle, Charter Keck Cramer noted in their State of the Market Report H1 2023 that although headwinds remain, there are now green shoots beginning to emerge.

"We anticipate the BTS apartment market will gradually improve over the balance of 2023 and into 2024," the report read.

"Whilst there have been challenges in various apartment sub-markets and locations throughout Sydney, boutique prestige projects continue to perform strongly. This is highlighted by strong takeup of new release projects and continued excellent demand (and prices) for development sites in premium locations."

They said once there is greater market certainty that we're nearing the top of the rate tightening cycle, which may have already occurred, overall market sentiment is expected to start improving.

"When interest rates enter a tightening phase (which could be as early as 2024), improved sentiment and ongoing supply issues are anticipated to combine and manifest in an extremely elastic response across the market. This is assuming that economic conditions do not notably deteriorate nor is there a significant increase in unemployment.

"The BTS and BTR apartment markets stand to be the primary beneficiaries of the next cycle given substantial affordability issues in Sydney as well as the structural changes in living preferences of which our readers are now well aware."

The supply v demand imbalance is even more pronounced than it was earlier this year, CKC suggested.

They believe Sydney needs to build between 22,000 to 25,000 build to sell and build to rent apartments every year to accommodate the growing population.

"Sydney has averaged about 18,500 apartment completions per year over the past decade. During FY2024 – FY2026, apartment completions are forecast to measure around 12,000 per annum."

Apartment completions in Sydney Metro fell to 7,700 during FY2023, the second consecutive year of decade low delivery. The 7,700 was just 50 per cent lower than typical annual completions.

CKC noted that a greater number of apartments will be delivered in the next two years, with 21,500 currently under construction and a further 7,800 marketed for FY2025 completion, as the market tries to ‘catch up’ from the COVID-affected years.

"We continue to expect Sydney’s apartment market to remain undersupplied, despite the projected increase in construction volumes as high levels of net overseas migration (NOM) absorb new stock. Furthermore, a significant proportion of projects currently marketed for FY2025 completion are likely to be delayed given elevated construction costs and a challenging pre-sale environment."

CKC also believe current projects by the Government "substantially underestimate population growth."

"This misalignment between supply and demand is anticipated to remain an ongoing issue, and depending on the responses by Government, could potentially be exacerbated over the balance of the decade."

The lack of supply is likely to place upward pressure on pricing.

"From a market perspective, lack of new supply over the last three to four years should result in greater demand for apartment stock, being the most affordable dwelling typology. This will likely place upward pressure on pricing, particularly when market sentiment improves and interest rates start to cycle downwards."

There's already been median apartment price growth in some markets due in part to the Reserve Bank of Australia holding cash rates firm and exorbitant growth in rental pricing.

"This has seen an increase in buyer activity as more purchasers return to the market. For developers to ensure the best opportunity to increase pricing, new projects will need to feature highly marketable characteristics in order to generate strong demand.

"There has been growing interest from purchasers to acquire product within well thought out master planned projects, offering excellent social amenity and practical design options. This is particularly in light of more residents employing a hybrid working model. Such projects in centralised locations offering superior lifestyle factors (close proximity to public transport, retail, schools, employment hubs) have seen a notable increase in project appeal."