Early student returns not likely to alleviate apartments pressure

Proposals to allow international students back into Australia are unlikely to provide any immediate relief to inner city apartment markets in Sydney and Melbourne, which remain among the nation’s riskiest to invest in.

While there have been some signs of improvement recently in inner city apartment markets in Sydney and Melbourne, they still lag behind the wider recovery and rapid price rises experienced in other residential market segments.

In Sydney, Riskwise Property Research’s latest Residential Risks & Opportunities report identified newer rental apartments had a materially higher risk profile than houses or multi-residential dwellings designed for family living.

“Newer rental units in high supply areas present a higher level of risk,” Riskwise chief executive Doron Peleg said. 

“Irrespective of COVID-19, there are areas in Sydney that have experienced major unit oversupply in recent years. 

“While buyer sentiment has improved substantially, the realisation of risks associated with high supply areas including price movements, construction defects and now high vacancy rates make these properties, that are generally bought by investors, a high-risk endeavour.”

Rental vacancy data from the Real Estate Institute of NSW showed the vacancy rate in Sydney’s Inner Ring had eased from its peak of 5.8 per cent in October last year, it remained historically elevated at 4 per cent at the end of April.

REINSW chief executive Tim McKibbin said while vacancies had increased across Greater Sydney in April, there was still strong rental demand for houses, particularly in the outer suburbs.

“However, renting out units is proving more difficult, with rent reductions commonly required in order to attract tenants,” Mr McKibbin said.

In Melbourne, data from the Real Estate Institute of Victoria showed a vacancy rate of 6.5 per cent in Melbourne at the end of April.

Riskwise’s report showed that like Sydney, a distinction should be made between family-suitable apartments and units in areas with limited supply to areas with a high supply of rentals, but there was nonetheless high risk in apartment investment close to the inner city.

Melbourne’s upcoming supply could prove challenging for investors, with 4,354 units in the pipeline in the city’s west, 4,283 to be developed in the inner east and 13,399 to be built in inner city suburbs.

“For these areas, the unit market will become less attractive than houses,” Mr Peleg said.

“In recent years, Melbourne has been the top destination for migrants, while interstate migration has also seen a net inflow to the state of Victoria.

“Vacancy rates have noticeably increased in some areas, such as inner Melbourne, increasing the serviceability risk, particularly for highly-leveraged investors retiring on rental income and taxation planning to service their mortgage payments.”

While there are plans in motion to facilitate the return of international students, initial numbers will be far below the levels enjoyed by Australian universities prior to the pandemic. 

Data from Austrade showed the number of international students enrolled in Australia between January and December last year was 882,482, while in March this year there were just 551,763 international enrolments.

In Victoria, the state government has developed a separate quarantine program that will allow students back into the state, with 120 arrivals being accepted each week, starting May 24.

People eligible for the program include university students, those involved in stage and screen productions and major events, while the state government has set aside a dedicated hotel to allow those arrivals to quarantine.

NSW is putting the wheels in motion on a similar plan that emerged earlier this month.

Under the NSW proposal, some students could return as early as the start of semester two in August, using a 600-bed student accommodation facility that’s been approved to be repurposed for quarantine purposes.

But while the NSW government has given it the green light and is working closely with the International Education Association of Australia to make it happen, it would still require the approval of Federal Education Minister Alan Tudge.

And it is not yet known whether the students would be required to remain renting at the quarantine facility for the length of their stay, or if they would be allowed to rent in the traditional leasing market.

BuyersBuyers.com.au chief operating officer Pete Wargent said it was still too early to say whether the proposals to bring students back in to Sydney and Melbourne  would convince investors 

“There are plans afoot to start brining international students into Australia, which will take the pressure off inner-city rental markets,” Mr Wargent said.

“But the risks of extended border closures, combined with high vacancy rates and increased serviceability risk, have made inner-city apartments less attractive to investors, who represent the main cohort of buyers in those areas.”

Forecasts and assumptions used to calculate the 2021-22 federal budget could provide a more accurate clue as to when students are likely to relieve pressure in inner city apartment markets.

Treasurer Josh Frydenberg’s budget indicated small groups of students would likely start returning to Australia before the end of the year, and gradually increase from 2022, meaning that large numbers of students descending on rental markets would not likely occur until midway through next year.