Investors, developers competing for Sydney flats

Private investors and property developers are competing strongly for blocks of units in Sydney, despite the COVID-19 crisis and mixed forecasts for Australia’s biggest real estate market.

Research recently released by Ray White showed blocks of flats had become an attractive alternative to commercial property investment in recent years, with high occupancy rates providing an almost guaranteed return for investors.

And with a limited number of the asset class coming to market, Ray White head of research Vanessa Rader said prices were rising and discounts associated with buying multi-residential units in one line had all but evaporated.

“The attraction of these assets not only are their limited vacancies and secure income stream, but the longer-term exit strategies which can see significant value uplift if redeveloped or strata subdivided and on-sold,” Ms Rader said.

“These assets historically have been associated with older style walk-up unit complexes, however, more recently we have seen an increase in modern developer stock sold in this manner, opening investment to syndicates and savvy buyer groups.”

Ms Rader said there were 30 block of unit transactions in Sydney last year, collectively valued at around $350 million.

In the first half of 2020, 7 block of unit transactions have been completed in the harbour city, valued at more than $53 million.

Ray White recently brokered the sale of a block of nine units in Ryde, where there were more than 95 enquiries, 25 private inspections and 15 registered bidders at auction.

The property sold for $3.43 million via online auction in April.

In Westmead, a block of five recently refurbished units was sold for $3.85 million in May, after receiving more than 120 enquiries, 20 registered bidders and 143 bids at auction.

“Since early 2019, yields have fallen each period in line with the reduction in interest rates and the increasing appetite for these assets,” Ms Rader said. 

“The current COVID-19 pandemic has done little to stifle demand as residential vacancies, while up, have remained low.”

Data from the Real Estate Institute of NSW showed Sydney’s rental vacancy rate was 4.5 per cent at the end of May, which Ms Rader said was far superior to that of commercial markets.

“Similarly, with average yields in 2020 recording 4.37 per cent within a range of 3.03 per cent to 5.58 per cent, this remains higher than the average Sydney residential yield of 3 per cent recorded by CoreLogic in May,” Ms Rader said.

The hot competition for blocks of flats follows mixed forecasts for Sydney property markets, with NSW’s economy heading into a recession and expected to face significant challenges for the next 12 months.

Research by JLL showed demand for housing, which had been recovering prior to COVID-19, had been significantly inhibited in recent months.

JLL said anecdotal evidence suggested many buyers had been backing out of pre-sales contracts prior to settlement, while 

“It is likely to remain a challenging demand environment for all buyer types given the extreme economic and price uncertainty that exists,” JLL said in its latest Sydney market update.

“Although some foreign buyers may be attracted by a lower AUD and the moderate health crisis in Australia to date, underlying demand will also be significantly impacted by lower population growth for some time.”

The fall in demand is also expected to prolong Sydney’s dwelling construction downturn, with COVID-19 exacerbating a trend of declining building approvals.

At the end of March, dwelling approvals were down 23.1 per cent on the previous year, with apartments approvals plunging by 25 per cent over the period.

JLL said it expected fewer apartment projects to be launched in 2020, with developer sentiment significantly dented by the crisis.

While JLL said while it was too early to assess the impacts of COVID-19 accurately, it was unrealistic to think that Sydney house prices would not be affected.