Australian apartment pipeline set to fall, raising worries about rental shortage when borders open: Knight Frank

The number of new apartments being built is set to plunge, new research finds, raising the prospect of rental shortages in future years once international immigration to Australia resumes.

Only 86,400 new apartments are tipped to be in the pipeline by 2024, compared with 135,300 from 2018-2020, Knight Frank Research’s Australian Residential Development Review 2021 found.

After the building boom of recent years dropped off, property developers had been keen to buy up sites for new apartment projects but then the pandemic hit, Knight Frank’s head of residential research Michelle Ciesielski said.

“With COVID coming through, that did put the brakes on,” she said.

“In the past, where developers would have been quite keen to buy a raw site without [development] approval, they started to switch to sites that had approval to take away some of that risk.

“There weren’t many sites that were suitable [and] there was a bit of hesitation because there was so much uncertainty in 2020.”

Total residential site sales fell to $4 billion in 2020, down from a peak of $11.3 billion in 2014, and lower than $5.03 billion in 2019, the research found.

The smaller pipeline could have a flow-on effect in coming years, she said.

Although CBD apartment towers have emptied in the pandemic as international students and migrants were banned from arriving, pushing rental vacancy rates up, this could reverse once vaccinations roll out and international borders reopen.

“We’re not likely to get a boost in population over the next 12 months,” Ms Ciesielski said.

“If we fast-forward to three years’ time, when population growth has switched back on again, we’re starting to see more people come back into Australia, we’re not going to have the apartments to accommodate these people.”

A diminished pipeline of new apartments could also help sustain values, she said.

“People will start to realise there isn’t much to choose from and that reflects the pipeline tapering back over the coming years,” she said. “Values would be sustained in that instance.”

The shrinking apartment pipeline is evident in the larger capital cities.

In Sydney, only 36,275 new units will be on the way by 2024, down from 67,925 from 2018-2020, the research found.

Projects could face higher building costs in the NSW capital and competition from state and federal government infrastructure projects for supplies and labour.

For Melbourne, new unit stock will fall to 34,250, down from 42,250, over the same time period.

New buildings there would need wellbeing elements such as gardens and dry and wet exercise areas after residents’ long periods confined to their homes, Ms Ciesielski said.

Brisbane’s pipeline is also set to halve, but the picture is more upbeat on the Gold Coast where the value of apartment sales tripled last year amid keen interest from first-home buyers and downsizers.

Although the Perth unit pipeline is also set to fall, rental vacancy rates have been tighter on the west coast and sales of established apartments are rising as the resources-focused city’s economy strengthens.

More broadly, the type of apartments being built are changing, with owner-occupiers starting to replace investors even before the pandemic.

“Traditionally investors are keen for the smaller stock but in a post-COVID world rental stock possibly can’t afford to be small anymore because people are looking for larger living areas after an experience of lockdown,” she said.

“Even though developers have adapted and started to build more owner-occupier stock, I think what we’ll find in coming years is investors are looking for that stock as well.”

Developers are increasingly buying sites for lower-density projects instead of mega-towers, with the share of sites sold for the former option rising from 10.1 per cent in 2015 to 23.1 per cent in 2020.