Why more apartment rent rises are on the way

Despite soaring rents in the past 18 months hurting many tenants who already taking big hits from a rising cost of living, apartment rents are predicted to continue to soar over the next five years.

Rents across Australia have risen at their fastest rate in more than a decade, according to property researcher CoreLogic. Annual increases, calculated monthly, topped 10 per cent in early 2023.

More than 50 per cent of Sydney renters now live in apartments.Credit: Oscar Colman

However, things are likely to get worse with more rent hikes and shrinking vacancy rates ahead, industry analysts say.

Research by commercial real estate firm CBRE says rents in Sydney’s eastern suburbs and Parramatta, Melbourne’s north, Perth city and almost all suburbs of Brisbane could rise by up to 30 per cent by 2028.

Median rents for two-bedroom apartments across 53 precincts surveyed for the report are expected to grow by $120 a week, or 26 per cent.

The rises are underpinned by forecast declines in capital city vacancy rates from a current average of 1.8 per cent to just 0.8 per cent – one-third of the previous decade average of 2.5 per cent.

In 2013, just four precincts had an average rent of more than $600 a week, CBRE says. Three were in Sydney – the CBD, lower-north shore, and eastern suburbs. However, by June 2023, the number had grown to 20 precincts and, by 2028, more than 70 per cent of two-bedroom apartments are forecast to have a rent of more than $600 a week.

In Sydney, less than 40 per cent of renters were housed in apartments in 2006 but, by 2021, it had jumped to more than 50 per cent.

The cost increases come as surging numbers of migrants enter the country seeking somewhere to live. Treasurer Jim Chalmers’ May budget forecast an extra 1.5  million migrants over the next five years, including a record 400,000 in 2022-23 and 315,000 in 2023-24.

History shows new arrivals prefer to make capital cities their new home.

CBRE forecasts the supply of apartments to grow by 60,000 in 2024 – well short of the 75,000 needed to avoid any further falls in the vacancy rate.

Commercial real estate firms and property funds are ramping up investments in build-to-rent apartment projects that will see 55,000 new units constructed across Australia by 2030, according to Knight Frank research. However, they would still represent just 1.5 per cent of total rental supply, leaving a major apartment shortage in capital cities.

There are an estimated 8350 dedicated BTR apartments under construction nationally as of September 2023, and a further 12,900 units are approved for development in the near term, according to the Knight Frank Breaking the Shackles – the rise of BTR report.

However, they are unlikely to do much to counter the soaring rent problem, with these units typically renting for about 20 per cent above market value, because of the extra services and amenities that these new buildings provide.

Though development returns are relatively lower for BTR apartments compared to other commercial real estate assets, their value for investors becomes more apparent over time. And with soaring rents, together with a malaise in office markets, they are looking like an increasingly good place to invest.

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