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Australia faces critical housing shortage

Thursday, April 7, 2016 - 05:50

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AUSTRALIA'S population growth is among the strongest and most rapid in the world, resulting in an increasing demand for residential property, retail goods and business services. This then feeds into logistics, warehousing and manufacturing, and demand to occupy office property. Questions have been raised as to which Australian city will benefit most.

As the population of both Melbourne and Sydney is set to double over the next 35 years, both of these cities will reap the rewards.

The fall in the Australian dollar has also led to increased appetite from international buyers. The Australian dollar has devalued against the US dollar over the past five years, which means real estate, both commercial and residential looks 30 per cent cheaper to overseas buyers.

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In 2015, Savills recorded a record A$30 billion (S$30.7 billion) of commercial property transactions on commercial property, of which foreign investors accounted for 38 per cent or A$11 billion.

Australia will continue to provide exceptional commercial property investment opportunities for high net worth investors, superannuants and developers - both local and offshore - in coming years with the bulk of transactions continuing in the Sydney and Melbourne markets.

In the post-global financial crisis world of low interest rates and constrained lending, equity has been searching for a home and asset price inflation has been inevitable.

Low and even negative bond yields in some countries have meant that the cost of funds is low. As a result, investment in high-yielding assets has been particularly attractive.

In prime locations of major cities, such as Melbourne and Sydney, which are favoured by overseas investors, yield compression has been rapid and pronounced, sometimes taking yields to record lows as competition for trophy assets in safe havens has led to higher prices and lower capitalisation rates.

While Australia's office yields had tightened by an average of 25 basis points in the last six months, we expect that the firming of investment yields has yet to fully run its course. Australian cities are seen as particularly good value, and it is the gateway cities of Melbourne and Sydney where competition for trophy assets is ultimately leading to higher prices and tightening yields.

The scale of overseas investors' interest in the Australian CBD office market has caused opportunities to diminish, prompting investors to scour for suburban office markets as well as regional and sub-regional retail assets and blue-chip industrial stock that have generally offered attractive yields.

RESIDENTIAL MARKET

Sydney is a global city, and the largest capital city in Australia. Home to four of the five wealthiest residential regions in Australia, it has an internationally recognised luxury residential market.

Shayne Harris, head of luxury residential sales at Savills Luxury Residential, noted that Sydney's luxury residential market and off-the-plan market is primarily being driven by international demand and more specifically Asian demand. With its close ties to Asia for business, together with personal investment, the wider benefits such as education and migration make Sydney compelling.

Sydney's recent population figures have only served to highlight the existing shortfalls in housing supply, where the undersupply gap continues to grow.

With a resident population of some 4.8 million people housed in approximately 2.2 million dwellings, Savills Research believes this is below average for cities of a similar size. As the population of Sydney grows towards 10 million residents over the next 30 years, apartments are forecast to make up a larger proportion of total dwelling stock (about 10 per cent of all dwellings in Sydney are apartments).

Government statistics predict that Sydney will need to create an additional 623,850 homes over the next 25 years, just to keep up with the population influx. Forecasts show that Sydney is falling well below its annual target, and Mr Harris believes that the limited additional supply will cause upward pressures in the foreseeable future for both rents and capital values.

Melbourne has a resident population of some 4.5 million people housed in approximately 1.9 million dwellings. The City of Melbourne currently contains approximately 122,000 residents in just over 58,000 dwellings.

In light of these numbers, and the dynamics of supply and demand, it is our firm belief that a city the size of Melbourne can cope with, and will demand, further additions to its inner city residential market, which covers approximately 5 per cent of the total housing market.

While the natural increase in the population can generally be accommodated in the existing housing stock, overseas migrants generally require a new dwelling. Over the last decade, new arrivals have demanded a total of 750,000 new dwellings in Melbourne. This is about 50 per cent of all new housing stock built in that period.

It is little wonder that construction has struggled to keep up with demand and that a combination of investor-driven and owner-occupied driven solutions to supply have been required.

With a critical short supply of housing, record immigration levels, lowest interest rates on record and bucket loads of first-time buyers, there is a vital need for more housing.

  • The writer is national head of research at Savills Australia.
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