25.10.2023

Apartment Rents Expected to Surge by 30%

Apartment rents are predicted to increase significantly in the coming five years, with a projected 30% or more surge.

This outlook is based on an analysis conducted by real estate firm CBRE, which has considered the severe shortage of apartments compared to the expected demand. CBRE's research indicates that the current average apartment vacancy rate of 1.8% will likely decrease to just 0.8% by 2028.

The expectation of rising rents follows the release of higher-than-expected third-quarter inflation data, which showed a year-on-year rent increase of 7.6%, the highest since 2009.

According to CBRE's Apartment Rent and Vacancy Outlook report, which studied 53 apartment precincts, the median rents for two-bedroom apartments in these areas are projected to rise by $120 per week, equivalent to a 26% increase between 2023 and 2028. The most significant growth, surpassing 30%, is anticipated in five key markets: Sydney's eastern suburbs, Parramatta, Melbourne's northern suburbs, Perth City, and most precincts in Brisbane.

Sameer Chopra, CBRE's Pacific head of research, noted, "In early 2013, only four precincts in Australia had an average rent of over $600 per week for two-bedroom apartments, namely, the Sydney and Perth CBDs, Sydney's eastern suburbs, and Sydney's Lower North Shore. By June, this number had grown to 20 precincts. By 2028, we expect 38 precincts—representing over 70% of Australia's two-bedroom apartments—to have rents exceeding $600 per week."

The rent rise will likely benefit current property investors by potentially increasing their returns, as the current net yields on apartments average between 3% to 4%. However, investors entering the market after 2026 may see rental growth offset by higher capital values, which are expected to rise by 30% by 2028.

CBRE estimates that approximately 75,000 new apartments need to be constructed annually to keep up with population growth to avoid a decline in vacancy rates and the resulting rent hikes. While 80,000 apartments are scheduled for completion in 2026, the supply is expected to decrease to around 60,000 in 2024 and 2027—nearly 40% below the previous peak in 2017 and nearing decade-low levels. This indicates that the supply will fall short of meeting the growing demand over the next five years.

While increased capital investments from the Housing Australia Future Fund and the expanding build-to-rent sector may influence long-term forecasts, CBRE's report suggests that these factors are unlikely to significantly impact supply over the next three to five years.

Despite the challenging outlook for rents and vacancies, Mr. Chopra believes that renting will likely remain more affordable than purchasing in most major Australian cities. He stated, "Currently, Australia's monthly apartment rents are 30% cheaper than buying at current property prices across most precincts. If interest rates revert to, say, 2% to 2.5%, we may see this relative rental affordability persist as property values increase."

For more information, please visit the original article by Larry Schlesinger at The Australian Financial Review, larry.schlesinger@afr.com.

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