Apartment rents set to rise by 30pc, says CBRE
A 30 per cent or more spike in apartment rents over the next five years will boost returns for investors already in the market, and create a short window of opportunity for new investors to maximise yields as well – before capital values surge by similar amounts.
That forecast is based on analysis by real estate firm CBRE, which modelled the impact of a massive undersupply of dwellings relative to future demand and found that the current average apartment vacancy rate of 1.8 per cent will reduce to just 0.8 per cent by 2028.
Apartment rents are set to surge 30pc due to a lack of supply.
Expectations that rents will surge over the next five years came as higher than expected third quarter inflation data released on Wednesday showed rents had risen 7.6 per cent year-on-year, the highest since 2009.
Following an examination of 53 apartment precincts in its Apartment Rent and Vacancy Outlook report, CBRE forecast median rents for two-bedroom apartments across these precincts to grow by $120 per week (or 26 per cent) between 2023-2028.
The highest growth of more than 30 per cent is expected to occur in five markets: Sydney’s eastern suburbs, Parramatta, Melbourne’s northern suburbs, Perth City and almost all precincts in Brisbane.
“At the start of 2013 just four precincts in Australia had an average rent of over $600 per week for two-bedroom apartments, being the Sydney and Perth CBDs, Sydney’s eastern suburbs and Sydney’s Lower North Shore,” said CBRE’s Pacific head of research Sameer Chopra.
“By June this had grown to 20 precincts, and by 2028 we expect 38 precincts – or over 70 per cent of Australia’s two-bedroom apartments – to have a rent exceeding $600 per week.”
Higher capital values
This surge in rents will put investors who already own units in a good position to boost their returns – net yields on apartments now average 3-4 per cent.
Mr Chopra said investors who bought apartments over the next two years might also benefit from higher rents, but those who purchased after 2026 would see rental growth offset by higher capital values. These are expected to have risen by 30 per cent by 2028.
To prevent a fall in vacancy rates and a corresponding spike in rents, CBRE calculated about 75,000 new apartments need to be delivered every year to keep pace with population growth.
While 80,000 apartments are due to be delivered in 2026, supply will fall to as low as about 60,000 in 2024 and 2027 – 40 per cent below the previous peak in 2017 and near decade lows – meaning that over the five-year period supply will be insufficient to keep pace with demand.
Increased capital flows from the Housing Australia Future Fund – the $10 billion housing investment vehicle aiming to tap superannuation investors to build 30,000 affordable homes in the next five years – and from the burgeoning build-to-rent sector could increase long-range forecasts, but are unlikely to make a material difference to supply over the next three to five years, the CBRE report said.
Despite the dire outlook for rents and vacancies, Mr Chopra said he still expected the cost of renting to remain more affordable than purchasing across Australia’s major cities.
“Australia’s monthly apartment rents are currently 30 per cent cheaper than purchasing at current prices across most precincts. The reversion of interest rates to, say, 2 per cent to 2.5 per cent could see this relative rental affordability remain as capital values rise,” he said.
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