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Inner City Blues – What’s going on with rentals?

The rental market has been in a state of flux, with the inner-city Sydney and Melbourne unit markets particularly hard hit with falling rent prices and high vacancy rates.

While things are looking a little brighter in 2021 there are still many hurdles to overcome. Kylie Dulhunty spoke to property managers about their experiences and sought their tips to help you move stock quickly.

Property managers in inner Sydney and Melbourne could face further challenges this year, with falling unit rents and higher than normal vacancy rates continuing to pose hurdles.

CoreLogic’s latest Hedonic Home Value Index shows unit rents have dropped 5.6 per cent in Sydney over the past year, and 7.8 per cent in Melbourne.

The Domain Rent Report, released mid-January, shows Sydney apartment rents have fallen back to 2013 levels.

For Greater Sydney, the median asking rent dropped 5.1 per cent, or $25, to $470 per week in the December quarter.

The hardest-hit areas include the city and east, where rents have dropped 15.4 per cent year-on-year, to $550 a week.

LOW END HARDEST HIT

Ray White Residential Sydney CBD Director Michael Lowdon says the low end of the unit market has been hardest hit.

“The apartments which have suffered the most tend to be the one-bedroom apartments or the studios,” he says.

“If you were renting an apartment at $650 a week, you might be getting $450 to $500 today.

“The premium end of the market hasn’t really been affected at all.”

CoreLogic Research Director Tim Lawless says weak demand and high supply has caused the poor rental conditions.

“On the supply side, inner-city unit precincts of Sydney and Melbourne are still coming out of an unprecedented phase of high-rise construction activity,” he says. 

“Halfway through last year, there were still more than 45,000 units under construction across both NSW and Victoria that were yet to complete.  

“Compounding the surge in supply has been a demand shock emanating from stalled overseas arrivals, especially foreign students, which previously comprised a large component of tenancy demand in these inner-city precincts.”

The latest Real Estate Institute of NSW Residential Vacancy Rate Report shows Greater Sydney vacancy rates climbed to 3.6 per cent at the end of January – up 0.3 per cent from December..

In the inner ring, vacancy rates rose from 4.4 per cent in December to 4.8 per cent in January, which is still much higher than the pre-pandemic vacancy rate of 2.5 per cent achieved in March last year.

In Sydney’s middle ring, vacancy rates fell to 4.2 per cent in January, but the outer ring climbed from 1.8 per cent in December to 2.5 per cent in January.

REINSW Chief Executive Officer Tim McKibbin says the rises were to be expected.

“This is a slight increase for the month, but nothing too unusual for this time of year, when seasonal fluctuations inevitably play a role in the residential market,” he says.

“Families are making decisions to move ahead of the start of the new school year and university students are yet to converge on the city for another year of study.”

WHERE TO NOW?

Michael says vacancy rates in the CBD peaked at about 14.8 per cent but were now hovering about 7 per cent.

While he agrees that things have turned around “a little bit”, he also warns against getting too excited as vacancy rates typically drop in the Sydney CBD area at this time of the year.

“I think it’s too early to draw any firm conclusions into why these vacancy rates dropped,” he says.

“Seasoned landlords would never want their properties to come up for rent in December or January because they know Sydney is a ghost town.

“Vacancy rates are always going to fall over those couple of months.

“The question is, what happens next? I would hazard a guess that the rate certainly won’t continue falling.

“It will either stabilise, or it may start to creep back up again as the leases start coming up for renewal.”

The other reason Michael believes vacancy rates in the Sydney CBD will rise is due to the number of newly built apartments set to come into the market in developments including Greenland Centre, Loftus Lane and Opera Residences.

“These are all going to inject large amounts of property into the system, which is still under pressure,” Michael says.

“Greenland Centre is a very large development of 490 units in the city, and typically about 50 per cent will come onto the rental market. 

“You might even find rates as high as 75 per cent will come onto the rental market.

“So that’s going to pump a huge amount of available stock into the marketplace.”

Michael says he doesn’t expect rental prices to fall any further.

A SUDDEN EXODOUS

Century 21 Eastern Beaches Maroubra Principal Eleni Roumanous says when COVID-19 struck last year, scores of tenants immediately left their rental properties, leaving her property management team scrambling to fill vacancies.

“In our area, there was a huge number of vacancies in apartments, especially around Kingsford, Kensington, Randwick and around the university and the hospitals,” she says.

“We had all the international students who upped and left pretty much straight away.”

Towards the end of the year, Eleni says there was a lot more movement, including tenants who moved to secure cheaper rental rates.

Now, their rental properties are moving faster.

“There is still a huge amount of stock on the market and prices are still reduced to accommodate this,” Eleni says.

“Typically the beginning of the year is our busiest, with people relocating before school and uni begin and this year was no different.

“This January we have had more people at our inspections than ever before, with people still keen to take advantage of the current situation and capitalise on the decreased prices in the market.

“Within the first two weeks of January we leased all the stock we held over the break.”

THE ROAD AHEAD

Richardson & Wrench Managing Director Andrew Cocks says the COVID-19 impact on the rental market had produced localised pockets where vacancy rates were steady while in others, such as the CBD, they remained high.

Multiple factors have contributed to this including job loss, employment insecurity, fewer tourists renting short-term accommodation and tenants moving properties or suburbs to secure a better deal.

“Rents have come back anywhere from 10 to 20 per cent in some cases,” he says.

“We’re probably at the bottom of that now, and I’d be surprised if they continue to go down much further.”

Andrew says that after an initial “massive dispersal” of tenants last year, we were now in a period of normalisation, although some areas, including suburbs along the North Shore train line, such as North Sydney, St Leonards and Chatswood, still had high vacancy rates.

But he tipped that would change as people became more used to life with COVID-19, as the vaccine was rolled out and as international borders started to reopen.

“I would expect that in the next couple of years it will convert from being very much a renters’ market back to being a landlords’ market,” Andrew says.

“I’d say within two years.

“As the vaccine starts to be rolled out and people are getting the jab, they’ll feel more bulletproof about not getting the virus and then you’ll find there will be more talk about reopening the borders again.

“That’s going to be the big trigger. Once there’s a level of confidence that the state borders aren’t going to get shut at the drop of a hat there is then going to be a conversation about when the international borders are going to open.

“Once that happens, you’ll see a seismic shift in what’s going to happen in the rental market.”

Andrew says with international borders open tourists will return, Airbnb properties that had changed to permanent homes will go back to being short-stay accommodation, and there will be increased demand from international migration.

“People who have been through an awful time in their own country, and seen what a great opportunity Australia is and how good the health response has been, will have a big impact on the rental market because those migrants typically rent for the first few years,” he says.

MELBOURNE RENTAL MARKET

According to the Domain Rent Report, in Melbourne, unit rents dropped $12 a week to $388 in the December quarter, which is the lowest in four years.

Like Sydney, units in inner Melbourne fared the worst, with rents dropping 16.8 per cent in the year to $395 a week.

Spruce Real Estate Director Alana Spruce says Melbourne CBD and St Kilda Rd rentals have been hardest hit, with the agency’s vacancy rate climbing to more than 10 per cent in the peak of the COVID-19 crisis. 

While the rate has now dropped to 7 per cent, Alana says it’s still much higher than she’d like, but she’s pleased it’s heading in the right direction.

Alana says high vacancy rates meant plenty of choice for tenants and that pushed rents down by as much as $100 per week in the CBD and St Kilda Rd area.

“It has been a tough six months and Melbourne CBD and St Kilda Rd rentals have been affected much harder than the rest of Melbourne,” she says.

“We have had to think outside the square to ensure our listings have stood out to prospective tenants and to attract attendance.

“We’ve had to ensure we were available to meet, FaceTime or do virtual walk-throughs of properties via 3D inspections and encourage applicants to apply.

“In most cases we had to negotiate hard in an oversupply tenants’ market to ultimately achieve minimal vacancies and leased properties for our landlords.”

Alana says at COVID’s peak they were receiving two to three notices to vacate a day and it was a mentally tough time for her team.

While most clients and prospective tenants were good to deal with, some proved challenging.

“We were playing real estate, counsellor and everything in between,” she says.

While all three agents agree that the rental market is faring better than it was mid last year, they also know that there are still hurdles to overcome.

“I think the market in Sydney over the next 12 months is going to remain relatively tough,” Michael says.

This article is an excerpt of an upcoming special in the Autumn 2021 Edition of Elite Agent out this week. To get more tips on how to lease slow-moving rentals subscribe to the magazine by clicking here.

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