Rental Market Update – Spring 2019

Residential Rents have been falling lately and Vacancy Periods are increasing.  At Marriott Lane, we measure our median vacancy between tenancies.  Last year it was an incredibly low 4 days.  Now, (September 2019), it’s moved out to 12 days.  We are very good at minimising vacancy, so something serious is going on. You may be interested to know what’s happening and why.

Why have Residential Rental Values Declined in the Lower North Shore This Year?

As with most markets, a major influence is supply and demand, with many different factors contributing to both sides of the equation.  Construction of new properties is the major part of supply and demand is affected by immigration, domestic migration, birth rates and the general economy, etc.

The main driving force in operation now, and likely for the next year or more, is the increased numbers of new properties been made available for rental. There have been many substantial new developments of units in Lower North Shore suburbs including St Leonards, North Sydney, Chatswood and Lane Cove.

One factor that has led to this oversupply of properties is that many developments were conceived and approved some years ago and constructed over the last couple of years.  Many of the properties were sold off the plans to investors, both local and overseas. This means there is a flaw in the market where properties can be constructed without necessarily there being a clear demand for them.

Of course, our population increase is creating a requirement for new properties in Sydney.  However, it’s possible that there will be an over-supply because developers can’t gauge the supply/demand situation and consequently start building with the expectation, or hope, that there will be enough customers.  Many of these customers are investors acting with the same uncertainty, also hoping or expecting there will be enough tenants to rent out their new property.

This mismatch is now manifesting itself with an oversupply of units in the Lower North Shore with developers struggling to sell or settle their newly finished properties and new investors competing to attract tenants.  This is coinciding with low wage inflation and higher costs of living.  This reduced appetite from tenants to pay higher rents, as well as often demand rent reductions, will probably continue throughout 2020.

To What Degree have Residential Rents for Units Declined in the Lower North Shore?

Over the recent past, industry-based reports are recording that rents have been falling in the last 12-month period by a range of 4% to 7%. (I dispute this). Their interpretation of the facts is gathered from various sources, but the best available is generated by the Rental Bond Board.  At the beginning of each lease for every residential property in New South Wales, the RBB records the postcode, type of property, number of bedrooms and weekly rent (one quarter of the bond).  This means we get to know the precise weekly rental for properties, rather than rely on the advertised rental amount that can be captured from advertising or electronic rental application forms.

Data requires interpretation to turn it into information. Problematically, the RBB data doesn’t take into account that the number and type of properties changes over time, especially lately. There are now many new properties being constructed and entering the marketplace for rental. These properties deliver higher rents compared to the existing stock of properties, due to their very nature of being modern and often with high-rise views.

This higher rent means that analysis that includes new properties can sway the market so that it appears to be rising when, in reality, rentals values are not changing or falling.  New developments then have the two effects of changing the market as well as disguising the degree of change.  Currently, the reports that appear in newspapers and on-line are based on the raw data that tells us that the market has declined by about 5% during 2019.  The real situation is that it certainly worse than this.

The best analysis then is to look at what’s happening to the rental of existing properties and how the rent changes when each one is re-leased. Tenancies of 12 to 24 months are quite numerous, so each reletting delivers reliable data for this category of ‘like for like’.

This pin-point data tells us that the median rental decrease over the past year is of the order of 10%.  Not appreciating this leads to setting an asking rent that doesn’t achieve a result and contributes to an extended gap between one tenancy and the next.  With vacancy, lost rent is never recovered.

In a difficult market, it’s important for your agent to advise you of the optimal asking rent right from the beginning to achieve the best income available from a good tenant in a reasonable time frame.

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