Pete Wargent, co-founder of BuyersBuyers.com.au, says that Australia's slow vaccine rollout will likely lead to further erosion of rental yields in Sydney and Melbourne, and consequently lower investor demand.
Mr Wargent said that "Australia and New Zealand have been notably successful in their containment of the coronavirus, but the latest news from the Federal government suggests that the opening of the international borders remains a distant prospect. About 2 million vaccine doses have been administered to date, but clearly there's still a long way to go".
Figure 1 – Vaccine doses administered
Mr Wargent commented that "there are a few implications of this, for residential and commercial markets. In many cases, rental markets have been tight away from the two largest capital cities, as mobile tenants have taken the opportunity to work remotely by moving away from the denser parts of Sydney and Melbourne".
"So while coastal rental markets in particular are very tight, the CBD and city fringe rental markets are soft in Sydney and Melbourne, with vacancy rates elevated and asking rents declining. International student enrolments have been robust, suggesting that Australia will ultimately remain a highly favoured destination, but the reality is that this dynamic won't be fully reversed until Australia can allow more inbound travel" Mr Wargent said.
Doron Peleg, CEO of RiskWise Property Research said that population growth in 2021 would be about 1.25ppts below what was previously projected, and the lack of international student arrivals would weigh heavily on rental demand for inner-city units in particular. "This has an adverse impact on investor demand for rental apartments, as many of these investors place strong reliance on rental income to cover the mortgage repayments" Me Peleg said.
Mr Peleg added that "fortunately for landlords the new apartment pipeline has continued to decline, but prospective landlords should refer to our research report on the top oversupply hotspots, as many areas carry high level of risk for high raise apartments".
Mr Peleg also noted that there would also be some risks in commercial property markets.
"Retail vacancy rates have clearly increased in the CBD markets, and office vacancy rates in the CBDs of Sydney and Melbourne have also increased, as many workers have taken the opportunity to continue working from home. With more office supply due to come onto the market later in the year, it's very likely that we'll see office rents falling, especially in Sydney and Melbourne".
Figure 2 – Office vacancy rates
Pete Wargent of BuyersBuyers.com.au said that overall demand for residential property still remains solid.
Mr Wargent said "the closure of the international borders is a double-edged sword. It traps Aussie dollars at home, and a range of measures this year from stimulus cheques to mortgage holidays and early superannuation release, when combined with record low mortgage rates, have bolstered household balance sheets. Those dollars have to go somewhere, and while collectibles and luxury vehicles will be drawcards for some, much is likely to be spent this year on major renovations or on upgrading to a better property".
"Investors are also now coming into the market, although they will tend to remain wary of rental vacancies in the major CBD apartment markets" Mr Wargent said.
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