Sydney apartment supply is set to shrink over the next few years as projects are cancelled or pushed back because of poor buyer demand extenuated by the pandemic slowdown.

Apartment construction activity in Sydney peaked at around 8000 apartments per quarter in early 2017. But unit construction is currently continuing through a period of decline. Assuming all currently marketed off the plan projects proceed, it has been forecast that residential construction in Sydney will fall to less than 2000 units per quarter from late next year.

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It will therefore create likely issues of undersupply, according to a new comprehensive report.

In the meantime, Sydney faces the challenge of finding buyers for an estimated 18,000 apartments that are set for completion in 2020-2021.

Supply will be concentrated in the middle suburbs, which will account for 45 per cent of the total, followed by the outer region with 25 per cent. Only 7 per cent of total completions will occur in the central city region.

Off the plan sales peaked in 2016 then slowed through 2017 before declining more sharply from 2018 as investors retreated amid more stringent lending practices after the Hayne Royal Commission, and higher interest rates being applied to investors.

Foreign investor demand was curtailed by the NSW state government foreign buyer stamp duty surcharge as well as capital controls by the Chinese Government limiting outbound investment.

Angie Zigomanis, director of research and strategy Charter Keck Cramer, reckons green shoots in off the plan demand had begun to emerge toward the end of 2019. However, the impacts of the COVID-19 lockdown have caused “significant ructions” in the rental and investor market. He said demand for apartments in metropolitan Sydney has historically been underpinned by a combination of high house prices and strong population growth driven by high net overseas migration.

However, occupier demand is weakening as the international border closure caused by the COVID-19 lockdown causes net overseas migration inflows to collapse.

The closure of international borders has caused a significant reduction in tenant demand and local landlords have added to the supply by marketing their short stay apartments as long term rentals.

“A moratorium on evictions has thus far prevented a large exodus from rental apartments although landlords will likely face lower rental income as rents are renegotiated,” Mr Zigomanis said. “As the economy contracts, the sharp rise in unemployment will constrain the ability of many tenants to pay rent.”

Supply remains high with 22,500 apartments completed in Metropolitan Sydney over the past year to June, the fourth highest on record. Some 60 per cent of completions were within the middle region, with many still for sale.

Project launches in FY2020 show a greater proportion of apartments in larger projects. The proportion of apartments in buildings of 300-plus apartments has increased from three per cent of completions to 14 per cent.

In FY2020, there were a total of 5300 apartments in projects that commenced marketing, reflecting a dramatic fall from the 23,500 apartments launched in FY2018.

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