Developers and other businesses rely on residential vacancy rates and rental rates as one measure of market demand relative to supply. But MacroPlan urges a large degree of caution, particularly in the apartment market space. Vacancy rates and rentals can be misleading and in some cases, quite deceiving. Here’s why…
The current wave of inner city apartment development in Australia’s major cities is unprecedented. As real estate markets were rising and investor appetites rose with them, a lot of projects came to the market with rudimentary research only. Their success was sustained by a wave of rising demand for the product, low costs of funds, and relatively easy access to credit by purchasers. With the changes announced by APRA and a tightening of LVRs by banks, projects will need to take a more disciplined approach to understanding the local market. There are still many opportunities for project success in our view, but that success will no longer be able to rely on a fast rising market to cover a multitude of sins. It will rely on a forensic understanding of local market conditions to gain a competitive edge in market intelligence, product design and marketing strategy.
Relying on published residential vacancy and rental rates, we suggest, is one example of research that can no longer be trusted for anything more than an order of magnitude assessment of residential markets city wide. The most widely quoted vacancy rates are provided by various real estate institutes. These are not audits of vacant stock – they only reflect a survey of member agents. Not all agents are members and not all members bother completing the survey.
The problem here is that with new apartment projects, the available rental stock is unlikely to be included in real estate institute numbers if being marketed through various investment or project selling channels, or strata managers or others. No one knows what proportion of properties available for rent are not being captured in ‘official’ real estate institute data because of this, but you can simply peruse available rental listings online to see how many are being offered outside of ‘traditional’ real estate agency channels to get some idea.
It’s significant. Plus of course, the ‘official’ figures can’t possibly capture the number of apartments that are kept unoccupied for whatever reason. So while ‘official’ vacancy rates for inner city areas might point to a 4% vacancy, the actual vacancy (including those not recorded in ‘official’ data) could easily be double that or higher in parts of the apartment sector.
The problem is exaggerated the closer you zoom in to particular markets. All our major cities have diversified geographies and each comes with their own appeal. A difference of just a kilometer can make a big difference in how a project is performing and in terms of its market appeal.
The only way around this is to understand in intimate detail local market conditions in and around a particular site. For example:
- What’s the current total stock of product in the defined catchment
- What’s the composition of this existing stock – one, two, three bedrooms
- What’s the breakup between owner occupiers and renters
- What’s the most recent price evidence on purchases, and also for new rentals and lease renewals
- What proportion of the current market is unoccupied, and of this, what proportion is available for rent (including off market)
- Of the occupied stock, what’s the profile of households living in it? Families, students, young couples, empty nesters?
The answers can have a significant bearing on how a project is positioned and as markets become more competitive and conditions cool, relying on loose indicators such as published vacancy or rental rates can give developers a false impression of the local market.
The additional challenge in this is for urban planners and for local businesses. Simply looking at new apartment towers and presuming that all units are occupied by on average 1.5 persons can be entirely misleading. This has implications for local shops, restaurants and cafes but also for transport and community facility planning which relies heavily on urban density calculations.
In summary, we suggest that relying on this published data is fine for following broad market trends but as market conditions cool, the difference between successful projects and ones that struggle could be the quality of market intelligence spliced into the project’s DNA from the outset.