Tight vacancies and dwindling supply is creating the perfect storm for the “rent-a-demic” emerging in both the industrial and residential sectors, experts warn.
It marks a pivotal shift in the market this year, according to CBRE head of research Sameer Chopra, who says construction cost escalation and delays in delivery of pipeline stock are constraining supply.
CBRE’s latest research points to something much more than the usual fluctuations in rental demand, prompting warnings of what it’s calling a ‘rent-a-demic’ in residential markets in its latest Pacific Market Outlook report.
Consistent interest rate rises have put the brakes on Australia’s run-away housing market with fewer property investors in the market exacerbating the shortage of rental properties, and pushing up rents.
It’s a bleak outlook for household budgets already under pressure. The National Shelter Rental Affordability Index highlights a 14 per cent decline in rental affordability over the past year, which has hit lower income households the hardest.
Vacancy is at an all-time low of 0.6 per cent nationally, and in some markets it’s even tighter. Demand from occupiers remains resilient and even with the forecast 50 per cent fall in occupier demand this year, there is still a floorspace supply shortage.
During the next 10 years, National Housing Finance and Investment Corporation (NHFIC) data indicates, there will be an increase of 1.9 million more households in the market for accommodation. About 148,500 houses are expected to be delivered this financial year with a fall to 127,500 in 2024-2025.
NHFIC chief executive Nathan Dal Bon says the supply pipeline has been constrained by “decade-high construction costs and significant increases in interest rates”.
“Analysis shows housing affordability and supply are likely to remain challenging for some time, underscoring the need for a holistic approach to mitigate the housing pressures Australians are facing.”
But NHFIC research shows new housing supply is also being constrained by the availability of serviced land, community opposition and long lead times for delivery of new projects.
NHFIC is forecasting a recovery in supply in 2025-26 when macroeconomic conditions shift and demand intensifies.
Property Council chief executive Mike Zorbas said the NHFIC data was a grim warning of a 79,300 home deficit.
“It reminds us that state, territory and local governments simply have to lift their run rates on housing supply across the at market, key worker and social housing spectrum,” Zorbas says.
“We also need to urgently move the housing needle by creating the right investment conditions for new build-to-rent housing, purpose-built student accommodation and retirement living communities.”
Meanwhile, CBRE predicts that apartment rents could grow 30 per cent over five years across capital cities, while construction costs could fall 15 per cent this year as labour supply rises and material costs drop.
Build-to-rent to fill the gap
Ray White research shows there are 3800 built-to-rent homes completed, and a further 8400 under construction and 22,500 proposed. Once these are complete, it will still only mean that 1.2 per cent of all rental properties are owned by companies, while a whopping 84 per cent is owned by private landlords, typically mum and dad investors.
Ray White chief economist Nerida Conisbee says build-to-rent is in its infancy in Australia, but believes the model could supply enough homes for the future. In the US, build-to-rent is the largest property asset class, with institutions developing, financing and owning most rental properties.
Conisbee says advertised rents increased 22 per cent in the past year on average, but were even higher in some parts of the country. Meanwhile, the total number of new loans to investors has fallen by 30 per cent from the peak in March 2022, with the rate of decline continuing.
A wider mix of landlord types would bolster the resilience of rental availability, but given that the cost of finance is so high, large companies remain active in the provision of rental properties, she says.
“Right now, large companies are one of the few groups still active in the provision of rental properties, as well as being able to attract funding to do so. Planning for greater diversification of rental property ownership should be encouraged and build to rent is our best bet to supply enough homes for the future,” Conisbee says.
The situation highlights a compelling investment case, with rents growing 4-6 per cent per annum over the next five years for cities on the eastern seaboard and 6-7 per cent in Western Australia. CBRE’s report also pointed to a significant mismatch between demand and supply for inner-city apartments.
Head of research Sameer Chopra describes it as a reversion of history to play out this year. “We expect weaker values and strong rent growth, with tight vacancy rates likely to lead to a ‘rent-a-demic’ in residential markets.”
Industrial stock absorbed
Construction delays, supply chain disruption and pool weather placed a lid on new supply in the industrial sector last year, pushing back projects, CBRE director of NSW Research Sass J-Baleh says.
New supply coming into the market will be soaked up this year in cities like Sydney, Melbourne and Queensland.
“As a result, the forward pipeline has a high pre-commitment rate of about 60 per cent. The remaining supply, if not taken up by year’s end will not move the vacancy needle by much,” J-Baleh says.
“Sydney and Perth have the lowest vacancy rates in Australia, which has driven rents in these cities to the highest year-on-year growth over 2022.
“Sydney and Melbourne naturally benefit from higher population, and therefore greater throughput of goods and logistic requirements.
“Melbourne is attractive for occupiers given the large rental differential to Sydney’s average rents, as well as being home to the largest port in Australia.”
CBRE’s report suggests that the rent-a-demic will endure for the next few years before it improves. The winners are landlords able to secure a premium for their property, though for some investors, the increased demand will be needed to cover increasing costs.
The national housing crisis has promoted a joint call from the nation’s four peak housing and homeless advocacy bodies in the hope that the government will step in and pass a package of legislation that will begin tackling the housing crisis.
The Community Housing Industry Association, National Shelter, Homelessness Australia and the National Aboriginal and Torres Strait Islander Housing Association points to recent ABS Census data showing a 5 per cent increase in the number of Australians experiencing homelessness, while the UNSW City Futures Research Centre analysts have found 640,000 Australians are in housing stress. That is tipped to reach one million by 2041.
Community Housing Industry Association CEO Wendy Hayhurst the lack of affordable rental housing was restricting Australia’s social and economic potential. She wants new policies put in place to build a better supply of social and affordable housing.
The Property Council of Australia has highlighted the grim warning in today’s State of the Nation’s Housing research from NHFIC that points to a widening national housing gap.
Article source: Queensland Property Investor