What Brisbane’s slowing supply means for investors

Brisbane has always boasted a superior rental proposition to its eastern seaboard counterparts, Sydney and Melbourne. Generally, rental returns have remained around 20% higher than Sydney in Brisbane.

Over the past few years the Brisbane market has been scrutinised as the supply of apartments resulted in a softening of the rental market and many area’s experienced value declines. What’s often lost in the emotional rollercoaster that is property investment, is the trust in the cyclical nature of market. Supply peaks are a normal part of a market cycle and the balance between supply and demand is constantly fluctuating.

Over the past 18 months the market has corrected itself from a supply perspective as a result of three key factors:

• Tightened lending environment – reducing buyer demand

• Rising construction costs – impacting project feasibility

• Reduction in foreign investor demand – reducing buyer demand

The below figure tracks the number of dwellings approved in Queensland over the last 5 years.

Source: Australian Bureau of Statistics

In addition, Jones Lang LaSalle reported that Brisbane’s number of marketed apartments had fallen 59% in the 12 months to March 2019. The supply drop has occurred across the nation with Melbourne and Sydney also seeing falls of 51% and 77% respectively.

So, what does this mean for the market?

Two things:

1. Resurgence in prices

2. Rising rents

The latter has already began occurring. Realestate.com reported that rents for two-bedroom apartments had risen 5% in 2018. Rents on three-bedroom houses in Brisbane also rose 4% in 2018. Anecdotally, we’ve seen rental increases of between $10 – $30 per week. The strongest performers have been in Brisbane’s 5 – 10km ring which had less exposure to property supply than the city’s inner ring.

Another indicator of the improving rental market is the movements in a vacancy rate. Vacancy rates refer to the percentage of properties that currently have no tenant. A vacancy rate of 3% is considered a balanced market, anything under that can be considered an undersupplied market. Brisbane’s vacancy rate has fallen to 2.5% and is trending downward, in 2017 it peaked at 4%.

Lower vacancies generally result in rising rental yields. According to SQM research average apartment yields in Brisbane remained around 5% throughout 2016 and 2017, in 2018 they began a steady rise to 5.2%. A rental yield is the actual rental income of a property expressed as a percentage of the property purchase price.

(e.g. Here’s how it’s calculated… $500 per week x 52 weeks = $26,000. If the property was purchased for $550,000 then the rental yield is 26,000/550,000 = 4.7%)

Of course, each suburb is different, so results are inconsistent this highlights the importance of suburb selection. Suburbs like Fortitude Valley, South Brisbane and West End will take longer to see rental increases as they continue to see strong levels of supply. In the 12 months to February 2019, 54% of apartment approvals were in these three suburbs.

Tightly held suburbs with less exposure to the increase in supply are generally the first to reap the rewards of improved market conditions.

The Brisbane market is providing the perfect equation for strong price growth. As per our previous blogs, rising interstate migration is a key indicator for improved performance, this, coupled with significant infrastructure spending. Add to this the slowing supply environment and this is likely to place upward pressure on prices.