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Global Insight: Mainstream markets outperform prime in Sydney and Melbourne

(Article by Michelle Ciesielski)
 
Despite this vast capital growth in both prime markets over the seven-year period to December 2015, the broader mainstream market in Sydney and Melbourne significantly outperformed at 80% and 52% respectively.

 
The value of prime (luxury) global residential property markets globally rose on average by 1.8% in 2015 according to the Knight Frank Prime International Residential Index (PIRI); similar to the 2% growth recorded a year earlier.
 
Ranking the top 100 cities in the PIRI 100, Vancouver leads the rankings by some margin, with prices accelerating 24.5% in 2015. Sydney follows in second place, with growth of 14.8%. Many comparisons can be drawn between the two cities – a lack of prime supply, coupled with foreign demand, spurred on by a weaker Canadian (and Australian) dollar are factors explaining both cities’ stellar performances. Melbourne prime property was ranked 6th globally with prices growing 11.9% in 2015.
Price growth in the Sydney and Melbourne prime residential markets, although lagged, has generally followed an upward trajectory in the Australian share market, when indexed to December 2008. Post the Lehman’s collapse to December 2015, coming off a lower base, the Melbourne prime market recorded cumulative growth of 31% while prime Sydney prices grew by 30%.

Despite this vast capital growth in both prime markets over the seven-year period to December 2015, the broader mainstream market in Sydney and Melbourne significantly outperformed at 80% and 52% respectively. In late 2008 and the years following, the federal government introduced several fiscal stimulus packages, including an extension to the First Home Owners Grant. This resulted in a recovery of the mainstream market at a faster rate than the prime market in 2009 and into the first half of 2010.

Since this time, the upswing in the share market, along with other stimulus such as favourable business conditions – and more recently a stable political environment – has renewed the confidence in the prime end of the market.

Across the past decade there has been limited new supply of prime residential properties built by global standard; especially within close proximity to the Sydney CBD and with uninterrupted harbour views. However, over the next 10 years, there are potentially three prime residential towers in the revamped Circular Quay precinct; within close proximity to the renovated Circular Quay wharves and the new Sydney Light Rail Terminal. There are another four towers in Barangaroo proposed, including part of the new Crown Casino.

In the pipeline for Melbourne city, One Queensbridge will accommodate high-end luxury with the most expensive apartments Melbourne has yet to experience, as well as Australia 108, which is now under construction. Both are well-positioned for vantage points along the Yarra River, and enjoy views of the CBD.
 
There continues to be limited new stock available at the high end of the market in prime locations – especially in Sydney – yet there is continued demand from foreign buyers not meeting the investment migrants’ criteria of the Significant and Premium Investment Visas. These foreign buyers must buy a ‘new’ property in order to comply with the federal government’s foreign investment regulation.
 
This demand for foreign buyers comes at a time when the purchasing power of the lower Australian dollar has been much stronger, notwithstanding a recent rally. Many foreign buyers have already seen success in other global cities after buying into new projects where new life has emerged in once obsolete inner-city areas; these buyers are now in a position to add a Sydney or Melbourne property to their global portfolio.

Looking forward, Knight Frank has analysed the annual prime residential price growth for 10 global cities in 2015 and forecast prices in 2016. Sydney prime is expected to remain the best performer, although the pace of price growth is expected to slow from close to 15% year-on-year in 2015 to 10% in 2016. Melbourne prime is likely to see annual growth closer to 6%. Australia’s economic slowdown, uncertainty surrounding the Australian leadership with a federal election looming, weaker share market performance in the past 12 months and the new foreign investment fees explains the lower rate of growth likely in 2016.

Download the full report here: Australian Prime Residential Property Market Insight April 2016


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