Demand for apartments in inner Brisbane is on the increase.

BIS Shrapnel’s Inner Brisbane Apartments Market Brief found that demand for off-the-plan apartments in Brisbane has escalated since 2013, thanks to improving economic conditions, attractive rental yields and lower interest rates.

This surge in demand is set to result in record new apartment supply in 2014/15, with completions set to escalate further in 2015/16 and 2016/17.

Angie Zigomanis, Senior Manager of Residential Property at BIS Shrapnel, says there is a combination of reasons why Brisbane apartments are in high demand.

“Brisbane is more affordable than Sydney and Melbourne largely due to lower incomes on average,” he says.

“Prices are lower and there are better yields for interstate buyers. It (Brisbane) also has lower development costs resulting from lower land prices.”

BIS Shrapnel’s study found that new apartment developments in Brisbane have been dominated by large scale and high rise developments in areas such as Spring Hill (CBD), Inner East, Inner North, West End, Toowong, Woolloongabba and Hamilton. Completions of these developments are expected within the next few years, which will result in record apartment levels; increasing to 3,610 apartments by next year and peaking at 4,040 apartments by 2017.

BIS Shrapnel’s study also found that sale prices of residential development sites in Brisbane CBD were considerably higher than all other suburbs within the Inner Brisbane area. In 2014, two development sites were sold to an overseas buyer for between $17,000 and $20,000 per square metre. Sites outside of Brisbane CBD have been selling at between $2,000 and $5,000 per square metre.

BIS Shrapnel’s analysis of the age profile of apartment residents suggests three main groups are driving occupier demand for apartments – students (particularly overseas students), young adults (typified by those in management or professional positions working in the inner city), and empty nesters (those aged 45 years and older without children).

Unlike Middle and Outer Brisbane, however, vacancy rates in Inner Brisbane have increased since 2013/14, hitting 3.8 per cent in December 2014. The report notes that some of these vacancies may simply reflect the time required to fill the new stock coming to the market, but the steady rise in vacancy rates throughout 2014 does suggest an excess of rental stock could be emerging within Inner Brisbane.

Mr Zigomanis warns there are risks involved in more apartments being built in Brisbane.

“There will be landlords chasing a finite pool of rental tenants,” he cautions. “Consequently, landlords will have to provide an increasingly attractive rental proposition to attract tenants.

“Modern new buildings with plenty of facilities will be able to attract tenants from older secondary stock. Landlords of these older apartments will have to discount against the newer apartments to keep their tenants.

“This pressure on rents will flow through to prices and impact on price growth.”

The potential impact all these new apartments could have on rents and prices in Inner Brisbane doesn’t seem to be deterring investors from interstate and overseas.

The report speculates that overseas investors, in particular, will increasingly favour the Inner Brisbane apartment market over Sydney and Melbourne, with demand underpinned by low borrowing costs, buoyant economic conditions locally in investors’ home countries, a preference to invest in a transparent and stable political environment, and recent falls in the Australian dollar.