According to Knight Frank’s Prime Global Rental Index (PGRI) Q3 2023, Sydney’s luxury residential rental market claimed the top spot for annual rental growth over the 12 months to the end of September.
At 18%, Knight Frank’s Q3 data reveals that the harbour city’s annual luxury rental growth rate was 2.3 times the 7.9% average growth in prime rents across the 10 global markets and 52 bps more than its 13.1% annual growth rate in the previous quarter.
Singapore (14.5%) and Auckland (13.1%) came in second and third on the PGRI respectively.
Among the cities in Knight Frank’s basket, both Singapore and New York experienced a quarterly dip in rents, however, none of the cities reported an annual decrease.
Elevated demand-reduced supply
Knight Frank’s head of residential Erin van Tuil attributes the underlying pressure on Sydney’s luxury residential rents to elevated demand for luxury homes and the ongoing trend of reduced supply, resulting from construction challenges during the pandemic.
“Not only have we seen a 52 basis point increase in annual growth from Q2 to Q3 this year, but the six-month rate of growth was also the strongest of the 10 global cities examined, at 7.9%,” she said.
“The increase in prime rents in Sydney is in line with wider rental growth in the Australian market.”
What’s also fuelling rental growth, adds Tuil is strong demand from newly arrived residents, with inward migration picking up sharply after a three-year hiatus.
Much of the unprecedented demand for luxury homes in Sydney can be attributed to the return of Chinese buyers.
The NSW Capital is now the number one destination for China-based property investors, many of whom are stumping up with cash to buy mansions in the $10m to $20m range.
Chinese buyers aside, Tuil notes the uptick in luxury home renovations is also adding to the demand for prime rentals as homeowners rent while they wait for their homes to be completed.
“This includes executive level workers being lured to Australia from overseas to alleviate the skills shortage, as well as crews coming from overseas to produce films in Australia… looking to rent a luxury home during their stay or until they find a more permanent home.”
Affordability bites
At 7.9%, average Q3 growth in the PGRI was only marginally up on the 7.5% recorded in Q2. However, Knight Frank’s head of residential research Michelle Ciesielski says the data confirms rents in this luxury sector are rising at a rate three and a half times their long-term pre-pandemic trend.
Strong recent growth has pushed prime rents 17.9% above their pre-pandemic high, seen in Q3 2019, and 25.5% higher than the pandemic low in Q1 2021.
Ciesielski attributes the continuation of strong demand from renters to affordability challenges in the sales market and constrained new supply.
“Despite ongoing debate surrounding work-from-home arrangements and the challenges in the office sector in key cities, the data confirms the underlying strength of demand for city living and the resilience of accommodation requirements in close proximity to the CBD,” said Ciesielski.
While the global outlook is for ongoing upward pressure on luxury rents, Knight Frank expects to see an inflection point – despite strong demand and weak supply dynamics – at which tenants become unable to keep bidding rents substantially higher.
“… we can see limits in terms of affordability. However, this is more likely the case in markets such as New York and Singapore, which have experienced a quarterly dip in rents following strong growth, rather than in Sydney.”
Image: 504a Bronte Rd, listed by Sotheby’s for $11,000/week.
