The latest Knight Frank Wealth Report has forecast a promising trajectory for Sydney’s luxury real estate market. The report forecasts a 5.0% increase in value over 2024 for Sydney’s luxury properties, ranking fifth on the list of the world’s key luxury property markets. The average increase predicted for the top 25 cities is 2.5%. Even more promising is the projected rental increase where Knight Frank believes Sydney will lead the way in rental price growth, increasing 12.0% over 2024. This is double the increase for number two on the list, Auckland.
This coincides with PropTrack’s report of a rise in inner-city apartment developments in Sydney. “To cater to these cohorts, developers are creating developments with hotel-style concierge services to manage dry cleaning and dog walking and adding amenities such as home cinemas, wine cellars and restaurants,” said PropTrack senior data analyst Karen Dellow.
These market trends make Sydney an interesting case study for investors looking to purchase luxury rental properties. But, investing in luxury property comes with advantages and disadvantages that potential investors must consider.
Advantages
- High rental yields: Luxury properties bring in significantly higher rental rates compared to their non-luxury counterparts. The premium amenities, exclusive locations and quality associated with luxury rentals mean landlords can charge more. With rental rates predicted to increase faster than property prices, investors could see high rental yields.
- Market stability: Luxury properties tend to be less volatile than the broader market. Wealthy tenants are often less susceptible to economic downturns. In fact, according to NAB, higher interest rates that would negatively impact low- and middle-income individuals, could even mean higher income for high-earners, depending on how the individual’s wealth portfolio is structured. This can help stabilise occupancy rates and create a reliable income source.
- Strong demand: Luxury properties cater to a specific demographic with a consistent demand for high-end living. This consistent demand from renters in a market of limited supply not only ensures stable occupancy rates but also holds the potential for long-term capital appreciation.
Disadvantages
- High initial investment: A concern when buying a luxury rental is the cost of the property. PropTrack reported that at the end of January, more than a third of Sydney apartments listed for sale on realestate.com.au were asking more than $1.5 million. The national median for apartments is $626,000.
- Unique requirements: Owning and managing luxury rentals requires a specialised skill set. These properties often come with unique amenities and may require a higher level of service for tenants. This could potentially mean needing a high-end property management company, which would put a dent in your profit.
- Higher maintenance costs: Luxury properties feature high-quality finishes and amenities that can be expensive to maintain, repair and replace. As a result, investors should budget to cover these ongoing costs which can eat into your rental income if not managed efficiently.
Investing in Sydney
The predicted surge in rental prices alongside more moderate growth in luxury property values presents an interesting situation for investors. Potential high rental yields could offset the higher initial investment. But, it’s important to consider the specific property, location and ongoing management costs before making a decision. Consider speaking to an experienced mortgage broker who has knowledge of the luxury market to see if high-end property investment suits your financial situation and long-term goals.