Penthouses Achieve Sky-High Prices Despite Sydney Slowdown

The most sublime apartments and penthouses Australia’s biggest city has to offer occupy a different universe to the broader housing market, which appears to be losing steam. Over the past year, price records for apartment sales have been smashed, and luxury apartments have taken up a steadily growing proportion of total sales in the city.

And with James Packer’s Crown Sydney, One Barangaroo—arguably one of the world’s most sumptuous developments—quietly commencing sales, hopes are high that even bigger price records could be achieved.

In November last year, two apartments in the Opera Residences at the former Coca-Cola Amatil building at Circular Quay sold for A$26 million and A$27 million (US$19.7 million and US$20.5 million), setting a price record both outright and per square meter.

Previously, the residential record was about A$50,000 (US$37,947) per square meter, with the One30 Hyde Park penthouse pulling in A$43,200 (US$32,786) per square meter and The REVY in Darling Island, Pyrmont, earning A$47,000 (US$35,670) per square meter. The A$27 million sale at Opera Residences, by comparison, clocked in at around A$96,000 (US$73,000) per square meter.

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In June this year, a penthouse at AMP Capital’s Quay Quarter at Circular Quay sold for A$17 million, or nearly A$67,000 per square meter (US$13 million and US$51,000 per square meter).

And in August, the penthouse atop The Castle on Castlereagh Street by developer Shanghai United sold for A$18 million (US$13.7 million) ahead of the building’s VIP launch. Due to be completed in 2020, the penthouse has private lifts, a pool, an indoor garden and three outdoor gardens.

This time, local buyers dominate

Ben Stewart, head of the premium sales division for CBRE—the real estate company behind sales at the Opera Residences, Quay Quarter and The Castle—said that the buyers were Australian residents, as opposed to the international investors who had dominated apartment sales in recent years.

"It’s very much local market owner-occupiers, typically downsizers," Mr. Stewart said, referring to older buyers moving to smaller houses after their children have left home.

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Inquiries from international buyers has fallen after the New South Wales government introduced a range of taxes on foreign buyers aimed at curbing the city’s housing boom, which has doubled prices since 2009, Mr. Stewart said. The measures included doubling stamp duty taxes to 8% from 4% for foreign buyers, raising the annual land tax surcharge to 2% from .75%, and introducing a "ghost tax" for investment properties left vacant for six months or more each year.

Those taxes have hit demand, Mr. Stewart said, but not for properties at the very top of the price spectrum.

"The market is definitely taking a breath, it has plateaued out, and inquiry is down," Mr. Stewart said. "But for unique properties there is still strong interest. Your A-grade sites and properties are still selling very well."

New records set to fall

More records are poised to be broken if all goes to plan at Crown Sydney, One Barangaroo, the famed harborside project led by billionaire James Packer that has been years in the making.

The development will have 82 apartments spread over 30 floors at the top of an architecturally striking tower, all with access to the lavish services of a six-star hotel beneath. The building’s crown jewel will be Sky Mansion, a two-story, five-bedroom home spread over 845 square meters (9,100 square feet) with 360-degree views over the city and harbor.

Todd Nisbet, Crown’s executive vice president of strategy and development, cites London’s One Hyde Park by Candy & Candy and New York’s One57 on top of a Park Hyatt Hotel as inspiration for the project. He has told media he is hopeful the apartments will set new price records. Various local media have reported the possibility of a A$100 million sale. This, of course, remains to be seen.

Mr. Nisbet pointed to the hospitality-service offering as the development’s biggest point of difference. "We believe our customers are looking for more than a nice apartment," he said.

Knight Frank’s most recent Prime Global Cities Index, which tracks the movement of luxury residential prices across 41 cities around the world, found Australasia was the strongest-performing world region on an average basis for the third quarter of 2017. Sydney and Melbourne had remained in the top 10 cities for growth for 10 consecutive quarters.

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Erin van Tuil, director at Knight Frank who is responsible for selling the apartments at One Barangaroo, said she has seen a shift away from smaller apartments targeted at investors, with developers changing their products to contain more larger apartments with three or more bedrooms and installing more expensive fixtures and fittings.

"We certainly think this sector of the market has legs," Ms. van Tuil says. "The market here in Sydney for super prime properties just isn’t as mature as other global markets. So there is room for growth."

She said demand has come from a range of buyers, both local and international. Many are seeking a trophy asset, but the scarcity and irreplaceability of rare apartments gives them some protection from market shocks.

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Rare assets, thin market

Figures from data provider CoreLogic show a long-term shift in demand toward luxury apartments in Sydney. Since 2012, expensive apartments are making up a growing proportion of apartment sales, while the percentage of apartments sold at the more affordable end has been shrinking.

In July 2012, sales of apartments worth over A$2 million (US$1.5 million) made up just 0.8% of apartment sales, Core Logic’s figures show, but this climbed steadily in the following years to hit 3% by August 2017. Apartments priced between A$1 million (US$1.14 million) and A$2 million reached 18.7% of total sales by August 2017 compared to 3.9% in July 2012.

This shift can be partially explained by rising house prices inevitably leading to a higher volume of sales at higher prices. However the proportion of sales at higher price brackets has risen consistently since 2012, while it rose and fell in the five years prior to 2012.

And by comparison, sales in the A$600,000 to A$800,000 (US$455,000 to US$606,480) price bracket, which includes Sydney’s median apartment value of A$783,221 ($594,000) as of Oct. 31, have flatlined between 30% and 32% since October 2014 despite strong value growth since that time. Apartments priced between A$400,000 (US$303,000) and A$600,000 (US$455,000) fell to 23.1% of the total in August 2017 from 42.5% in July 2012, according to Core Logic.

There are early signs that Sydney’s broader property market is losing steam. Sydney’s rolling quarterly home value fell in October by 0.6%, the first fall since May 2016. CoreLogic head of research Tim Lawless said the slowdown was primarily due to tighter credit policies, such as premiums on loans to interest-only borrowers and investors, and tougher lending criteria from banks.

But the top end of the market is driven by a different set of fundamentals to the broader market, such as business confidence and the vagaries of foreign investors.

Penthouse apartments haven’t always fared so well in the Sydney market. In the years following the financial crisis in 2008, a swath of luxury apartments languished on the market and eventually changed hands for prices that were often millions of dollars below their original asking price.

A penthouse at the top of the Ritz in Cremorne Point, for example, had an asking price of A$29 million in 2007, but it was ultimately taken over by receivers when its owner, property developer Simon Symond, fell into financial difficulty. It sold in 2011 for an undisclosed price after being marketed at around A$15 million, then around A$9 million.

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High-end not necessarily a slam dunk?

George Tharenou, chief economist at investment bank UBS, said there are still risks with investing in Sydney’s luxury property market. The market is relatively small and the assets are harder to sell than those at more affordable price points.

"It’s so illiquid, you get very small changes in sentiment that can have disproportionately large influences on price trends," Mr. Tharenou said.

There are also trends that could soften demand and slow price growth for luxury housing, he said.

"I would say in aggregate it is becoming quite clearly increasingly difficult for foreigners to buy property in Australia, given the tightening of capital controls out of China, and also on the Australian side with regulators continuing to increase taxes," Mr. Tharenou said. "This is likely to continue over coming years in my view. That will dampen demand."

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But the key drivers of demand for these kinds of homes are the globalization of housing markets, the desire from wealthy investors to diversify their asset holdings, and Australia’s attractiveness and stability as a destination. These are mega trends that he doesn’t see changing.

"You have seen the persistent demand for high end luxury property, particularly in Sydney and Melbourne, go on for long enough that you’re starting to see more development targeted at that," he said.

"To date, it’s been a successful investment strategy," Mr. Tharenou said. ‘We’ve seen persistent price growth in those areas, and you will probably continue to see that dynamic play out until there’s some negative shock, which causes a very large correction."