Melbourne's inner city unit market appears to be finally emerging from its long hiatus as evidenced by strong demand, limited supply and improving returns.

Colliers PRD revealed that 172 units worth a total of $111.4m were sold during the June quarter of 2007, and these were snapped up by empty-nesters and young professionals relocating to more convenient inner city apartments.

Units in Melbourne's CBD accounted for the highest sales volumes; however, properties in Southbank, Docklands and St Kilda Road were also highly sought-after.
"Growing population, the increasing attractiveness of convenient, inner city living, and a slowdown in the number of yearly apartment completions, are also factors driving demand upwards," said Tim Storey, managing director of Colliers PRD.

Melbourne's inner city market showed a weighty average sale price of approximately $650,000 in the same period. The St Kilda Road precinct recorded the highest average price of $1.5m, while Melbourne CBD recorded a more affordable average figure of $395,440.

The average gross rental yield for an inner city apartment stands at 5.2% per annum while the average gross property return came in at 11% per annum.

"Improving rental yields and property returns will continue to bring investors back into the market," Storey said.

Strong demand from buyers has produced record-low vacancy rates of 1.1% for inner city Melbourne for the year ending June 2007 - lower than metropolitan Melbourne's vacancy rate of 1.4%.

Storey expects the extra supply (which was to be released in September this year) will be quickly absorbed by strong demand in the inner city unit sector, and predicted opportune times ahead for investors.

"The strengthening demand is closely aligned with supply increases due to the depth of the investor market improving and the lack of affordable dwellings in metropolitan Melbourne that are within close proximity to the CBD," he said.