Investors appear to be losing interest in Sydney's inner ring but first-home buyers see an opportunity to break into the housing market, according to the latest report from Herron Todd White (HTW).

Matt Halse, local expert for New South Wales at HTW, said investor activity appears to have slowed down substantially in the region, particularly in homogenous medium- and high-density areas such Haymarket, Zetland, and Forest Lodge.

"This is largely driven by declines in rental demand pushing rents lower and therefore reducing overall returns," he said.

In Zetland, for instance, the residential vacancy rate hit a record high in May at 6%, which declined to 5.7% in June. Mascot also recorded a high vacancy rate at 7.4%, according to figures from SQM research.

Halse said the decline in rental demand in similar locations is pushing rents down, which ultimately impact sale prices. This, however, creates an opportunity for first-home buyers to break into the market.

"It appears that more first-home buyers are entering the market which does help increase demand for some of the investment style apartments, however, there is still an oversupply of apartments advertised for sale and lease," he said.

It is crucial to note, however, that this trend is unlikely to improve soon, given the impacts of the COVID-19 on the general economy and the housing market.

Still, Halse believes investors need to take advantage of the available properties that are at prices similar to or even lower than what they were sold for over the last few years.

"However, this is assuming that someone can tolerate the reduced rental income and 'ride out the storm' until the market starts to recover," he said.

Halse said Sydney's Inner Region will always benefit from its proximity to the central business district. He said the infrastructure, the services, and the amenities the region has to offer would be able to attract buyers and investors continuously.

Furthermore, the future Metro West and Metro City & Southwest lines will be able to make suburbs in the region more attractive.

"As always, we believe that the strongest investment properties over the long-term will be those that are well-positioned, quality-built and designed, lower density developments and free-standing or semi-detached dwellings or the older properties that have renovation upside," he said.