The Search for Yield (Cash flow)

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Rental yields for both houses (circa 3%) and units (circa 4%) in Sydney and Melbourne are now at record lows.  This is not surprising given the dramatic growth in prices over the last three years.

So how do property investors respond to areas where rents are falling? How can you future-proof your portfolio if you own investments property in areas where rents are stalled or declining?

The past 12 months, rental rates have increased in Sydney (+0.4%), Melbourne (+1.7%), Hobart (+4.6%) and Canberra (+1.9%). Rental rates have fallen over the past year in Brisbane (-0.3%), Adelaide (-0.4%), Perth (-8.6%) and Darwin (-16.2%). Hobart and Canberra are the only capital cities to have recorded stronger rental growth over the past year compared to the previous year.

Over a ten year period it is a vastly different story. The combined capital cities show that the average annual change in rents was 4%.

Why are we seeing lower rental growth than previous years?

  • Wages growth has been the slowest on record
  • Population growth has slowed
  • Low interest rates driving higher levels of housing investment, and
  • Significantly higher levels of housing construction – most of which are units.

“With housing supply, and subsequently rental supply, continuing to rise as growth in wages and the population continues to slow, it is unlikely we will see a turnaround in rental markets in the short-term. As a result, renters will continue to have more choice and may actually be able to move into superior rental accommodation for similar or even lower costs. Over recent years landlords haven’t had much incentive to push yields higher due to the low cost of debt and strong capital gains. However, with capital gains starting to slow, investors may place a renewed focus on rental returns which will be difficult in the face of falling rents and increasing rental supply.”

This flight to higher quality stock and higher vacancy rates in lower quality stock has been the norm in commercial property markets, but previously in residential property, new/ modern units and older, boutique blocks in quiet streets were more or less distinct separate markets.

Now we are seeing that apartment renters are likely to move towards higher quality properties as modern apartments often have superior locations and increased access to amenities. The price differential is also decreasing due to the large amount of new stock coming on the market.

With capital growth slowing in the major capitals we are likely to see investors to place more focus on yield.  Brisbane is a major city that is primed for more growth and delivering stronger yields.

We are actively sourcing good quality properties in the Brisbane market where we find houses for between $300k to $400k delivering up to a 6% yield.  When you add a granny flat, we can push the yield to around 8%.  With apartments, you need to be very selective about where to buy in Brisbane as there are pockets of oversupply and areas where units are in high demand.  We are also seeing strong rental demand in Newcastle and have completed several dual living and duplex projects for clients there.

With the capital city markets, lower yields will also drive investors to consider renovations to boost yield. New kitchens, bathrooms, fresh carpets and fixtures will make your property stand out from the crowd when leasing.

Here’s my tips for chasing yield:

  • Consider the supply of properties coming to market – watch for potential oversupply
  • Yield is also a reflection of risk.  Property in mining areas have suffered a serious decline but were previously showing massive yields
  • Use a proactive property manager that knows the local market for leasing
  • Set the rent appropriate to market rates – three weeks’ vacancy can swallow up a $10 increase in a heartbeat
  • Get independent advice on which areas and property types deliver the best rent and growth.

It’s important to remember both sides of the property coin when investing – yield and growth.

Yield is the cash flow that helps you service the loan repayments (or deliver positive cash flow), while capital growth is the bedrock of growing your wealth.  I often get asked which one is more important….the answer is BOTH. But they are important in different ways.  Each property investor will have individual financial circumstances that are unique to them and they will need to set specific goals and strategies that reflect their income and equity levels.

 

If you would like help creating a property strategy that fits your individual situation then please call my friendly team of buyers agents to start a conversation today on 1300 655 615 today or email us your requirements.

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Rich Harvey


Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

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