Investors seek high-yielding houses as CBD apartments sour

For the next few years property investors need to know one number better than any other ... rental yield.

If you are a property investor then for the next few years you better know one number better than any other ... rental yield.

As forecasters fall over each other to tell us the inner-city apartment market is heading for a fall of 10 to 15 per cent, every sector in property is going to feel chill winds ... but seasoned investors will be seeking rental income to cushion the blow.

In the past few days everyone from US investment bank Morgan Stanley to accountancy group Deloitte has warned the apartment market — where building approvals are running at up to twice long-term levels — is going to flame out. Chris Richardson of Deloitte has called residential property “the worst investment” for the future.

Is Richardson’s view extreme? New RBA governor Philip Lowe has been extra careful trying to strike a balance between what he describes as “brisk” house price increases and the need to stimulate other parts of the economy. Mind you, despite Lowe’s attempts to keep his options open, the money market has talked more clearly, running down the prospect of another rate cut in December to what is now a long shot at 9-1.

As always it is to analysts who do not hold positions within the property industry we need to turn for independent perspective.

One of the clearest commentators is Nigel Stapledon, real estate research fellow at the UNSW Business School who says: “It’s not a disaster scenario — in fact the market for houses is very much within a normal cycle. But what is happening in the apartment market is a different story entirely ... And in the end all sectors of the residential property market are connected.”

What can I do?

The issue for investors is that analysts talk in general terms citing national averages, but property investments are made in specific locations. Nevertheless, there does appear to be a consensus that all apartment markets will do it tough — in particular there will be defaults and discounts in the inner-city apartment markets.

Working off the supply numbers it looks like problems will be most severe in Brisbane with Melbourne and then Sydney in that order. Perth already has problems — SQM research says asking prices for units across Perth are 5 per cent lower than this time last year.

One standout in the national picture is that there are more apartments being built just now in Brisbane than in Sydney.

Separately, there are already signs such as the rising rate of non settlements in apartment areas such as Docklands in Melbourne. Apartments are going to be the happy hunting ground for first-home buyers — houses, on the other hand, are set to emerge as a much safer choice where relatively strong yields will continue to attract seasoned investors.

Pockets of gold

The best yields are in houses in regional areas and outer suburbs. It is not unusual to see yields as high as 6 per cent in country towns against yields as low as 2.5 per cent in affluent suburbs. As you can see even from a glimpse at rental yields (these are all gross. To get the net you would have to take out expenses which will depend on whether you manage the property) there is considerable variation between major cities.

But it is when you get down to the variations within the cities themselves that just how “local” an investment property is comes to the fore and with it the danger of national statistics. In houses the national rentals rose by just 1.3 per cent last year but they fell by a massive 9.5 per cent in Perth and rose by 5.5 per cent in Sydney.

Vacancy rates — another key indicator — showed the same split. They have inched up across the country but while the figure has crawled to 1.8 per cent in Sydney and 2 per cent in Melbourne it is 5 per cent in Perth ... you can see the RBA’s problem even within this narrow sphere — ideally rates would be set differently in different states.

In Sydney the days of rental yields with a 4 in front of them are largely gone — yet still Edgecliff offers 3.6 per cent, so does Woolloomooloo and Erskineville. In Brisbane 4 per cent is standard in many suburbs, so too with Perth. In regional areas the yield story is even better but history suggests that capital appreciation will never be as good as in the cities.

Sticking strictly to the yields on houses — Albury (NSW) shows 4.6 per cent, Toowoomba 5.1 per cent, Warrnambool 5.2 per cent and Burnie 6.8 per cent.

Well-located houses in suburbs with strong records have reasonable yields and the prospect of slim rental growth. Rental yields such as these can cover mortgages that can be fixed for five years or more at which time we should have emerged from what looks like a rocky period for all property investments.

Wealth editor James Kirby hosts a live Q+A on investment issues every Wednesday at 12.15 AEDT at www.theaustralian.com.au