13 May 2016

Reading the tea leaves of property with rental yields

Everyone wishes they had a crystal ball when it comes to property. Although this may elude us there are numerous drivers that can be assessed to make more informed choices. The health and stage of a property market can often be read from the movement of rental yields and change in average rents as they reflect the supply/demand relationship.

The latest figures from CORELOGIC RP DATA show rental yields and average rents have varied across the major capital cities, with a mix of minor gains and massive drops. The current low interest rate environment and investor activity has spurred high levels of new inner-city apartment developments and city fringe land estates in all markets. Pushing supply ahead of demand, rental yields should continue to fall into 2017, when a significant amount of off-the-plan developments are due to complete. Large, investor-only developments and those with inferior inclusions and finishes will be the worst affected. There still seems to be demand for premium product and owner-occupied focused projects.

Sydney and Melbourne have shown minor gains in rental prices, however gross yields are now at record lows (3.4% and 3% respectively). This is due to exponential price growth in these markets which has in turn compressed yields. An investor buying into these markets at this stage of the cycle will find the lower yields significantly impacting the cashflow of an investment.

Brisbane’s gross yield has dropped slightly to 4.4%, as a result of increased inner city unit supply, but still represents the most attractive return for the investor looking at the Eastern states. When combined with the current affordability of property, where in many suburbs it is still cheaper to buy than rent and the median house price is half of Sydney, the right product still shows sign of future price growth.

Perth and Darwin have shown significant drops in rental prices (-13.2% and -12.9% respectively), this can be attributed to the slowdown in the mining and resources sector, which makes up a large part of these economies. The increase of unemployment and excess supply left over from the mining boom has increased vacancy rates and pushed down rents as a result. Price growth will be hampered until this stock is absorbed and the economy improves.

Written by Andrew Cull, Sound Property Group

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This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.