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Investors driving rising markets on Herron Todd White property clock

Soaring Sydney property prices in 2021 “overshadowed” another key market trend of rising rental rates, according to the latest Herron Todd White (HTW) Month in Review.

In the new March report, HTW Director Shaun Thomas said SQM Research showed Sydney house rents increased 15.2 per cent in the 12 months to mid-February.

Unit rents also climbed 7.2 per cent.

“This is on the back of increased demand for rental properties as potential buyers are priced out of the market and international students and workers started to return to Australia,” he said.

“The vacancy rate for residential properties across Sydney was 2.1 per cent in January 2022, down from 2.7 per cent in July 2021 and 3.2 per cent in January 2021, according to SQM Research.”

This, combined with record low interest rates, has seen many investors turn to residential property for solid returns, particularly in Western Sydney.

Mr Thomas said the recent sale of a house and granny flat at 6 and 6A Brunswick Close, Colyton, for $1.155 million, was a case in point.

“The potential gross annual rental was calculated at $46,280 per annum which reflects a gross yield of 4 per cent,” he said.

“Another option for investors is to chase yield and invest in a unit in Blacktown. The median price for a two-bedroom unit is $420,000 with the median two-bedroom rental being $370 per week, reflecting a much larger 4.58 per cent yield.”

Source: Herron Todd White

In South West Sydney both owner-occupiers and investors have driven the market with new investment loans increasing 73.9 per cent nationally, with investors now borrowing 31.5 per cent of all new loans in December, equating to $10.34 billion nationwide.

“Moving forward this year, we should expect to see a slower but continued growth in the South West region, with investors playing an increasing part in this growth, particularly in higher-yielding property types synonymous with investors such as apartments, townhouses, granny flats and duplexes,” Mr Thomas said.

“While overall growth in Sydney is expected to soften, South West Sydney still offers an attractive opportunity for investors who want to remain within the basin.”

In the Inner West, the sale of flats and strata buildings comprising multiple units in one line has strengthened.

Mr Thomas said there had been about 25 sales of in-one-line strata buildings or flats in the past six months, compared to 18 sales between January 2020 and June 2021, according to realestate.com.au figures.

“The low interest rate environment as well as a recovery and subsequent strengthening in the residential property rental market from the lows of the COVID-19 pandemic during 2020 and early 2021 are considered the main drivers of this increase in sales activity,” he said.

“The increase in sales activity has also correlated with a strengthening of capital prices and a tightening of gross yields.”

Source: Herron Todd White

In the inner city the story is slightly different. 

“The pandemic has hit rental returns hard, with the inner city faring worse than most areas due to the huge reduction in rental demand causing record high vacancy rates, however throughout the pandemic, government schemes (such as the Home Builders grant) and record low interest rates have fueled property prices with median prices rising as much as 23 per cent in some areas,” Mr Thomas said.

“So whilst the pandemic has not been favourable to rental returns, investors who have been able to afford to hold on have been rewarded with solid capital growth returns.”

But in the Eastern Suburbs a more favourable tide is rolling in.

While the 12 months after the first Covid lockdown saw the vacancy rates rise and asking rents fell, that trend has now reversed.

“According to SQM Research, vacancy rates in January were just 2.1 per cent for the Eastern Suburbs region, down from 3.2 per cent a year earlier,” Mr Thomas said.

“The increased demand for rental properties is likely on the back of people being priced out of buying in the area as property prices jumped sharply over 2021.

“International borders have more recently started to open up for international students and workers and this will see vacancy rates continue to tighten over the next 12 months and put further upward pressure on rents.”

Melbourne

Covid hit the Melbourne CBD and inner city areas hard, with rent rates falling and vacancy rates soaring, but more recently this has started to change.

“With the recent announcement that fully vaccinated travellers and international students will be allowed into the country without having to isolate, the increased number of people in the city should only cause prices and rents to rise,” HTW Director Perron King said. 

“Many investors will look to enter the market prior to the CBD correcting to match some of its surrounding suburbs.”

Melbourne’s south eastern suburbs such as Mornington Peninsula have remained solid with the growing popularity of working remotely and buyers seeking a better lifestyle pushing median prices and rents up.

In the city’s eastern suburbs, investors of varying ages have been active, with those that are more experienced looking for larger blocks of land and development opportunities.

“Chadstone shopping complex and notable educational institutes, Deakin and Swinburne Universities, create more opportunity and appeal within the area for investors,” Mr King said.

Mr King said Melbourne’s northern suburbs had experienced significant capital growth in the past 12 months but rental yields had fallen as a result.

One of the area’s most popular suburbs, Carlton, was recovering from a tough 18 months where international students left in large numbers when the pandemic hit.

“Currently, the median price of a house in Carlton is $1.44 million, up 17 per cent year-on-year,” Mr King said.

“Apartments are doing even better – the median price for units in the suburb is $515,000, up 51 per cent from the previous year. Carlton’s current asking price for housing rent is $635 per week and $350 per week for apartments. 

“Investors are also likely to be circling due to these suburbs being closely located to Melbourne University, the RMIT city campus, along with retail and restaurants on Lygon Street.”

Brisbane

In special flood commentary, HTW Managing Director Gavin Hulcombe said how the property market would be affected was still to play out, but he suspected it would follow a similar trend to what happened after the 2011 floods.

“Houses that were up to their rooflines in water will be most seriously impacted in terms of value loss,” he said.

“Even dry homes located in flood-affected suburbs could see a pause in the runaway demand that fuelled price growth last year.

“There will also be more purchasers – both homebuyers and investors – who will no longer consider any property that saw even minor inundation. 

“In time, however, the market will find its own level and properties that remain flood-free will likely attract more interest.”

Mr Hulcombe said if you set the flood issue aside, Brisbane’s fundamentals remained good, with relative affordability compared to Sydney and Melbourne, low interest rates and good infrastructure projects and employment prospects leading up to the 2032 Olympic games.

“Another big attraction for investors is rental demand,” he said.

“We are currently tracking at historically low vacancy rates in Brisbane. This tight market has driven rents higher. 

“This situation may tighten further in the coming months too, as flood displaced residents look to relocate while repairs are underway.”

Adelaide

Adelaide has experienced a period of strong capital growth with the median metropolitan house price hitting $600,000. 

Local and interstate demand has driven the investor market, with investors capitalising on strong rental returns in the outer suburbs and good capital growth in the middle and inner rings.

HTW Director Nick Smerdon said gross rental yields of 5 to 7 per cent were common in established suburbs of the outer ring.

“Advertised rents range from $250 to $450 per week, with median house prices ranging from low $200,000s to high $300,000s,” he said.

“Representative of typical investor stock is the sale of 1 Romsey Court, Salisbury North, for $251,133. At the time of the sale this property was achieving $270 per week, generating a gross yield of 5.6 per cent.”

Perth

HTW Director Chris Hinchliffe said the Western Australian property market was off to a “cracking start” in 2022 despite the delay in the state border reopening.

He said the Perth median selling price stabilised towards the end of 2021 at $520,000, while the median unit selling price rose to $415,000.

“Sales volume has remained consistently strong despite a lack of supply and the median selling period of just 16 days is well below the mid-2019 figure of 57 days,” Mr Hinchliffe said.

Darwin

There are signs of an investor resurgence in the Darwin market, with investors chasing yields across varying markets.

HTW Valuer Cameron McDonell said the three most desirable property types for investors were units, new-build homes and DHA homes with long-term leases.

“When considering a new home, there are three new suburbs an investor can choose: Zuccoli (affordable), Northcrest (mid-range) and Lee Point/Muirhead (premium),” he said.

“If we take Zuccoli, for example, the cost of land and construction of a three-bedroom home on a 400sq m allotment is circa $550,000 (however build costs are on the rise).

“A comparable three-bedroom home within the area is currently renting for $620 to $650 per week. This is a gross yield of 5.9 to 6.2 per cent, while also taking advantage of all the depreciation off-set come tax time.”

Canberra

Canberra is still the most expensive city in which to rent in Australia, with the median rent for a house sitting at $714 per week and $541 for a unit. The vacancy rate is 0.8 per cent.

HTW Assistant Property Valuer Nicole Claughton said Canberra had low unemployment and higher than average incomes due to the public sector and had been “relatively pandemic proof”, which was attractive to investors.

“Whilst detached housing is quite a safe bet, it is also a huge initial outlay,” she said.

“Domain reports for the September quarter showed Canberra’s median house price reaching a record high of $1,074,187, up 32.4 per cent year-on-year.

“With Canberra also having the title of the largest price gap between houses and units in the country, units can be a more achievable option for most investors and still have low vacancy rates and higher yields than other capital cities.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.