The great investor about-face

Once upon a time, mum and dad investors cherished residential real estate for its ability to secure decent yields, equity and strong capital gains.

But times are changing.

Top agents in the residential, commercial and industrial real estate sectors are noticing a distinct shift in what mum and dad investors are looking for and why.

That’s if they’re buying an investment property at all.

A changing equity model

Cunninghams Real Estate Managing Director John Cunningham says there’s been a significant change in the residential investment model, with families that once bought an average-sized home to live in now seeking a lot more.

“With the push to bigger, better and newer homes for families, the traditional equity build model has been delayed as mortgages are stretched to their limit, fuelled by low interest rates,” he says.

“As a result, the leverage of equity meets a capacity to repay debt, which inhibits further borrowing and the capacity to buy investment properties.

“The normal flow-on has been affected, which is evidenced by first home buyers outnumbering investors, from what we are seeing.”

Another interesting trend John has noticed is those who do buy investment properties are not necessarily doing it for themselves or to set themselves up for their retirement.

Rather, they’re using the equity in the family home to purchase an investment property to help their children buy a home.

“Rather than it being an inheritance down the line, it’s something they can use as a way to build equity for their kids so they can actually afford to buy a home in the capital city,” John says.

The problem with this is it ties up housing stock, and when the home resells, it may not sell to an investor, which has a flow-on effect on affordability.

Investors exiting the market

John says over the past two years, many residential property investors have exited the market, and more homes have been bought by owner-occupiers.

“In the past, if we had a property for sale from a rent roll, we’d find 50 per cent or more of the (interested) buyers would be other investors,” he explains.

“Through the past two years, we’ve seen that drop down to 20 to 30 per cent, and the rest have been first home buyers, downsizers or other types of buyers.

“Investors dominated the space for quite a while, and we had a 50 per cent-plus chance that’d we’d retain the management, and then it just wasn’t the case.”

John says with COVID-19 restrictions easing more recently, there has been a little more investment buyer activity, but it’s still far from what the market was like pre-pandemic.

Property management expert Jodie Stainton says many investors opted out of long-term units, which hadn’t attracted significant boosts in yields, in preference for more significant capital gains in 2021’s hot market.

“Units haven’t really had asset growth, and the rents haven’t really increased over the past 10 years,” she says.

“I think they’ve taken the opportunity to get out of the market while the market’s hot and they are looking for investments with less hassle.”

Looking for control

Jodie says changes in legislation had unsettled some landlords looking to have greater control over their investment properties.

“In Victoria, what I’m hearing from our property managers is that the no reason vacate clause is a sticking point,” she explains.

“Not being able to just vacate a tenant, having to have pets, comes up a lot. People want control over their investments.

“If they’ve got good tenants, it’s not a problem, but if they don’t have good tenants, it really is a problem.”

Jodie says many have been turning from residential investment to commercial and industrial options. 

“You don’t have the changeover of tenants as much, you don’t have the upkeep, and they have their own outgoings,” she says.

“Commercial feels like a less hassle investment.”

Turn towards commercial assets

That’s a statement Burgess Rawson National Head of Agency Adam Thomas concurs with. 

While commercial and industrial investment had always been relatively popular with mum and dad investors, he says the trend has picked up pace in the past two years.

“Certainly during COVID-19 and as a result of low-cost capital and the increased cost of residential real estate, that’s led to your mum and dad investors focusing on commercial assets,” he says.

While commercial investment properties can range in price from $500,000 to $200 million, Adam says the sweet spot for mum and dad investors is between $1 million and $3 million.

Longer lease terms and lower vacancy and damage risks are attractive to investors too, he says.

Adam says the most popular type of commercial asset mum and dad investors sought included childcare centres, service stations and fast food outlets. 

He says generally such assets return yields between three per cent and four per cent, but can push up to 4.5 per cent.

In the past year, sales included Global Sky Education in Hallett Cove, South Australia, for $1.692 million, which attracted a yield of 3.99 per cent.

The Shell service station at Parafield Gardens, in Adelaide, sold for $3 million and attracted a 4.06 per cent yield.

“Fast food, service stations and childcare are what we call essential service assets,” Adam says.

“And with everything navigated through COVID-19, they remained robust, resilient and open.

“If you couple that with a national tenant, then that’s a very good recipe for a good, long-term commercial investment in anyone’s books.”

Before the pandemic, capital cities were the location of choice for commercial investments such as these, but with significant population migration towards the regions over the past two years, Adam says investors are much more open-minded.

“There’s now as much comfort in regional locations as what there is in metropolitan locations, which was not the case before COVID-19 when there was more of a concentration around the major capital cities,” he explains.

Holiday rental hurdle

John says other more minor trends in the residential investment market include the increase in the rentvest movement and the short-term holiday rental sector.

He says in 2021, five Cunninghams team members opted to rent where they could afford to in Sydney, but invested elsewhere.

Four of those investment properties were bought in Queensland.

“They’re getting good yields, and they’re hoping for good capital growth,” John says.

“It’s basically a way of building equity and having a slice of the property market. That’s the key.”

John says many investors have also opted to purchase in holiday destination towns where they use the home part of the year themselves but largely operate it as an Airbnb or short-term holiday rental.

But doing that slices a chunk out of the permanent rental market in metropolitan and country areas, which puts further pressure on rental rates.

Looking forward

So what’s the solution? 

John says Australia needs an in-depth national housing plan that caters for low-cost housing, improves supply issues and moves people into existing housing appropriate for their needs, including downsizing.

He says stamp duty is a major inhibitor to that last point, and whether the NSW Government’s proposal to introduce the choice of a land tax would help is unknown.

“Why should housing, which is one of the three fundamentals of living, be a tax revenue component?” John asks.

One method to tackle social housing is the build-to-rent scheme, which John supports but says can’t happen fast enough.

“It’ll fill a huge hole in the social housing space because it’s saying, ‘let’s move some of the responsibility to the private sector, and we’ll give you concessions, but we don’t have to run it’,” he says.

“So, that’s something, but it takes forever to get these things off the ground.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.