While new investors are almost always initially drawn to the potential for a property to generate significant capital gains, savvy investors have long been on the hunt for yield.
Generating cash flow through strong rental returns might not be as exciting as picking the next hotspot, but it forms a strong foundation for many investors in the current market, given the fact that lending is tighter than ever and many markets have already experienced strong gains in recent years.
This month’s Herron Todd White monthly review examines where investors should try and find yield in the various states around Australia.
Generally speaking with the highest property values in the country, Sydney has the worst yields. Rental yields in Sydney have been on the decline over the past decade, as rents have failed to keep pace with increasing property prices.
According to SQM research, average yields for houses in Sydney fell from 3.7 per cent in August 2009 to 2.8 per cent in August 2019, while units fell from 4.9 per cent to 3.7 per cent over the same period.
This has obviously been offset by strong capital gains in virtually all locations in the last 5-10 years. However, now owners are also looking at other strategies to improve their yields such as granny flats and of course Air BnB in more in-demand areas.
For houses, the Lower North Shore has the highest average yield at 3.5 per cent, while south-western Sydney and western Sydney enjoy a 3.3 per cent yield.
On the unit side, the CBD is the clear winner for average rental yield at 4.4 per cent, while the Hills Districts, southwestern Sydney and western Sydney were at 4.1 per cent.
Like Sydney, Melbourne suffers from the fact that prices have been steadily rising over the last decade. That has seen yields drop and it has been tough to find strong yields in many parts of Melbourne.
At the same time, the rise of Air BnB has helped offset that in areas that feature high-density and are close to the CBD, sporting precincts and nightlife venues.
Interestingly, the CBD still offers good opportunities for investors hunting yield, but comes with the risk of oversupply and insufficient demand at times.
The latest statistics show that apartments in the Melbourne CBD are priced at an average of $435,000, generating $530 per week in rent, earning a 5 per cent to 6 per cent rental yield for investors.
As to whether high yield makes for a good investment option in Brisbane the answer is – not necessarily! High yields do come at the risk of price fluctuation in areas like the CBD and of course the Gold Coast.
There are plenty of high yield options available such as serviced apartments in the inner city and dual-key units, but the downside is capital growth prospects are more limited than for traditional detached housing and owner-occupier style attached housing.
Brisbane also features the ability to use granny flats as a yield option, while there are also no shortages of inner-city apartments that offer strong yields.
Despite some big falls in property prices in recent years, Perth’s rental market has continued its resilience against a subdued sales market, with the median weekly rental holding at $350 for the June quarter – a median of $360 for houses and $330 for units.
The average yield for houses in greater Perth is 3.8 per cent, generated from the $485,000 median house price and a $360 median weekly rental. Units prove to be a more lucrative asset, producing an average yield of 4.5 per cent from the $385,000 median and $330 median weekly rental.
The highest yields come from suburbs within the lower price band. Armadale, Butler, Camillo, Chidlow, Coodanup, Coogee, Cooloongup, Kwinana, Leda, Mandurah, Orelia, Parmelia, Stratton and Yangebup all hold the highest current yields for the greater Perth region.
This suggests that on yield potential alone, some of the best suburbs to invest in are within the cities of Armadale, Kwinana, Mandurah and Rockingham, all being local authorities in traditional mortgage belt areas.
Darwin rental yields generally sit at 4.6 per cent, which is slightly above the average seen in other Australian capital cities.
During the peak period of the recent mining boom, high rents on corporate long-term leases reflected yields of 7 per cent to 8 per cent which were driving strong investor demand. Since that point, prices have fallen away significantly.
For investors looking to take advantage of weak prices, the Darwin CBD has the most options available. Dated one-bedroom stock can be purchased from the early $100,000 mark which is almost half the price at the peak of the market in 2014.
An entry-level unit of this type would typically rent for $230 per week which translates to an extremely attractive gross rental yield of 9.5 per cent.
The Canberra residential market has always been attractive to investors seeking high yielding properties.
The traditionally strong rental market is driven by a low vacancy rate, strong demand for rental accommodation, above-average income levels and a transient population comprising professionals, government workers and staffers, students, embassy occupants and defence personnel.
High yields in the range between 5 per cent and 6 per cent gross can be achieved in these types of areas in Canberra.
In Tasmania, you can currently find inner-city units that yield 5-6 per cent, while further out we are still seeing units that are yielding 6-7 per cent at current levels.
With price points considerably below the metropolitan median house price and a strong rental market, the outer ring has historically provided the greatest yields.
Yields typically range in the 5 per cent to 7 per cent range with certain pockets and property types providing yields of 7 per cent plus.
With a variable price point of $100,000 to $150,000 and achievable weekly rentals in the low $200s, maisonettes surrounding Elizabeth Centre fall into this category.