September 2016

What should you look for in an investment property?

With Australia’s residential real estate worth $6.6trillion – more than three times our superannuation holdings or listed stock holdings – it’s clear our nation’s wealth has housing at its foundation.

But as prices have soared, particularly in the Sydney and Melbourne markets, investors may be becoming more wary.

"When you look at the capital growth returns over the past 10 years and factor in rental income, housing has returned quite strongly compared with other asset classes," says Cameron Kusher, CoreLogic’s Head of Research.

"But the cost of purchase is increasing, and we’re seeing more supply coming on – especially in the unit market. A lot of that unit stock will end up on the rental market, and rental yields are already weaker."

So what should investors be looking for in today’s market?

Hunt for yield

In Sydney and Melbourne, rental yields are now at record lows, at 3.1% and 2.9% respectively. Once you take inflation and taxation into account, there’s not much income left.

"As an investor, you really should be looking for rental yield. But most people bank on capital growth," explains Kusher. "When housing stock goes up, you need to be confident you can rent your property and keep your tenants."

Within Sydney and Melbourne, there will be pockets of higher yield. Look for areas with high rental demand – near universities or major employment hubs like hospitals, for example. Or look outside these markets: Hobart currently offers Australia’s highest gross rental yield at 5.2%, and Brisbane is 4.3%.

"Remember, these yields assume the property is occupied 52 weeks of the year, and the economies in these markets are not as strong." comments Kusher. "Rental markets are still relatively soft – rents are declining in Brisbane, for example, and across all capital cities rents are down 0.6% over the past 12 months."

Search for growth

Investors in Sydney and Melbourne have enjoyed substantial capital gains over the past seven years, with Sydney property values up 90.2% in that period and Melbourne up 73.7%.

So have prices in Sydney and Melbourne peaked? "Growth in these markets is expected to slow over the second half of this year and into 2017 as stock levels rise," says Kusher.

"We expect Brisbane and Hobart to be the most likely capital cities to see a pick up in growth, along with coastal or lifestyle areas near Sydney and Melbourne. Wollongong, the Central Coast, Bendigo and Geelong are all within a commutable distance by train from the city centres."

After 10 years of no growth, the tourism and lifestyle attractions of Hobart have made it attractive to investors – particularly those from Melbourne looking for a potential future holiday home. Property values in our most southern capital city rose 6.2% in the 12 months to July 2016 and with a median house price of $575,0001 it’s still relatively affordable.

And although Perth and Darwin prices may seem more realistic now, Kusher believes there is still further decline ahead. "Changes in Adelaide’s economy with the closure of the automotive industry will also impact the housing market there."

Beware of over-supply

Kusher urges caution if you’re considering investing in off-the-plan units in inner city locations. "Be very choosy with the type of property, especially in Melbourne and some parts of Sydney as there is a lot of unit stock coming on in these areas."

Make sure you understand where tenant demand will come from. "Ideally you want a location people want to live in, with local employment or study opportunities, in a market that won’t be over-supplied." He recommends reading local papers and council records to check plans for new developments, and looking for locations and developments that will appeal to families as well as other types of tenants.

"The risk of investing in a big development is that if another investor needs to sell quickly to free up cash, their asking price will impact all the other units."

"As an investor, you really should be looking for rental yield. But most people bank on capital growth."

Focus on the future

With the cost of borrowing so low, Kusher believes this is an ideal time for investors with equity to look at buying a property they might want to live in during retirement – and again, this is where markets just outside capital cities will provide value.

"They still offer great lifestyle benefits for tenants willing to commute, and potential for future growth."

If you’re unfamiliar with an area, it pays to do your homework first – CoreLogic’s data is available on subscription but also powers the website. Benchmark pricing and yields, and check plans for infrastructure, business investment and developments in the area.

As well as looking for areas with greater tenant demand than supply, positive signs for future growth include2:

  • Population growth (check Census data)
  • History of good capital growth over 10 to 20 years (CoreLogic’s data can guide you)
  • New infrastructure such as recreational facilities, retail centres or better CBD transport (ask the local council)
  • Improving local employment (plans for new hospitals, corporate centres and improved transport to employment hubs)
  • Signs of gentrification (look for renovations and council programs)

"Ultimately, where you should invest depends on your timeframe," concludes Kusher. "If it’s longer term, be selective in areas outside Sydney and Melbourne."

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