High yields in smaller cities attracting investors

Australia’s smaller capitals and mid-size regional cities are experiencing chronic rental property shortages that are pushing rents higher and luring investors seeking to achieve capital growth as well as positive cashflow. 

Recent reports from SQM Research show that over the four years to March 2021, vacancy rates fell substantially in Brisbane (3.5 per cent to 1.5 per cent), Perth (5 per cent to 0.9 per cent), and Adelaide (1.7 per cent to 0.8 per cent).

Property investment is still, and likely always will be, motivated by capital growth, but investors are being tempted in Adelaide, Perth and Brisbane by positive cash flow.

In those cities, rent yields of up to six per cent can be the icing on the cake of their revenue-building strategy.

As rents rise in these markets, investor lending nationally has increased 4.5 per cent over the month to about $7 billion, the highest since February 2018.

Investors from Sydney and Melbourne who would normally buy locally have boosted property markets in Adelaide, Brisbane and Perth.

Western Australia’s capital has seen investor activity ramp up over the past six months, with investor finance almost doubling from activity seen this time last year, to $462 million and coming off a low of around $250 million a month. 

It’s still a far cry from the $1 billion a month spent by investors in peak years of 2007 and 2014.

But rent yields of 4.5 to 6.0 per cent in a city with a less than one per cent vacancy rate have attracted some who had sat on the sidelines, including investors from the biggest capitals where rent yields are at a tepid 2.5 to 3.0 per cent, and even less in the vacated CBDs.

REIWA president Damian Collins said the higher rents were a short-term positive for investors but not necessarily the catalyst to buy.

“Rent is definitely important but it’s worth recognising that supply (of rental properties) can come on relatively quickly over a couple of years and therefore it’s potential capital growth that remains the key motivator for investors,” he told API Magazine.

“In outer suburbs such as Kwinana and Armadale there has been good growth and rent yields in recent years but this could change quickly, while established inner city suburbs are unlikely to have a great increase in rental properties.”

“It’s the same in the Pilbara, where rent yields can top 10 per cent and property prices are rising but there’s a lot of volatility so it’s best suited to investors with a solid portfolio looking for some riskier diversification, rather than for property investors with one or two rental properties.”

Queensland queues

Desperate renters are being squeezed out of the Gold Coast and Brisbane rental markets. 

In the last year, rental vacancies dropped 1.1 per cent across the Brisbane local government area, while Greater Brisbane saw the market tighten by 0.9 per cent. The Gold Coast rental market tightened to reach a record low of 0.6 per cent in the last 15 years of data records.

Stephen McGee, director of National Property Buyers in Brisbane, said the vacancy rate is certainly an important factor in the decision making for investors but other factors such as ratio of transactions in the suburb (in terms of investor versus owner occupier) are worth considering.

“Overall, the recent lending to homeowners has still proven more prolific than lending to investors but the recent increase in lending to investors is certainly a sign that property confidence is returning,” he said.

“We find that areas surrounding universities and hospitals are rewarding investors with higher rental yields.

“These suburbs can also go through times of being a very tight rental market but can also fluctuate as university terms come to an end and students graduate and leave the area.”

He identified suburbs such as Annerley, St Lucia, Kelvin Grove, West End, Indooroopilly and Toowong as areas offering high yields to investors looking at rental income as a key driver of their decision making process.

North of Brisbane, the low volume of property listings has resulted in Sunshine Coast asking sale prices soaring by 13.1 per cent for houses and six per cent for units over the past year, according to SQM Research. 

The Sunshine Coast’s rental vacancy rate sunk to 0.6 per cent in March, helping push up rents by 18.5 per cent for houses and 13.3 per cent for units. 

Image Property Sunshine Coast sales agent Paul Blackledge said the rental market there currently had one of the lowest vacancy rates in the country. 

“It’s always been common for sellers to rent for a while if they haven’t been able to find a new home to buy, but that option is often no longer on the table,” he said. 

He said vendors who are listing their properties are securing strong prices, often well above their expectations. Demand from local buyers remains strong, as does enquiry from buyers in other parts of Queensland and interstate, he said. 

“Interstate buyers are active in the market, but some are becoming frustrated because they haven’t been able to buy anything and they’re flying back and forth on the weekends only to miss out every time,” he said. 

Adelaide adding up

Buyer's agents in Adelaide have reported strong interest from their neighbours in Victoria and New South Wales. 

Alf Petito, proprietor of Adelaide Buyer Agent, said a lot of interest had been coming from Melbourne, where rent yields are among the most affordable of the country’s capitals. 

Melbourne is still playing host to the highest number of vacancies at 27,300 residential properties. Unit rents decreased the most at 1.4 per cent to a median of $365.70 – the second most affordable capital city unit rent.

“Investors realise the good investment properties in Melbourne are out of reach pricewise and unaffordable for the average investor, whereas Adelaide provides a safe alternative much closer to the city and has surprised many an investor with growth in property value over the years and solid rental yields.”

Unlike WA’s volatile northwest market, where mining is the sole factor underlying any property investment strategy, he said South Australia’s regional markets presented definite opportunities for investors. 

“With more and more people looking for a relaxed and tranquil lifestyle away from the hassles of city life, I think regional areas will become a real option for investors searching for a decent rental yield while still enjoying acceptable capital growth,” he said.

“You would have to say the city still has pole position but don’t discard popular growth townships that offer all the conveniences of city living at a more affordable entry price point.”

South Australia director of National Property Buyers, Katherine Skinner, said areas with low rental vacancy rates did not necessarily translate into the best investment opportunities.

“Low vacancy rates indicate that you will secure a tenant quickly, however, there are many low vacancy rate locations that provide higher risk tenancies or are rental dominated areas that may restrain strong capital growth,” she said.

“Low vacancy rates are important when considering an investment property but they do not automatically make a property the right choice.

Ms Skinner said there were locations in the far northern suburbs of Adelaide where price growth has been muted over the past 10 years despite the six per cent-plus rental yields.  

“Areas like Elizabeth and the surrounds are rental dominated locations with higher risk tenancies in many pockets, which have seen quite stagnant capital growth year-on-year.”

She said there was exceptionally strong performance in many of the southern suburbs that are still providing five per cent-plus in the more affordable sub-$500,000 price point.  

“These areas are becoming increasingly popular with tenants and owner occupiers alike, which is really driving this market.

“We are seeing a huge amount of increased interest in the Adelaide investment market right now, with no signs of that changing any time soon.  

“The general feedback we receive from these clients is the value for money, strong rental yield and opportunity for solid, secure capital growth is really driving the motivation to park their money in SA.”