Perth: the two speed capital seen as 2020's rising star

Given an annual house price decline of more than five per cent, and an alarming 20 per cent drop over the past five years, it may come as a surprise that property investors are touting Perth as the best place to invest in 2020.

Recent months have seen barely perceptible median price increases that have still offered widespread hope and expectation that the Western Australian capital is about to emerge from a long slumber.

Its affordability (median house price of $440,965) is beginning to attract the interest of investors from the eastern state, while an upturn in mining activity, commercial property stabilisation, population growth and a tightening rental market are all indicative of a market that presents an opportune buying window.

Perth topped a recent survey of more than 400 property investors, with 37 per cent ranking it as the best place to invest in the next 12 months, and 61 per cent ranking the city as the property market with the highest growth potential over the next three years.

The rental market is a key driver of this newfound optimism.

REIA Deputy President Hayden Groves said rents were on the move across Perth, with vacancy rates at 2.3 per cent, well below market parity of 3.5 per cent.

“Yields are the best amongst all capital cities at 5.2 per cent, much better than those found in Melbourne and Sydney markets of around 3 per cent,” he said.

“Rents for houses in Perth have risen to a median of $370 per week, well shy of its $460 peak but a sharp improvement over the last quarter.”

James Nihill, Managing Director of Patrick Leo, said Perth’s standing as the fastest declining rental vacancy location was attributable to increased migration and a tightening supply due to a lack of new developments.

“It is clear Perth has passed the bottom of its property cycle and is on the way back up, so with prices still more than 20 per cent below their 2014 peak, it is a great time for investors to get into the market and realise some solid gains over the short to medium-term,” Mr. Nihill said.

In other developments

The WA Labor Government is aiming to transform the metropolitan area over the coming decades, with medium to high-density developments surrounding new and existing train stations central to that vision.

Director of Vision Surveys Consulting, Jay Sidhu is an expert in the Perth subdivision landscape.

As with wider property values across Perth, he said a two-tiered market was emerging in terms of development activity.

“The blue-chip suburbs such as Nedlands and Mosman Park were attracting a lot of interest for subdivisible blocks that could be turned into townhouses or apartments, while the outer suburbs are relatively quiet in that domain,” Mr. Sidhu said.

“Buyers from over east had definitely come on board more over the past three months,” he said.

Risks remain

Not all pundits were entirely convinced the Perth market was about to show consistent and solid gains, as opposed to the anaemic 0.1 per cent monthly increments seen at the moment.

Steven Rowley, Head of the School of Economics, Finance and Property at Curtin University, pointed out that there remained a lot of supply in the established market.

“We are seeing some evidence of increased sales activity in new houses but we are coming off a very low base,” Mr. Rowley said.

“Median house prices might’ve inched up a fraction but only 30 to 40 per cent of suburbs are actually seeing an increase in prices, as the higher end of the market lifts.”

Mr. Rowley acknowledged the rental market was tightening and could drive investor interest, but saw the medium-term outlook as essentially flat.

“Properties near good amenities and schools will continue to perform relatively well, but the outer suburbs are struggling amid falling but still very high stock levels.

“There are no major downward pressures, aside from unknowns such as the coronavirus and other potential international developments in trade and the economy, but there’s not enough to suggest the market will be pushed too much higher either.”

Annoying commercials

Supporting Mr. Rowley’s caution based on a lack of economic impetus in Western Australia, were the insights of Julie Drago, CEO of Hero Properties, which specialises in industrial and commercial accommodation across the state.

Ms. Drago said 2019 had been a very challenging year, with the market for industrial property running at two speeds, much the same as the residential market has been described.

“There remain high vacancies in what I consider to be second-grade B-class stock but strong competition for A-grade stock in core areas,” she said.

“Rents have stabilised in the A-grade space, with incentives being offered at record highs, while across the industrial market sales activity has declined for the second year running, however, there is strong demand for fully tenanted assets in the A-grade space in the plus $20 million bracket by institutional investors.

“Forecasting ahead for 2020, I would expect the demand for this stock to increase and for rents in A-grade stock to continue to stabilise, but rents in B-grade stock will continue to fall.”

Despite the unspectacular economic clues provide by the commercial property market, REIA’s Mr Groves said no market is ever risk-free but Perth was looking the most favourable among Australia’s major cities in 2020.

“Low inflation, improving employment levels, infrastructure investment rebounding, population growth returning, increasing rents and low interest rates suggest 2020 will be the year the Perth property market moved off what has been a long bottom,” he said.

Patrick Leo’s Mr Nihill also agreed Perth was a capital that offered solid growth prospects for an investor portfolio.

“Frankly, the only way is up for prices.

“Not all locations are equal though, so investors need to do their homework – lifestyle areas like the northern suburbs along the beaches will always have strong appeal,” he said.