When deciding on a potential purchase, two of the primary determinants for property investors are, 'What will it cost?' and 'How much rental return, or investment yield, will it make?'.
Since the strong price runs in Sydney and Melbourne started to abate, there has been increased demand on assets providing strong yields – but they’re not easy to find.
This got us thinking. Is it still possible to secure property in locations across Australia that provide excellent investment potential, and return enough cash flow to make servicing loan repayments and other costs easier?
So, we put it out there to our teams... and they delivered
Brisbane's market on the whole has always offered an extraordinarily good balance of property options for those building a diversified investment portfolio. There are opportunities for capital-gain motivated buyers looking to park their dough in an asset with excellent value upside potential.
Conversely, if you’re seeking to ramp up returns, we have plenty to offer across our landscape that would put other larger cities in the shade in relation to rental return. And of course, our offerings are relatively affordable too. Given some of the good news on the horizon around infrastructure investment and increasing interstate migration, there’s every chance Brisbane will be one of the country’s best performing capital city markets over the next three to five years.
All that said, let’s drill down a little on the yield side of the equation in the current market. First up, we aren’t seeing investors flock to yields in the same way they might in Sydney or Melbourne. The run to yields is often on the back of markets that have undergone major fluctuations – for example, when prices are running too hot and investors are seeking options where a comparatively higher rental return will help service the debt. In this instance, high yields are hard to find and hotly contested.
Conversely, when values are at the bottom of the cycle, cash flow investors might look for a high return so they can purchase a holding with good long (or even very long) term growth prospects at an attractive yield. The new landlord can then use that relatively attractive rent to service the debt while playing the waiting game. This is all to say that in Brisbane, our steady market movements suggest the attraction to high-yielding investment is no greater in 2019 than it has been in previous years.
That’s not to say it’s bad, it’s just to say that demand has been consistent. Certainly, the ongoing low interest rate environment has been attractive for investors, and this means net returns look healthy. Any investor operating in our markets will be factoring in yields in their buying decision, but low yield is rarely a deal-breaker in this sector.
On a positive note, along with low interest rates, Brisbane has seen a recovery in its rental market. Average rents are rising, albeit modestly, with vacancy rates tightening. This has something to do with the uptake of inner-city apartment oversupply. While there is still plenty of stock to be absorbed by the rental market, the numbers are better now than they were a few years back.
So, who are the buyers seeking high yields in Brisbane?
Well, analyse the retail-level investor pool operating in our market and keen to secure above-average yields and you’ll discover a broad church. They range from typical individual or mum-and-dad investors through to self-funded superannuants chasing a cash flow strategy rather than capital gains. These buyers seek properties such as units around the university nodes and multiple-occupancy style accommodation such as flats buildings, boarding houses, student accommodation or dual occupancy dwellings.
As to whether high yield makes for a good investment option in Brisbane the answer is – not necessarily! As mentioned, 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.
Also, while the gross yield tends to be high on some property types, the net yield can be fairly unappealing once management costs and other outlays are factored in. This can typically extend and apply to outer lying regions too where high yielding properties such as duplexes and dual occupancy bring a great gross income but less impressive net income.
All in all, higher yields reflect higher risks. While some Brisbane metrics look good, economic uncertainty at the national and international level compels us towards caution. Many of the asset classes associated with higher yields appeal to a more limited buyer segment (being the investor market) and when there is a limited number of buyers for this style of property. It can become difficult to liquidate assets without a significant discount. Setting aside the position laid out above, let’s take a look at some high-yield examples in our river city... head to page 38 of the report to read more.