Rental market: its hot, and its not...

Rob Farmer examines the residential rental markets in the eastern states to find out whats hot and whats not. With historically low residential vacancy rates putting upward pressure on rents in Australias eastern states, property is currently providing attractive returns for investors.

The residential rental market is exceptionally strong and the vast majority of landlords are enjoying excellent returns. However, the high end of the market continues to be sound but is not emulating the stellar performance of properties priced under $1,000 per week. The rental scenario is almost a carbon copy of the residential sales market, where top-end properties have been slower to move than lower priced homes for some time now.

Melbourne, Sydney and Brisbane all have vacancy rates well below 2%, but there are two distinct markets in each city: one which is over performing the other under performing. Market statistics are very general and often amount to averages of averages. This can distort the true position and lead the casual observer to think every landlord is in the same boat.

Overall, vacancy rates are slightly over 1% across the eastern state capital cities, but what the published statistics dont reveal is the percentage of vacant properties in different categories. One market sector can have a vacancy rate of almost zero while another could be around the 4% mark.

In Melbourne, Sydney and Brisbane the position is the same: well located lower-end to medium-priced properties that are presented well are in heavy demand, are providing excellent returns and are being let quickly. But this is not necessarily the case at the other end of the scale.

The economic downturn has dealt a blow to the top-end of the market, and properties in this category are taking longer to attract tenants - especially if the rent is out of kilter with the marketplace.

There is ample anecdotal evidence of significantly reduced salaries and loss of employment in the upper echelons of the corporate world. This is considered to be affecting highly-priced executive rental properties in exclusive suburbs, which had previously been a goldmine for landlords. Despite the limited supply of rental accommodation across all eastern state capitals, tenants are choosy. A modern kitchen, bathroom and internal laundry rate highly with tenants who are prepared to make concessions with location in return for these amenities. Dwellings located on main roads are not flavour of the month with tenants unless they are cheap or modern, and properties in poor condition are attracting little attention regardless of price.

Our experience shows that tenants would prefer to spend a bit more on rent provided they can see they are getting something for their money. Reducing the asking rent by as little as $15 a week can have a profound effect on demand - it can go from zero interest to 10 groups inspecting the property overnight.
Weve noticed that the big turn-ons for tenants at the moment are proximity to public transport and efficient heating and cooling systems. Secluded outdoor living areas and balconies are also very popular.

Two markets in Melbourne
Stephen Erickson, manager of RUN Propertys Carlton office, says its very much a tale of two markets in Melbourne. "The under $600 sector is particularly strong, with anything half-decent in this range being snapped up by eager tenants. But its an entirely different kettle of fish with high-end properties, which are not attracting a great deal of interest and can take a while to let even if theyre competitively priced," says Erickson. To illustrate the strong demand that exists for affordable property, Erickson cites the example of a four-bedroom house in Brunswick (a northern suburb located about six kilometres from the CBD) which the owner plans to redevelop at some stage in the future and does not want to spend money on now.

Located close to transport and other popular facilities, the house had previously been occupied by the same tenant for five years and requires a lot of work. "Although the house is quite tired and in need of painting and new carpet, the kitchen and bathroom are in reasonably good order," says Erickson.
According to Erickson, 100 groups attended the first - and only - open for inspection and 10 applications were received on the spot. Within two days, a further 10 tenants applied for the $380-per-week property. But while tenants are attending open inspections of sub-$600 properties in droves, agents across Melbourne are not finding it as easy to generate interestin properties offered at higher rents - and they frequently remain vacant for some time.

A large terrace house in Fitzroy North which had been leased in 2007 for $1,100 a week was put back on the market in May this year and, although extensively marketed, it took a number of weeks to find a suitable tenant at a reduced rental of $1,000. "Landlords of more expensive properties see reports of historically low vacancy rates and escalating rents, and automatically think there will be a ready market for their property. In reality, vacancy rates for dearer properties are probably closer to 3% or 4% in this part of Melbourne at the moment," says Erickson.

Rent: the key in the Sunshine state
According to Rozelle Walker, manager of RUN Property Brisbane office, properties in Queensland with rents of less than of $400 are red hot - while anything higher than this attracts fewer applicants and requires more marketing. Properties in multi-apartment developments located in out of the way locations with little street appeal and few, if any, amenities within the complex or close by are not attracting a great deal of interest from tenants, even if extensively marketed.

"Rent remains an important consideration in the Brisbane market. Its a matter of striking the right balance," Walker says. "A good case in point is a multi-apartment complex in Sherwood which was initially advertised in the low $400s and failed to attract much interest. But when it was reduced to reflect the marketplace it was different story. Applicants appeared, and two apartments were quickly leased and an application received for another."

High flyers AWOL in the Harbour City
In Sydney the hot market sectors are two-bedroom apartments priced between $400 and $500, and renovated garden apartments up to $800 in the triangle bounded by Bondi Beach, the airport and the CBD edge.

"The latter category is attracting a lot of interest from couples with young families who want an outdoor area for kids, and expectant couples wanting to get into something larger before the birth of their first child," RUN Propertys Bondi office manager Scott Morrissey says.

Many tenants are opting for garden apartments over houses in these suburbs because of the price difference which is usually over $200 per week.

"If we were able find more two and three-bedroom properties with large living areas and pristine kitchens and bathrooms in the $400 to $600 range around the Leichardt area, prospective tenants would be beating a path to our door," says Morrisey.

"Tenants are not as free with their money now that things have tightened up and are more selective, opting for a lower rent in case their financial situation changes because of the economic downturn."

"Understandably owners want the maximum return on their investment, but its often preferable for them to forgo or moderate rental increases when times are tougher for the sake of tenant continuity," says Morrisey.

The circumstances surrounding the recent leasing of an executive two-bedroom apartment in Bondi Beach clearly demonstrate how crucial it is for landlords to respond to prevailing market conditions.

The property became vacant and was offered at $1,100 - the amount the previous tenant paid - but although it was inspected by a number of groups, no applications were received over a seven-week period. The rent was lowered to $1,000 but still no suitable applicant surfaced until, on the property managers advice, the landlord decreased the rent to $900 and a highly qualified tenant was signed up in days.

We believe there can be times when it is preferable for owners to adhere to a strategy of holding on to tenants rather than risk them moving out for cheaper accommodation.

Rents are dependent to a great extent on supply and demand. When the markets tight, a landlord can ask, and will probably get, premium rental for a well presented property in a highly sought-after area.

Where is the vacancy rate heading?
There's no doubt that the changing fabric of Australian society is affecting housing. The rising rate of divorce and separations has resulted in many families living in two homes, Australias population is increasing through immigration and there is growing acceptance of a multi-dwelling lifestyle. All of these factors are putting additional stress on an already inadequate supply of rental accommodation at a time when building approvals are subdued.

There are other factors which are likely to shape the destiny of the rental market over the next few years. Building approvals are - and have been for a long time - at a low ebb and there is degree of reluctance in the part of investors to get into the market.

First homebuyers have been enticed into the market by government assistance and have purchased much of the previous rental stock. However, when the package ceases in 2010 there will be fewer sales in this category. With fewer first homebuyers around, it is expected that competition for available rental accommodation will intensify.

Australias real estate institutes consider the rental market to be balanced when the vacancy rate is around the 3% mark. That is a figure that has not been recorded in the capital cities for several years. I can see no end in sight to Australias current housing crisis. The shortage of stock and increasing demand for rental property is likely to keep vacancy rates around the 1% mark and maintain the pressure on rents for the foreseeable future.

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