Government incentives during 2009 have driven up activity in the lower market sectors meaning investors have to look elsewhere for opportunity. Andrew Johnstone reports.

Sydney houses grew by 6.56% in the 3 months to July 2009, beating all other states. While units grew by 4.14% in the same period, inner ring apartments were offering investors a strong mix of growth and yield going forward.

First home buyer activity in 2009 overstimulated the lower end of the market inflating prices says Sandra Peachey, valuer for Herron Todd White.

"Investors have been pushed out of those cheaper outer suburbs," says Peachey. "I would say the stable middle ring suburbs would be attractive to investors."

However as first home buyer activity falls, there are renewed investment opportunities at the lower end of the market.

Affordable investment apartments

Apartments in well tenanted suburbs and luxury properties are the best buys, says Peachy. She names the burgeoning South Sydney area, Potts Point and Manly as her picks in the Sydney market.

Green Square, Waterloo, Surry Hills and Alexandria are undergoing a revitalisation with traditional warehouse and industrial sites being transformed to modern inner city housing.

"What was an oversupply in South Sydney has really been absorbed so that has stabilised that market," says Peachy. "South Sydney is reasonably affordable and is still showing a really good return."

Green Square has a railway station to the city and the airport, and is the hub around which most of this development is happening. It has become the unofficial centre of South Sydney's new inner city bustle.

What is attractive about the area is the master planning, and the superior location near golf courses and parks, approximately 4 kilometres from the CBD and with easy access to the beach.

The local rental market in South Sydney shows strong demand for new apartments, and the bells and whistles they can offer compared to older dwellings.

Because of wholesale zoning changes in South Sydney Peachy warns that there are a lot of projects in the pipeline. She says investors should be discerning about where they pick, and what.

"Quality of development is the important thing. There has been some construction in the past few years that has been substandard," she says. But there are a number of quality developers building good stock that will stand the test of time.

With the 50% discount on NSW stamp duty there is a further incentive for investors to look at quality new apartment stock in South Sydney.

Peachy also like Manly, though most of the unit stock is older, it is well tenanted and relatively affordable for a beachside suburb.

Potts Point sits harbourside of Kings Cross and is walking distance to the Sydney CBD. Potts Point enjoys strong tenancy from city professionals and has a 'New York' feel to its streets.

Apart from some good value buying in Sydney's inner west, Peachey sees units as a more affordable investment that can yield more than traditional houses in this market.