Sydney’s high prices come at the expense of yields

 

Sydney’s rental yields are among the lowest of all capital cities

 

As 2015 came to a close, Sydney’s double-digit growth deflated while investors beat a hasty retreat in line with APRA’s lending changes. Now, investors in Sydney are caught between low rental yields and puffed-up property values.

 

Rental yields in Sydney are among the lowest of the capital cities at around 3.3% (SQM Research), although this figure is likely the result of the city’s recent steep growth outpacing rental increases.

 

“Sydney dwelling values have gone up by hundreds of thousands of dollars in the last few years,” says Eliza Owen, market analyst at OnTheHouse.com.au. “It’s hard for renters, who typically don’t have enough money to buy, to keep up with rent increases that are proportional to capital growth.

 

“For example, the rental yield in December 2014 was 3.8%. In order to maintain the rental yield from December 2014 on the median house in December 2015, rent in dollar terms would have had to have increased by $122 a week for that tenant.

 

“And even if they could keep up with that, those rents are only negotiated on a six- to 12-month basis. In dollar terms of course, Sydney rents are the highest.”

 

SQM Research’s February 2016 figures report that Sydney’s median rental return is $711 per week for houses and almost $500 for units – by comparison, Melbourne’s return for houses is $476 and units are $371.

 

Fortuitously for investors looking to purchase, the Sydney market has begun to turn itself over to the buyers’ hands, as prices stabilise across the board and the house median drops just under $1m, according to CoreLogic’s February figures. If prices continue to cool as they are expected to, 2016 could begin to bridge the gap between growth and yields.

 

Concerns that oversupply will push yields lower as demand cools are somewhat irrelevant in a market like Sydney’s. Unlike other capitals, Sydney doesn’t seem to suffer deeply from oversupply anxiety. “The population is steadily growing, and there is limited space for new development,” says Owen. “I believe a lot of areas in Sydney will soon be rezoned for higher density to accommodate a growing population.”

 

Owen explains that research shows developers in Sydney use price expectations as a signal as to whether to supply new dwellings.

 

“This can explain why for the last three years, despite the completion of dwellings in NSW increasing by 46%, the median NSW dwelling increased by 40% in the same period,” says Owen. “As new dwellings are supplied, prices are actually going up.”

 

The good news for investors is that analysis of data has revealed, says Owen, that “most places in Sydney experienced double-digit growth at some point in the last four years, which suggests to me that many suburbs of Sydney have fairly uniform rates of capital growth, just at different times”.

 

“Anywhere you can afford to get into the Sydney market could have growth potential, so long as you are buying a quality property.”

 

Felix Taing, associate at Cohen Handler, is familiar with the lay of Sydney’s land, and believes the stabilisation of prices in 2016 will likely see stronger yields on the rental market – as long as you know what to look for.

 

He suggests major transport infrastructure as a common drawcard for renters. “Take Strathfield for example, an area that is close to the city, with major hubs and facilities that will appeal to renters. Parramatta, often considered the second CBD in Sydney, also has strong numbers.”

 

Taing also sees growth potential for southwestern suburbs in close proximity to the new Badgerys Creek airport, and Blacktown, which currently holds the lowest median house price in Sydney at $650,000 (CoreLogic), with an upcoming hospital expansion providing more job opportunities.

 

“On the other hand, areas further out west such as Colyton struggle a bit when it comes to finding renters. While it was a hotspot with investors in the last year or two due to affordability and yield, this has led to an oversupply of rental properties.”

 

Of course, there’s more to NSW than just its capital, and the state’s regional areas are showing just as much growth potential, with solid positive returns.

 

Wollongong boasts several high-yielding suburbs with some of the tightest vacancy rates in NSW, Real Estate Investar’s January reports show. Among them is Koonawarra, which has a vacancy rate of 0.4% and a yield of 6.75%, complemented by a low median of $285,000.

 

Strength in the Newcastle market is dominated by ‘blue chip’ suburbs within 5km of the CBD, as evidenced by suburbs Hamilton East and South, which demonstrate high demand, with vacancy rates of 1.19% and 0.99% respectively.

 

 

SUBURB TO WATCH

Zetland: New look could earn an over-the-top price tag

 

A high-density residential and industrial suburb 4km south of the CBD, Zetland has been the recipient of a $1bn redevelopment for over a decade, focused on transforming an unused warehouse along South Dowling Street into a central retail and residential hub called Victoria Park.

 

However, while the suburb’s new look and continuing urban renewal have underpinned growth to date, it could also be a warning sign of price inflation that has buyers paying too much.

 

With a unit rental yield of 4.4%, Zetland is returning an average of $670 to investors each week. While these figures, in line with a median unit price of just under $840,000, could work positively for investors, they could also spell problems down the track.

 

Simon Cohen, MD and co-founder of Cohen Handler, believes buyers may be paying too much in Zetland, which has a higher median than its neighbours Kensington ($742,000), Alexandria  $680,000) and Redfern ($790,000), OnTheHouse.com.au figures report.

 

“The current demand has led to buyers paying crazy prices, which in turn leads to lower yields. Unless they know where to look, and what to look for, they may continue to overpay in areas like Zetland, where we’re seeing a lot of new developments.”

 

Growth has been upwardly trending in Zetland since 2009, when the median sat at half a million.