VIC Excerpt from the 2011 March Market report

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As Melbourne cools, is it time for rural Victoria to claim the capital growth prize?

Investors who got their timing right with Melbourne will have been laughing all the way to the bank. The city’s seen a few years of impressive growth, with RP Data reporting median values as 25% higher than they were at the beginning of 2009, and 50% higher than at the beginning of 2007.

That’s an incredible rate of growth by anyone’s standards – and it’s no surprise that it’s slowing.

“Prices are likely to be flat, and that’s probably a good thing for the longer term,” says RP Data research director Tim Lawless. “The increases we’ve seen were at least partly as a result of Melbourne being undervalued: it’s very much caught up now, and the market is likely to take a bit of a breather. It’s more about long-term growth now.”

That’s also going to mean that investors will need to be more selective about property choice, rather than being able to pick almost any property and watch it increase in value overnight.

“Much of the price growth came from the middle and outer ring,” continues Lawless. “That’s a testament to the strategic approach successive Victorian governments have taken to infrastructure planning and land use. However, it’s now likely to be the case that the strongest candidates for growth will be much more in line with the Sydney market – the inner-city unit market.”

Lawless suggests that “personality precincts” like Carlton and Fitzroy – “areas where Generation Y and young professionals are seeking to live, which are on tram lines and are well-established” – will be good bets in the short to medium term.

Chris Turnell, head of research at Capital 360, highlights the bayside suburbs South Yarra and Hawthorn as areas that will also continue to outperform and attract strong investor interest as markets pick up after the March quarter.

Rental stress 

That may not be the case for suburbs slightly further afield, however. John Lindeman, chief property consultant, Property Power Partners, warns that falling overseas immigration could cost Melbourne investors dearly.

“There’s a section of the Melbourne apartment market which is very dependant on overseas students and migrant workers,” explains Lindeman. “If the number of students and migrants falls, there’s a risk we could see an oversupply of rental properties in the areas they gravitate to – which could then lead into price falls in the longer term.”

Suburbs that could fall foul of a slump in immigration include popular districts like Footscray, Oakleigh, Sunshine and Essendon. While Lindeman stresses that any oversupply wouldn’t lead to price falls straight away, he suggests that any investor with an interest in these areas should keep a close eye on migration figures over the coming months. Lawless agrees.

“The student market is in the doldrums, and I wouldn’t be targeting student accommodation at the present time,” he says. “But, in the more established inner-city markets, opportunities are still reasonable.”

In fact, rental yield is unlikely to be one of Melbourne’s strengths for the time being, given how its capital growth has spiralled.

“Rental yields have been a bit of a shocker of late,” adds Lawless.
“Value growth has been so strong that yields have plummeted to less than 4% – so investors will need to be sensitive about yield expectation and do their best to maximise that. Having said that, I don’t think we’ll be seeing too many investors looking for yield in Melbourne for a while.”

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