With limited growth drivers Adelaide could stumble
Adelaide has experienced a slight boost over the past few months, but the future looks bleak for this capital city.
“The Adelaide property market is likely to underperform again this year, with few growth drivers and high unemployment,” says Michael Yardney, CEO of Metropole Property Strategists.
Angie Zigomanis, senior manager of residential property at BIS Oxford Economics, concurs, pointing to the closure of the Holden automotive plant, which will take away many employment opportunities.
“There’s a broader impact to be felt across the city, so that’s going to be a major hit for the state. In the meantime, you haven’t got the economy driving growth at the moment,” he explains.
“We’re seeing that interstate migration to the other states has increased over the last couple of years as well. Not a huge amount of short-term upside at the moment.”
This jump in migration levels is a major problem in sustaining local businesses, especially with the youth comprising many of the migrants. ABS data suggest that, as of September 2016, over 6,000 left South Australia, representing a significant year-on-year increase of almost 60%.
“More people are leaving South Australia than are settling here. Anecdotally, we know that young South Australians move interstate in search of lifestyle and job opportunities,” notes Daniel Gannon, executive director of Property Council SA.
“Not only is South Australia’s ‘brain drain’ a real threat, but when combined with our state’s low population growth rate – 0.6% compared to the national average of 1.5% – and an ageing population, these problems are compounded.”
Balanced supply and demand
Despite the state’s economic troubles, Adelaide’s property market has been doing a good job of ensuring that demand and supply meet.
“South Australia is very affordable for even the novice investor right up to the seasoned professional,” comments Prue Muirhead, director of Muirhead Property Management and Your Investment Property’s 2010 Investor of the Year.
“There are mini markets all around [the state] that have some fantastic capital growth. [Meanwhile,] some suburbs in Adelaide like Port Noarlunga and Christies Beach show very obvious signs of gentrification and new developments at a rapid rate.”
In addition, the rental market is showing positive signs due to considerable demand. This draws investors, particularly from the eastern states, who are looking to capitalise on the solid yields.
“Returns on rent in these markets should provide 5.5% on average for houses, with up to 6% for the purchase of an undervalued property,” Muirhead says.
“Townhouses in these suburbs would bring approximately 5.5% returns but would have greater vacancy times as they appeal to a smaller market of renters. Generally, yields in South Australia will be higher for a unit than a house.”
Units pose oversupply risk
Nonetheless, demand remains stronger for houses than for units.
“The majority of tenants are looking for a house with a yard. A house also provides options for development if the land is sufficient in size,” Muirhead explains.
“Generally speaking, tenants wanting to rent a home are more stable [in the] long term than tenants wishing to rent a unit.”
Residents see unit rentals as being short-term, and this low demand hits hard as more properties come onto the market in the same areas, such as the CBD and Glenelg. Thus, oversupply is a real concern.
At present, the key to succeeding in the SA market is to be able to hold on for long-term gains.
“Consider buying properties with a land component that presents a future development option, or simply buy and don’t sell,” suggests Muirhead.
“Just hold on for the long term and enjoy the better-than-national-average rental returns.”
SUBURB TO WATCH
Hope Valley: Waterside suburb brings hope to buyers
Home to one of the biggest bodies of water in Adelaide – the Hope Valley Reservoir – this suburb is highly popular among homebuyers due to its affordability and many amenities.
House prices are coming in at under $400,000 despite 4.3% growth over the past 12 months. This continues a streak of positive performance recorded over the latest five-year period.
The average yield is also high, at 4.5%. And although the unit market has tumbled slightly in the last year, returns for investors soar at over 5%.
Hope Valley could therefore serve as a good entry point into the market for first home buyers. It is close to Modbury Hospital and is just about 30 minutes’ drive from Adelaide. The suburb is also home to several schools and a well-stocked shopping centre.