October Property Clock

Where does Brisbane currently sit in the cycle?

• Houses = Start of Recovery (moved up from Bottom of Market)
• Units = Bottom of Market

Brisbane has always offered an extraordinarily good balance of property options for those building a diversified investment portfolio. There are opportunities for capital-gain motivated buyers looking to park their dough in an asset with excellent value upside potential. Conversely, if you’re seeking to ramp up returns, it has plenty to offer across the landscape that would put other larger cities in the shade in relation to rental return. And of course, its offerings are relatively affordable too.

Given some of the good news on the horizon around infrastructure investment and increasing interstate migration, there’s every chance Brisbane will be one of the country’s best performing capital city markets over the next three to five years.

Looking at the yield side of the equation in the current market, we aren’t seeing investors flock to yields in the same way they might in Sydney or Melbourne. The run to yields is often on the back of markets that have undergone major fluctuations – for example, when prices are running too hot and investors are seeking options where a comparatively higher rental return will help service the debt. In this instance, high yields are hard to find and hotly contested.

Conversely, when values are at the bottom of the cycle, cash flow investors might look for a high return so they can purchase a holding with good long (or even very long) term growth prospects at an attractive yield. The new landlord can then use that relatively attractive rent to service the debt while playing the waiting game.

This is all to say that in Brisbane, the steady market movements suggest the attraction to high-yielding investment is no greater in 2019 than it has been in previous years. That’s not to say it’s bad, it’s just to say that demand has been consistent.

Certainly, the ongoing low interest rate environment has been attractive for investors, and this means net returns look healthy. Any investor operating in our markets will be factoring in yields in their buying decision, but low yield is rarely a deal-breaker in this sector.

On a positive note, along with low interest rates, Brisbane has seen a recovery in its rental market. Average rents are rising, albeit modestly, with vacancy rates tightening. This has something to do with the uptake of inner-city apartment oversupply. While there is still plenty of stock to be absorbed by the rental market, the numbers are better now than they were a few years back.

So, who are the buyers seeking high yields in Brisbane?

Well, analyse the retail-level investor pool operating in our market and keen to secure above-average yields and you’ll discover a broad church. They range from typical individual or mum-and-dad investors through to self-funded superannuants chasing a cash flow strategy rather than capital gains. These buyers seek properties such as units around the university nodes and multiple-occupancy style accommodation such as flats buildings, boarding houses, student accommodation or dual occupancy dwellings.

As to whether high yield makes for a good investment option in Brisbane the answer is – not necessarily! As mentioned, there are plenty of high yield options available such as serviced apartments in the inner city and dual-key units, but the downside is capital growth prospects are more limited than for traditional detached housing and owner-occupier style attached housing.

Also, while the gross yield tends to be high on some property types, the net yield can be fairly unappealing once management costs and other outlays are factored in. This can typically extend and apply to outer lying regions too where high yielding properties such as duplexes and dual occupancy bring a great gross income but less impressive net income.

All in all, higher yields reflect higher risks. While some Brisbane metrics look good, economic uncertainty at the national and international level compels us towards caution. Many of the asset classes associated with higher yields appeal to a more limited buyer segment (being the investor market) and when there is a limited number of buyers for this style of property. It can become difficult to liquidate assets without a significant discount.

For inner city units, townhouses and dwellings, higher yielding properties are typically located around the university hubs as they are often let out on a per room basis reflecting a much higher overall rent, often with a few little extras included such as free internet and full furnishing (generally of very modest condition and quality though).

Some of the outer ring suburbs such as Burpengary, Caboolture and Morayfield have estates full of dual occupancy and duplex style accommodation which will attract higher yield in comparison to traditional single unit dwellings. Tenants in the dual occupancy and duplex style accommodations of the outer ring suburbs are often attracted to the lower cost associated with renting just their part of the dwelling as well as the modern or new condition of the asset in comparison to renting out an entire property. Furthermore, although shared, these assets are generally still seen to offer privacy in comparison to units or townhouses although they are often of a similar size internally.

There is an alternative in new estates for some investors - a display home with a leaseback to the builder in place. While they can show an excellent return on paper, they often sell at above market prices to reflect the inclusion of the leaseback. Often these agreements can be for one or two-year terms with options at the end to extend further. While the agreed rent on a display home can vary, typically they are rented back at a commercial rent which is well above standard market rents.

There are of course ways to boost the rental return on your existing investment such as renting room-by-room, renting furnished or letting the car space separately. Higher density dwellings which offer the ability to be rented out on a per room basis particularly those which are ensuited) tend to do well. There are some dwellings being built new that offer four or five large bedrooms each with their own ensuite and a small kitchenette or wet bar, although they have minimum living area in the common parts of the house. Whilst these are classified as dwellings, they will yield a much higher return due to the ability to be let per room.

Occasionally in areas such as St Lucia, some of the larger two-bedroom units located in those 1970s style walk-up units have been converted into three-bedroom units at the expense of smaller living areas. This increases the rental income substantially.

Likewise, there are a large number of high set dwellings which get built in under (not necessarily considered to be habitable height) to accommodate additional space to be let out. The caution here is that from a valuation point of view, a lot of these areas end up being treated as storage as they aren’t strictly deemed habitable under building guidelines. As such, the assessed rent applied by valuers is often far less than the rent actually received by the owner.

Would you like to know where your property sits in the market? Send me a message HERE, let me know where your home is and I will send you through some information.

The above information has been sourced from Herron Todd White’s Month in Review Property Report. To read more of the report CLICK HERE.