Sydney rental yields becoming ugly: Terry Ryder
One of the side effects of Sydney’s boom is that prices have risen a lot but rents haven’t, so yields have become ugly – i.e. not attractive to investors.
Melbourne prices haven’t risen as much (generally speaking) but the city has developed a gap between prices and rents similar to Sydney’s. These days you’re lucky to find a rental yield as high as 3% - which, even in these days of low interest rates, is unappealing.
Other capital cities like Adelaide and Brisbane have much better yields on offer, but for investors seeking properties that can pay their own way the pickings are slim.
There was a time when investors could access double-digit rental yields in resources-related locations (if they were willing to disregard risk). But many of those markets have collapsed, either through developer over-supply or the impact of FIFO workforces or the mining downturn - or some combination of those three factors.
There’s nowhere left that provides 10%-plus rental yields. Some of the more careless research houses publish lists claiming you can get 15% or 20% yields in certain locations, but those are statistical aberrations that prove the adage about “garbage in, garbage out”, exacerbated by researchers with a garbage approach to business ethics (as long as it generates publicity, to hell with accuracy).
A recent list claimed you could get yields above 30% (!!) in Mission Beach in Queensland, when in reality typical yields on residential property in this location are below 5%. If 30% yields were truly achievable, every investor in Australia would be stampeding north and buying every property in sight.
The best yields you can find anywhere in Australia – I mean genuine rental yields based on real situations, not computer glitches, in locations of substance – are to be found in Cairns.
Cairns is one of a number of regional Queensland cities where you can readily buy property that pays its own way – i.e. cash flow positive or at least neutral.
In the North Queensland city, you can find plenty of houses with rental returns in the 5.5% to 6% range and apartments between 7% and 8%. I can’t find another market of substance with rental yields that strong.
Other regional cities in the state offer attractive returns as well. The Sunshine Coast, Townsville and Hervey Bay have this in common: houses where yields are typically in the 4.7% to 5.5% range and units that generally range from 5.7% to 6.5%. If you hunt around, you can find better.
The other common things they share are strong economies, growing populations, major spending on infrastructure, ambitious local councils and plenty of affordable dwellings. They’re all on growth paths, some of them after long periods of under achievement.
Some, like Cairns and the Sunshine Coast, are transition economies, where civic and business leaders have recognised that the historic reliance on tourism makes them vulnerable to downturns caused by forces beyond their control. So they’ve been proactively working to broaden the economic base and encourage new industries.
The Sunshine Coast now has a medical sector that didn’t previously exist, based on the $2 billion University Hospital which is generating all kinds of new medically-related development around it. It’s helping the Sunshine Coast become a regional city, rather than a coastal retreat for tourists and retirees. Similar things are happening in Cairns and, to a lesser extent, in Hervey Bay.
These property markets are starting to deliver good price growth and strong rents, with yields far in excess of what you can get in any of the capital cities.
Terry Ryder is the founder of hotspotting.com.au. You can email him or follow him on Twitter.
