Where to find Australia’s best High Yield capital city suburbs
Last week I looked at three regional towns currently delivering strong rental yields with good prospects for future capital growth. This week’s blog highlights three capital city areas with promising investment profiles for strong rental return and capital growth prospects.
Units, over houses, are generally performing better across the board in capital cites.
Brisbane – City
· Yield: up to 7% (units)
· Vacancy Rate: 4.5%
· Growth (1yr/3yrs/5yrs): 0.11%/3.33%/1.09% (units)
Sources: RP Data, SQM Research
Why Invest: The Brisbane market has now entered its next growth phase after a period of decline. Investors have the opportunity to buy-in at very affordable prices, considerably less (up to 45%) than the Sydney and Brisbane medians for quality inner city units.
Brisbane has been undergoing transformation in recent years and along with fantastic weather now counts world-class culture, entertainment and dining options among its draw cards. It’s also investing heavily into infrastructure with $132 billion of projects planned between 2010 and 2014, with a significant focus on improving transport.
Queensland is also one of Australia’s most resources-rich states with a massive LNG export industry that’s only in its early phases of development, further strengthening the state’s industry with significant flow-on effects to Brisbane.
Top tip: Investor demand is most definitely on the rise in Brisbane – apartment sales in 2013 almost doubled that of 2012. Get in now and make the most of the current affordability and opportunity to maximise growth. Look for boutique apartments with unique features.
Risks: Apartment oversupply is an issue in Brisbane, as it is with many Australian capital cities. This could result in slow rental and capital growth, and high vacancy rates in the short to medium term until supply is absorbed.
Sydney – Western Suburbs (e.g. Whalan, Mt Druitt, Lethbridge Park)
· Yield: 6-7%
· Vacancy Rate: 0.7%
· Growth (1yr/3yrs/5yrs): 15%/35%/34% (Averages)
Sources: RP Data, SQM Research
Why invest: Sydney’s market has boomed in recent years prompting investors to look outside the usual inner city areas – which have reached unaffordable heights – to suburbs where they can secure decent sized blocks for renovation or development and where the low buy-in can facilitate good yields.
While not considered highly desirable locations to live in the past, suburbs such as Whalan, Mt Druitt and Lethbridge Park, which all fall within the local government area of Blacktown, have emerged as areas worth further investigation for these very reasons. Despite the LGA’s rapid population growth – a 25% increase over the last 10 years – median property prices range from just $270,000 for a unit to $410,000 for a house across Whalan, Mt Druitt and Lethbridge Park.
They might be 40km from Sydney’s CBD, but transport connections are excellent which is one of the area’s most desirable features. There are direct rail lines to central station and close access to major motorways. Vacancy rates are extremely low at 0.7% and the area is very popular with families.
Top Tip: These outer suburbs are ripe for renovation projects and larger blocks mean the addition of granny flats to increase income are also worth considering.
Risks: Sydney’s capital growth over recent years has been huge and is now slowing. A ‘crash’ is unlikely but investors should be aware that growth will more than likely to be slower than recent years and this is cash flow investment rather than a capital growth investment.
Perth – City of Bayswater
· Yield: Around 5-6% for units
· Vacancy Rate: 1.9%
· Average Annual Growth: 10% (houses and units)
Sources: RP Data, SQM Research
Why invest: It has been reported that slower growth, sales and rising vacancy rates suggest that Perth’s booming property market is softening and maybe reaching – or have already reached – its peak. However, this doesn’t mean good yields can’t be found in certain pockets within the city.
Bayswater council – which includes the suburbs of Bayswater, Maylands, Morley and others – has plenty of highlights. It’s just 7km from the CBD, the Swan river is on its door step, there are excellent bus and rail connections and a lively cultural and entertainment precinct in neighbouring suburb, Mount Lawley.
Top tip: Morley looks to be one of the most interesting of the suburbs within Bayswater due to its recent and future development. Despite not having its own train station, unlike some of the other Bayswater suburbs, it has superb bus infrastructure – the CBD is only around 15 minutes by bus. Major roads are also easily accessible and the light industrial area in Ashfield, under development, is within a couple of kilometres.
In 2011, the $60 million Coventry Square, Perth’s biggest markets complex, opened in Morley, creating a major tourist and entertainment destination.
A masterplan for the further development of the Morley city centre has also been approved. The plans include a new central park, improving public transport, upgrading streetscapes and public spaces, and making streets more pedestrian friendly.
Risks: The Bayswater area has experienced good capital growth in recent years and could slow based on the broader market indications for Perth.
High Yield locations in Australia and where to find them
Below are my top three high yield location recommendations.
While these can change monthly, they have been and are currently performing and in my expert opinion, look like they will continue to perform well.
- Yield: up to 9% – 10% (units are currently attracting the best yields)
- Vacancy Rate: 1.9%
- Growth: Flat to negative
Source: RP Data, SQM Research
Cairns, the gateway to the Great Barrier Reef, should be back on investors’ radars following the announcement of the proposed $8.15 billion Aquis Great Barrier Reef Resort development in the northern end of the town.
Why invest: While the proposed Aquis resort development still requires some approvals before construction can begin, it’s already having an impact on the local market. The proposed 343ha development features eight hotels totalling 7500 rooms, two casinos, a golf course, shops, an aquarium, theatres and more.
According to plans, the first phase of construction will create 3,750 construction jobs and 11,000 operational jobs. The second stage will create 3,500 construction jobs and 9,000 operational roles. Its location is 13km north of Cairns, just outside Yorkeys Knob.
Top tip: While the suburbs closest to the proposed development have experienced a sudden surge in demand, the locations to look at now are those in the southern Cairns area where property is more affordable, while still benefitting from the project and producing decent yields. Suburbs such as Woree, where units are currently delivering 10% yield, have a number of schools and other local amenities, which add to the appeal. Once the Aquis project has final approval, the market is expected to take off in a big way and those seeking to maximise capital gains, as well as yield, will need to weigh up the risks and get in quick.
Risks: The obvious risk here is what will happen to the market in the event the Aquis project doesn’t receive final approval? Cairns has a robust tourism industry and purchasing in an area that is less reliant on the Aquis attraction as the main drawcard (such as those with schools) and with a large proportion of owner occupiers will help minimise any negative impact should the project not come to fruition.
- Yield: 8-10% (houses)
- Vacancy Rates: 6.1%
- Growth: -20% since 2011
Source: REIWA, SQM Research
Why invest: Despite having undergone a significant house price correction over the past two years, rental yields in Karratha have remained relatively strong, and well above the national average.
The drop in property prices is now providing investors with an ideal opportunity to access the market at the bottom of the current cycle ahead of expected upward swing as the population continues to grow and absorb current supply on the back of developing local & resource infrastructure projects over the coming 18 months..
Recent news that the development of Anketell Port is progressing through initial approvals should help further ignite the market and stimulate population growth once in full swing.
The WA government has unveiled a master plan for the multi-user, multi-commodity deepwater port which is to be located just 30km from Karratha. The plans would see Anketell have an eventual export capacity of more than 350 million tonnes a year. This would be more than double the total exports through the nearby Dampier Port and 20% larger than shipments at Port Hedland, placing it as Australia’s biggest export facility. The government estimates the project would create 4,000 construction jobs.
Major investment into civil infrastructure in Karratha is also underway to redevelop and revitalise the town and support the projected population increase.
Fundamentally, Karratha remains the service centre for Chevron’s Gorgon LNG project – Australia’s largest ever single resource natural gas project – and
Woodside’s Pluto LNG project – both which have lifespans of 40 years.
Top tip: Take advantage of the current low prices to maximise capital growth and secure a quality property that will appeal to the corporate leasing market.
Risks: Resource towns can experience higher volatility and relatively short market cycles, compared to capital cities. Investors should have a comprehensive strategy in place focused on investing for the medium to long term to ensure they’re financially prepared to withstand volatility periods.
- Yield: 9-12%
- Vacancy Rates: 3.7% and declining based on current trend
- Growth (1yr/3yrs/5yrs): -6.38%/16.79%/56.86%
Source: RP Data, SQM Research
Why invest: South Hedland is a major residential area forming part of the economic powerhouse that is Port Hedland. Port Hedland is now the largest bulk commodity port in Australia, used predominantly by iron ore giants BHP Billiton and Fortescue Metals Group. Both companies have invested billions over recent years to upgrade and expand port infrastructure to facilitate a ramp up of exports. The town’s next mega project – rail and port infrastructure for Gina Rinehart’s $10 billion Roy Hill iron ore project – is now underway.
Investment into civil infrastructure has also been significant in South Hedland. A new town centre, waterpark and sports stadium, among other projects, have all helped create a very desirable lifestyle and multiple commercial opportunities.
In just three years, Hedland’s economy has grown by more than 60% and the rapidly increasing workforce has resulted in a population surge. The town counts 20,000 residents today, rising around 30% in just five years.
Port activity remains strong with Roy Hill ramping up development of its rail and port infrastructure. Port expansions have also been flagged by both BHP and Roy Hill.
Top tip: The recent slump in house prices has provided good buying opportunities and has an opportunity to buy in low ahead of the next upswing. Whilst the town throughout the recent slowdown has continued to benefit from nation leading rental returns as high as 12% on large family homes.
Risks: Capital growth is likely to be slow in the short to medium term as the market moves through the current cycle. Investors should also take note of the current residential development pipeline which and avoid buying older properties in the town.
How to find a hotspot… before it becomes a hotspot!
Imagine as property investors if we could predict the future!
We could identify the best hotspot locations around the country before they happen and hey presto – instant growth!
The problem with property hotspots is that once they become widely known as hotspots, investors flood in, prices rise and the best opportunities for maximising rapid growth have usually passed.
The key to finding a hotspot ahead of the rest is to identify areas which are experiencing a dynamic shift in population or growth trends, resulting in upwards pressure on rents and house prices.
How do you find such places?
Consider these factors when doing your research to identify the next hotspot before everyone else does.
Infrastructure investment. In metro areas, suburbs experiencing population growth are likely to be those undergoing urban revitalisation or new development. Regionally, large industrial infrastructure projects will bring with them large construction and ongoing operational and maintenance workforces.
Location. Look for areas with good transport connections – easy access to trains, buses, airports and key roads for example – close to schools or with good connections to the CBD. This will ensure the area is attractive to a wider population demographic.
Neighbouring areas. Areas already well known as hotspots, where demand continues to outstrip supply, pressure can cause spill over into adjoining suburbs and towns in close proximity. This means suburbs surrounding an area that’s in high demand may also start to benefit from house value and rent rises as buyers and renters overflow into these next closest locations.
Demographic appeal. Certain city suburbs will also appeal to certain demographics. In metro areas the FIFO worker population, for example, often prefers to live close to the airport, tertiary students close to universities and families close to schools, creating ongoing demand for housing in those areas. The best locations however are generally those that appeal to a wider demographic – from students to workers and families.
Industrial growth. In regional towns, strong population growth derives from industry growth. Towns on the verge of a population boom are those most likely to create positively geared property markets due to sharply increasing rents as demand for accommodation from the rising workforce outstrips supply.
New projects and workforce numbers. Look for areas where new projects have been committed and establish the proposed temporary and permanent workforce numbers. Identify where these workers will come from (how many will relocate from other areas) and how they will be accommodated. Consider that some companies may supply their own temporary worker accommodation villages which reduce the impact that workforce numbers can have on a town’s housing supply.
Multiple projects. For risk mitigation purposes, it pays to choose towns with multiple projects to reduce the impact project closures may have on the population. Consider the level and timing of future infrastructure spending and the size and diversity of the proposed projects in the area. Also investigate the financial strength of the key companies operating in the area and expected duration of any expansion works.
Population trend. It’s also important to examine the population trend to determine the sustainability of any increase. If a town’s population shows a historical downward trend then there is likely to be housing over supply which means the arrival of a new workforce will have less impact on the market.
Population trends and a variety of other useful information that will assist with your property research can easily be accessed from the Australian Bureau of Statistics (www.abs.gov.au).
Housing supply. Investigate the level of new housing development currently being undertaken in the area and if the current level could affect the demand/supply imbalance when it comes online.
Occupation and income. As a general rule, the more people earn, the more they will spend on housing. In metro locations, identify where there are growing populations of professionals and high income earners as they are likely to be contributing to increasing rents and house prices. Regionally, increasing numbers of FIFO and DIDO workers – one of Australia’s most highly paid groups – are a sure sign that rents and prices are on the rise, particularly if workers are being accommodated in town housing. Another precursor of a market increase within resource towns is whether major companies are offering subsidies to employees who purchase within the town. Company-backed home ownership is a sure sign of increasing strength and activity in the marketplace.
Landlord types. Look for areas where government housing is low. Areas with high numbers of owner occupiers can also be beneficial as it generally means better street aesthetics and neighbourhoods, helping to boost values.
Vacancy rate. Check the town or suburb’s vacancy rate. A low rate indicates an undersupply, a high rate indicates an oversupply. A consistent increase in population suggests that (if new development is constrained) supply will struggle to keep up with demand putting pressure on rents.
Beware the median price statistic. Rises and falls in average house prices can be grossly distorted. They can be dragged up by a handful of sales at the higher end of the market or dragged down by a string of sales of lower priced properties. Median house price growth/falls are not an accurate reflection of the market and do not mean that every house in that area has increased/decreased in value.
Property selection within a hotspot. Choosing a property that will appeal to the area’s demographic and the type of tenant you want is the final step. Talk to local property experts to determine what types of housing are in greatest demand and if there are any particular streets to avoid. In resource town hotspots there is an increasing trend towards new, well located properties such as luxury lifestyle apartments and large houses close to the ocean or town centre. Blue chip companies prefer this type of housing as it ensures they attract and retain their desired workforce.
Yield and capital growth. Gain advice from local property experts to gauge the rent you can expect for a particular property, the level of demand for the area and where the market is in its property cycle. This will allow you to determine what return you can expect over your intended holding period.
Each and every year hotspot towns emerge around the country with the ability to pay large dividends to investors willing to spot the signs, research the areas and ultimately purchase in a location that ticks all the hotspot boxes.
Take these factors into account when conducting your research and give your next investment purchase the best chance of featuring in the next emerging hotspot!
Central Queensland: The New Frontier for Positive Property
The trends that have characterized the positively geared property markets of the Pilbara boom towns can now be identified in the resources hubs of Central Queensland, providing investors with opportunities for portfolio diversification.
Over the past decade, the development of large resource projects, significant infrastructure investment, sharply increasing workforces, massive demand for accommodation and a severe undersupply of rental stock have caused both rents and house values in the Pilbara towns of Hedland, Karratha and Newman to skyrocket.
The Pilbara’s major iron ore and LNG projects are now in their operational phases. Housing markets remain strong and continue to deliver investors leading rental returns but growth is stabilizing to more sustainable trends.
In contrast, Gladstone, Central Queensland’s industrial centre is very much in development. An established Alumina refinery has contributed to a healthy rise in house prices over the last several years, but its coal and LNG industries are still in their infancy.
Three LNG projects are currently in construction and another 14 infrastructure projects are in the pipeline (coal terminals, additional LNG and other mineral processing facilities). The value of these projects totals $105 billion – dwarfing Port Hedland’s $12 million, the Pilbara’s top town for infrastructure investment.
Moranbah is the Bowen Basin’s coking coal hub and services more mines than any other town in the country, drawing comparisons with Newman’s proximity to the Pilbara’s many iron ore operations. Moranbah has also seen its housing market strengthen following the commodities boom. It has $15 billion of approved and planned projects, including 14 coal mines to add to its existing 14.
While current and anticipated development in both towns is unsurpassed in Australia, investors will be aware of the softening of the market in recent months – a result of an increase in land availability and new residential development.
However, a combined $120 million in current and planned projects, a diversified long term commodities industry and projected population growth which is unlikely to be met with sufficient housing supply, they continue to make a strong investment case for the positive cash flow investor.
100 Billion Reasons to invest in Gladstone
With over $100 billion in infrastructure projects planned or under construction, the city of Gladstone in Queensland can be aptly described as a super infrastructure location for property investors.
Infrastructure investment has historically been a key driver in property values because it results in a rising demand for homes as well as higher living standards. For example, the massive new infrastructure investment in Gladstone is predicted to create a demand for an estimated 8,100 new dwellings by 2018.
Gladstone is now a key hub for the growing energy sector in Queensland and as a result is attracting massive overseas investment both in coal and LNG.
The Port of Gladstone is Queensland’s largest multi-commodity port and the fifth largest multi-commodity port in Australia. It is now the world’s fourth largest coal exporting terminal with coal making up 70% of the total exports from the port. To help cater for the increasing level of coal exports from Gladstone, approval was recently given for the $2.5bn Wiggins Island Coal Terminal Stage 1 project.
In addition to coal, Gladstone is also the centre of a rapidly expanding LNG industry. LNG emerged as a major industry in the city in 2010 with the approval of BG Groups’ $20bn Queensland Curtis LNG (‘QCLNG’) project on Curtis Island, across the harbour from Gladstone. A few months later in January 2011, Santos approved its $18.5bn Gladstone LNG (‘GLNG’) project also on Curtis Island.
This was followed with Origin approving the first stage of its $23bn Australia Pacific LNG (‘APLNG’) project in July 2011 with the second stage further approved a year later. It is estimated that the potential of Gladstone’s LNG industry is capital expenditure totalling $70 billion and thousands of new jobs.
For investors taking a long term perspective of the property market, it is important to understand why Gladstone is attracting such a large level of investment and why it will continue in the future.
International companies are now pouring billions of dollars of new investment in Gladstone because of the surging demand for energy in the world – a demand which will continue well into the future.
This trend has been underlined by the latest predictions by the International Energy Agency (IEA) in its 2012 World Energy Outlook Report.
The IEA predicts that global energy demand will grow by more than one-third over the period to 2035 with China, India and the Middle East accounting for 60% of this increase.
Over the coming two decades, there be ongoing challenges to meet this growing world- wide demand for energy and that is why key energy hubs such as Gladstone will continue to attract the large infrastructure dollars and projects.
For investors seeking property in an established location, offering mining town rental returns in a lower risk environment – Gladstone should be given serious consideration during the coming year.