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.
Conduct due diligence like a property expert in 4 easy steps
I’ve blogged regularly on the importance of research and due diligence when investing in property.
Risk is one of the biggest obstacles to investment for many property investors. Everyone has different comfort levels – some of us are prepared to take greater risks for greater returns, others are happy with lower returns if it means lower risk.
Risk assessment is a critical element of the purchasing process, but how many of us really undertake comprehensive due diligence?
It’s common for investors to get caught up in hype or act hastily out of fear of missing out. As a result, they skip over or rush through their market research and property assessment.
For others, a full understanding of the risks, getting comfortable with them, knowing the worst case scenario and how they would deal with it is the only way they can overcome their fear and take the plunge.
Risk evaluation can seem a very daunting thing. I have provided comprehensive lists of research areas in past blogs. This time, I thought I would suggest a more simplified due diligence process to help make it more manageable. I have split this into two parts. This blog covers the first part – market due diligence. The second part will cover property due diligence and will be the subject of my next blog.
Right, you have your deposit, you know your borrowing capacity and you have your investment strategy in place. You’ve done some initial groundwork and, depending on whether you’re seeking cash flow or capital growth, you think you’ve identified some potential markets. Now it’s time for the nitty gritty.
The four questions to ask yourself when doing your market due diligence:
1. What will drive market growth?
For our investments to deliver us strong yields and/or capital growth, we need demand for accommodation in our chosen area to outstrip supply. This requires us to identify some solid drivers of sustainable population growth. Local and state governments often publish economic reports on towns, cities and suburbs which provide population and housing projections and predict shortfalls. This information is useful but make sure you look at what factors they are using to reach these predictions, when the reports were published and if they match up with your own research outcomes.
Look for as many of the following growth drivers as possible. These factors can all have a positive effect on population growth and will greatly improve the growth prospects of an investment:
· Proximity to good existing or planned infrastructure and appealing lifestyle amenities such as public transport, shopping and entertainment precincts, good schools, parks, rivers and beaches
· Urban development and revitalisation projects
· Industrial development – the more projects the better. Exercise caution with single-project towns – if the project should run into trouble the property market will suffer swiftly and drastically.
Where can I find this information? Information on infrastructure and urban development planning can be found on the local council’s website and the state government’s department of planning website.
2. Where is the market at in its cycle?
It’s no secret that the best time to buy in an area is ahead of the growth cycle. Buying in at the peak means you’ve missed the boat. Suburbs, towns and cities will all go through cycles – it’s not difficult to evaluate if the market is a buyers market (what you want) or a sellers market. You just need to know where and how to access this information.
Where can I find this information? Source historical sales information (for a small fee) from the relevant state’s statutory authority on land information. For example, Landgate if the property is in WA, Land and Property Information if it’s in NSW, Land Victoria etc.
For historical listings data, you should be able to request this from your state’s Real Estate Institute. Run a comparison of the number of properties for sale and the number of properties sold over the last six months, 12 months, two years and five years. This will give you a comprehensive picture of the market’s cycles and what stage of the cycle the market is currently in. An increasing number of listings and a decreasing number of sales indicate the market is in a downcycle creating a buyers market.
3. What residential development is planned?
Any increasing demand for property in your identified area will be greatly softened if you haven’t accounted for increasing supply. Find out what residential development is underway or planned for the area.
Where can I find this information? Information on land releases, development areas, planning applications and building applications can be found on the local council’s website.
4. What type of housing will be most in demand?
To determine the type of rental accommodation that will be most in demand you need to know what type of people make up the local renting market.
Where can I find this information? Council websites and the Australian Bureau of Statistics (though be aware this information can be out of date) can usually provide you with information pertaining to the area’s demographics, type of housing and the proportion of the population that is renting. But to ascertain the demographics of the renting population, you’ll need to speak to several local agents. They will be able to provide you with a profile of typical renters in the area which will enable you to identify the type of housing most likely to be in demand, whether it be houses, units or apartments and whether there is a preference for new or older style accommodation.
5. What is the worst case market scenario?
Understanding and planning for the worst is an essential step for stress-free investing. A solid back-up plan that you can easily initiate if the going gets tough will give you complete peace of mind. The worse case scenario with any property investment is negative growth and a vacant property.
How do I plan for it? Property in general is a fairly low risk and stable investment. Having done thorough due diligence to this point, you should be in a position to make a well-informed decision. But successful and experienced investors know that you still need a plan B. You need to know your financial limits.
For example, if you plan to negatively gear a property, at point would you no longer be able to afford the interest payments if rates were to rise or the rent dropped? Reducing the risk of not being able to afford your monthly payments is one reason why positively geared property has risen in popularity in recent years. But regardless of gearing, how long would you be able to maintain the interest payments with no rental income if the property was vacant? A rule of thumb is to give yourself a buffer in case of emergency by having the equivalent of four weeks rent in a savings account.
Taking the time to work through these key points will arm you with the knowledge and understanding required to make an informed decision on where and when to buy. Investors who do their due diligence stand a much better chance or getting their investment purchases right the first time and creating a successful portfolio sooner.
NEXT WEEK – Due diligence made easy – your step by step guide: Part 2 – The Property
Value adding – how to sniff out instant equity
With many capital cities and regional centres around the country tipped for double digit growth in 2014, it’s time to focus on how to take full advantage of the market and products available to accelerate your equity and portfolio development.
Selecting the right “value add” property is the key to rapidly increasing your portfolio and investment returns.
Homes on blocks with sub division potential
Blocks with sub division potential– allowing you to divide, develop, sell or lease the new property – provide significant opportunity for creating instant equity.
While sub dividing can be highly rewarding, it can also be a very complex process. Thorough due diligence is paramount as there are a number of factors to take into account that will affect the success of the project. These include zoning, access and drainage, among others.
Multiple discussions with the local council and other consultants such as engineers and architects will be required to ensure you meet all relevant government regulations and develop a property that will appeal to the market and make you a profit.
One of the greatest advantages of a house and land package is the instant equity that can be generated. Locking in construction and land prices through a fixed price contract means that in a rising market, any increase in the value of the property between when the contract was signed to completion and handover is to the benefit of the buyer.
It is not unusual to see in well-researched markets that, following the typical five-month build timeframe, the completed property is worth an additional $100,000 over costs to construct.
Purchasing a house and land package early on in your investment journey can provide you with the immediate funding ability to make another investment.
Off the plan properties
With construction of off the plan properties often taking six to 12 months, investors are given an extended timeframe to settle. In a rising market, investors can take advantage of this additional time to generate capital growth. As the property is purchased based on a fixed price contract, any equity the property generates between the deposit payment and settlement is the investor’s capital gain.
Astute property investors can add substantial capital value to older style properties especially if homes in the area are undervalued, run down or rented below the market. When undertaking reno projects, it’s essential to consider the leasing market in the property’s location. The renovations must appeal to the local market if you’re to achieve the full rental potential of the property and avoid overcapitalising.
Mortgagee sales – where banks are forced to sell properties due to unpaid mortgages – can offer excellent opportunities to pick up investments at below market value.
It’s not uncommon to see these types of properties sell for 10 to 15% below the market – the banks are typically desperate to sell and know buyers expect a discount.
Seeking out properties with the potential for ‘instant’ equity will enable you to take full advantage of the rising market, purchase again quickly and give your portfolio a real boost in 2014!
Holidays – The perfect time to plan your next investment move!
Holiday downtime can provide the perfect opportunity to reassess your current investment position, conduct a portfolio and financial health check and plan your next investment move – putting you in the best position to maximise returns in the new year.
Portfolio health check
Take a no nonsense look at each property in your portfolio, how it’s performing and whether it could be improved.
Strategy – First, review your strategy and goals. If your portfolio is not currently meeting your objectives, establish a plan to realign and improve performance. If your portfolio is negatively geared, you may need to revise your approach to focus on positive cash flow investments so that you’re not left out of pocket in 2014. Or, you may need to consider properties that will deliver some instant equity if your portfolio has not been growing as rapidly as you had hoped.
Finance – Are your current products and lenders providing you with the most competitive interest rates and fees? If you’re not sure what you’re paying, request this information from your loan provider and then compare with other products available. Utilise comparison websites and mortgage calculators. If you find better deals elsewhere, use this information to have your broker renegotiate with your current lender first to assess whether they can offer better terms. If not, consider refinancing – it could make a significant impact on your return.
Tax planning – Start preparing your investment property records well ahead of the new financial year to ensure you’re maximising your interest and tax depreciation deductions, and you have recorded any costs that can be used against Capital Gains Tax should you decide to sell in the future. Your property manager is the best person to access and provide you with this information.
Also review with your accountant whether you are utilising the best form of property ownership for tax purposes and your personal circumstances.
Maintenance – Up-to-date maintenance is critical in attracting the right tenants and rent, which in turn maintains the value of your property. Your property manager will be able to tell you what maintenance should be prioritised. Plan out what needs to be done, particularly if a lease is due to expire.
Structure – Is your portfolio structured to facilitate fast growth? Having all properties tied up in a single structure can be a major disadvantage as it often reduces your borrowing capacity and the ability to find better deals with other providers. Consider separating new investments into standalone structures so that equity in each property is protected, enabling you to continue building your portfolio by using a line of credit against the properties which have generated equity.
Equity – Establish what equity your portfolio may have generated by having the properties re-appraised by your local real estate professional. Also consider how some aesthetic improvements or additions could create equity that would allow you to expand your portfolio. Talk to your mortgage broker. This will give you an idea of what you have to work with for your next investment.
Plan your next move!
Spend some time utilising the wealth of free online resources to identify locations which display all the signs of good yields and capital growth. Research key factors such as industrial growth, infrastructure investment and low vacancy rates which suggest a population on the increase.
Investigate specific investment opportunities in your target areas, looking at those close to key infrastructure that would appeal to high salary workers, and calculate the potential yield and growth. Create a shortlist of opportunities and questions you have for the agents and you’ll then be ready to hit the ground running in the new year, giving your portfolio a flying start to 2014.
What re-elected govt means for property investors in WAs mining towns
Liberal government restores stability for WA Property Investors
The re-election of the Liberal government in WA appears to have garnered a positive response from the resources industry, suggesting that it is both content with the level of support it has been given over the past four years and satisfied with the policies the coalition will carry into its new term.
With government support remaining solid for the resources industry and the regional economies that are critical to its operation, the re-election should also provide a sense of comfort and stability for property investors in WA’s northwest mining towns.
The government will maintain its most significant policy affecting the region, the $1.1 billion Pilbara Cities Initiative, which will continue to transform Karratha, Port Hedland and Newman into regional cities. Numerous civil infrastructure, health and education projects have been completed with many still in the pipeline:
The state government, council and private developers (in partnership with the government) have committed $1.1 billion in civil infrastructure projects ranging from the redevelopment of the airport and main highway to the new waste water plan. Community development projects include the revitalisation of the South Hedland town centre, multi-purpose recreation centre and aquatic centre.
As part of the government’s plan to revitalise Karratha as the City of the North, it will benefit from a massive $771 million in civic infrastructure projects with two projects at Karratha Airport underway and a proposed new hospital.
Newman has $70 million in planned civil infrastructure projects such as major sports upgrades.
Although the Pilbara Cities Initiative aims to leverage private investment for the development of new residential dwellings, development is proving slow due to the lengthy planning and application process created by the government’s 2012 Building Act. With the ongoing undersupply of housing in the towns, demand remains high.
The government has also pledged an additional $20 million to the resources industry with funds to be allocated to a variety of programs focused on supporting the sustainable growth of the industry.
It remains committed to its $138million Exploration Incentive Scheme which encourages further exploration for minerals and petroleum in WA and will continue to support the development of the state’s uranium resources. The undeveloped Kintyre uranium project in the Pilbara is one of the world’s largest uranium deposits.
The development of WA’s vast reserves of shale and tight gas, including the onshore development of Woodside’s Browse LNG plant in the Kimberly have also received strong government backing. Woodside will make a Final Investment Decision on the project by June and it will have a major impact on the northwest economy. An onshore facility will open up significant opportunities for property investors in Derby and Broome.
Aside from this ongoing support for resources and regional infrastructure, one of the potentially most valuable policy developments for property investors to have come out of the pre-election campaign is the proposed change to the ‘granny flat’ legislation. The government has committed to changing the residential design codes to allow any tenant – not just family, as is currently the case – to occupy granny flats. It has also increased the allowable floor space from 60m2 to 70m2.
Normal planning requirements around setbacks and density will continue to apply but the change will give investors the flexibility to add a granny flat to their property and increase their rental yield, enabling them to generate hundreds of dollars more each week.
The addition of new policies such as this and the ongoing implementation and enhancement of existing policies focused on supporting mining town economies mean, at the very least, property investors can expect more of the same from their positive properties in WA’s northwest – excellent yields and good capital growth.