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.
New Infrastructure Investment Signposts Continued Confidence in WA Mining Towns
Property buyers can get a good forward indicator of future trends in mining towns by looking at investment in key support infrastructure such as airports.
Airports are now the life blood for mining towns as they are used to transport people, equipment and supplies to these remote regional areas.
It was therefore very significant that Qantas has just announced a major multi million investment in its Perth terminal to cater for future demand resulting from the resources boom.
Qantas has invested heavily in regional WA, having expanded QantasLink and Qantas capacity over several years and is now operating more than 280 return flights with 75,000 seats to regional WA every week.
According to Qantas chief executive Alan Joyce, the airline recorded double digit growth annually over the last five years in WA and believes growth will continue at a rate of 10% for the foreseeable future due to the resources boom.
As a result of this growth, Qantas is enhancing facilities in Terminal 4, its dedicated terminal at Perth airport, and from February, Qantas will expand its operations into the adjacent Terminal 3.
Looking to long term trends, Mr Joyce supports the need for a third – and second parallel – runway at Perth to handle rising future air traffic demand flowing from the growth in the resource sector.
With major companies such as Qantas now investing for future growth flowing from the long term expansion of the resources sector, it only makes sense that property investors should take their lead by investing in housing which is also a major support service.
In late 2012, property investors were bombarded with negative news about the end of the mining boom based on a slump in iron ore prices.
However, this slump only proved to be a temporary phenomenon with the benchmark price of iron ore now above US$140 a tonne.
Strong commodity prices will see a rebound in investment in mining regions during 2013. This trend is already underway with Fortescue Metals announcing that it will recommence expansion of the Kings deposit at the Solomon mine hub after it was suspended late last year due to low iron ore prices.
This increasing investment comes at a time when exports of iron ore from the Pilbara are already at record levels. Some 25.999 million tonnes of iron ore was shipped from Port Hedland during last month – the highest monthly trade in its history.
Therefore, the outlook for the Pilbara real estate market in particular, looks very positive as we enter 2013 and property investors in the region can look forward to rising capital growth rates and returns based on continued new investment in the region and support services.
WA Resource Sector Bucks Trend & Grows By $12 Billion
The latter half of 2012 has seen an unprecedented amount of bad publicity surrounding the resource industry in Australia.
However, when one takes a closer look at the state of our country’s largest income stream, the Western Australian economy continues to show signs of strength and growth.
Of particular importance was the Deloitte Access Economics quarterly investment monitor for the September 2012 quarter which shows that total planned or existing investment in Western Australia stands at $281 billion – an increase of $12 billion over the past year.
These figures underline the fact WA’s resources sector is not a boom and bust economy but rather a growing sector which is often misunderstood.
Deloitte director David Rumbens said WA’s economic future based on these investment figures seemed assured for some time to come.
“Even with few new approvals, resources projects under way will keep construction activity in the West humming along at heightened levels for several years yet,” he said.
The reality is that short term fluctuations aside, the growing demand for our resources from both China and India will continue to power the WA economy for many decades to come. For example, The World Bank still foresees China overtaking the US as the world’s largest economy by 2030, if it maintains an annual growth rate of 8 per cent.
While a large amount of the recent negative publicity has focussed on the European economies, it is important to remember that Australia’s economic fortunes are tied to Asia.
One simple figure puts this into perspective – by 2025 or just over 10 years, it is estimated that there will be 221 cities in China with a population of over 1 million, whereas today in the whole of Europe there are just 35 cites with this population.
Overall, it is expected that 350 million Chinese will migrate into cities by 2025 with over 103 million having already made the move since 1990. As a direct result of the expansion of Chinese cities, it is predicted that 50,000 skyscrapers (+30 stories) will be built – the equivalent of 2 Chicago’s every year during this period.
In addition it’s important to consider the continued industrialisation of India which has a population of 1.2 billion people. Over the next decade the demand for steel is expected to soar in India and this will help to underpin the demand for resources such as iron ore.
The Western Australian Iron ore region is already beginning to see increasing activity by Indian companies in the resources sector and this trend is set to increase over the coming decade.
The Pilbara Region offers more than the average mining town, with astute positive property investors gaining the opportunity to participate in what will become the counties greatest resources era experienced to date.