Rental Update

Decreasing Vacancy Rates Are Good News For Property Investors

Rental returns are rebounding in many parts of Australia, delivering investors a welcome bonus. Two years ago, it was a very different story. A flood of investment properties coming onto the rental market led to soaring rental vacancy rates and declining returns.

Softer investor activity in 2005, coupled with increased construction costs, has reduced the pool of rental properties and residential developments in key investor markets around Australia. Around the country, growing rental demand has seen rents firm.

Buyers Back Off

While property remains a popular asset class, many investors have sat on the sidelines this year awaiting the Reserve Bank of Australia’s (RBA) next move. Slower growth in house prices and the comparatively strong performance of the stockmarket has also shrunk the pool of potential property investors.

The irony is that as investor activity wanes, returns are improving as supply and demand becomes more balanced. This in turn is helping to put a floor under the investor market. The latest Australian Bureau of Statistics (ABS) lending finance figures show that nationally, approvals for rent or resale property investment increased by 2.2% in February.

Tenants Feel The Bite

As fewer investment properties become available for sale, demand begins to exceed supply. This is exactly what has happened over the past 12 months in key capital cities around Australia. Vacancy rates in most capital cities have fallen below the balanced market rate of 3%. By contrast, two years ago vacancy rates of 4-5% were common.

Forecasters are predicting median rent increases of 5 to 15% this year, although the lag between tightening vacancy rates and rent reviews means that significant rent increases will probably not occur until mid-next year.

New South Wales: Vendor Tax Blamed For Investors Retreat

Sydney’s residential vacancy rate for March was 2.2%, the lowest in five years. The rate is even lower in the inner and middle suburbs.

The Real Estate Institute of NSW (REINSW) predicts that vacancies will continue to fall and has even warned of a crisis in Sydney’s rental accommodation. Rental accommodation shortages are also being reported in Newcastle and Wollongong.

The REINSW says that the vendor tax on investment properties introduced last June has caused a slump in investor activity and the number of rental properties becoming available.

On a positive note, the slowdown in supply should help stabilise the high-rise apartment market. Latest ABS figures show apartment approvals for NSW were down 48% in March. This drop in new supply will give the market a chance to absorb the influx of stock built during the boom, particularly in inner-Sydney.

Forecasters have predicted substantial rent increases from the start of next year, helping to offset the vendor tax . According to figures for December 2004 quarter rents for two-bedroom, inner-city apartments rose nearly 3%.

Victoria: Melbourne’s Apartment Supply To Peak

Melbourne’s vacancy rate for the December quarter was 3.8%, one of the highest in the country. And it could go higher as the supply of inner-city apartments peaks. Much of the stock bought off the plan during the boom is soon to be completed, with 3,600 apartments due for release this year.

However, the Melbourne rental market will eventually stabilise. Capital growth is expected to follow, although this could take at least five years. Demand for new apartments is increasing as the cultural shift to city living progresses, helped by rising numbers of overseas students and immigrants who are more likely to choose high-rise living. Meanwhile, planned construction has already fallen to sustainable levels in response to over-supply warnings.

In Melbourne’s inner suburbs, agents are reporting rent increases and vacancy rates of 2%. By contrast, regional Victoria is experiencing increasing rental demand, with a vacancy rate for the December quarter of 1.7%, less than half that of Melbourne.

Queensland: Supply Down, Rents Up

According to the Real Estate Institute of Australia (REIA), Brisbane’s rental vacancy rate for the December quarter was 2.7%. The median rent was up 3.6% over the same period.

Moreover new apartment approvals declined 10% in the March quarter. This growing imbalance between supply and demand is expected to drive up rents and with them, rental returns. Independent analysts BIS Shrapnel predicts rents for inner-city apartments will rise 12% this financial year.

The market is even tighter in the state’s regional hot spots, such as Townsville, where agents report vacancy rates between 0.5 and 1.5%.

Western Australia: Interstate Migration Drives Demand

A recent REIA survey found that Perth offered higher property investment returns than any other capital city. The national residential index showed that returns for a three-bedroom house in Perth increased 16% in 2004, well ahead of both Sydney (up 0.4%) and Melbourne (up 5.5%).

Perth’s vacancy rate decreased in the December quarter more than any other capital city - falling 1.2%, to 2.7%. Demand is being sustained by higher interstate migration, a by-product of Western Australia’s booming economy and very low unemployment.

Outlook Patchy In Other Cities

In Adelaide, apartment rents grew 3.1% in December quarter, in line with a very low vacancy rate for the city (1.9%).

Conversely, Canberra’s vacancy rate for December quarter was a high 5%, according to the Real Estate Institute of ACT. Increasing land tax has contributed to falling rental yields, although these remain higher than yields for Sydney.

It remains to be seen whether the demand exists to meet expansions of investment markets in Hobart and Darwin, where new developments are planned for construction this year.