By Herron Todd White
The Darwin property market, on the back of a sustained period of contraction from 2016 onwards, is still suffering across all facets of the residential market and the investor segment is no different. Several factors directly affecting this range from the tightening lending practices aimed at interest-only loans, contraction of capital values, population decrease and a general oversupply of both unit and dwelling stock. These aspects are troubling however it is a general consensus among all professionals in the property industry that a dramatic correction needed to occur to cool off the over inflated house prices and rentals.
For standard dwellings, rental yields generally sit at 4.6% (source: REINT, June 2019) which is slightly above the average seen in other Australian capital cities. During the peak period of the recent mining boom, high rents on corporate long-term leases reflected yields of 7% to 8% which were driving strong investor demand. Since this period, we have seen a dramatic contraction in terms of annual returns and a greater chance of minimal capital growth. Investor activity in this segment, as a result, has dramatically declined, with a small percentage of investors taking up the Defence Housing sale and leaseback scheme. The scheme offers a long term nine-year plus three-year term at a yield of approximately 5.2%. This guaranteed income provides an attractive option where vacancy rates and the possibility of rental price weakening may be a determining factor. The trade-off is a high management fee of 16.5%.
With regard to unit stock, traditionally investor activity in Darwin has been directly linked to large gas and mining projects requiring accommodation for transitory workers. These long-term leases with attractive yields have certainly diminished with the completion of the construction phase of the Ichthys Inpex Gas Project in late 2018. This type of investment did achieve quite high yields, however obviously at higher risk. The median unit price in Darwin now sits at $325,000 which is 15% lower than mid-2018 however the transaction levels have improved by a similar percentage. These factors may indicate there is some faith returning to this section of the market.
With every situation, there is a silver lining and generally low capital values present many opportunities for investors looking to purchase in the Territory. In addition, the latest results for residential dwellings across the entire Darwin market have shown a stable median price of $500,000 (from mid-2018) which does indicate the market is slowly returning to a healthier state. This is mirrored in transaction volumes improving slightly by 5% from June 2018 (source: REINT, June 2019). For investors looking to take advantage of weak prices, Darwin CBD has the most options available. Dated one-bedroom stock can be purchased from the early $100,000 mark which is almost half the price at the peak of the market in 2014.
An entry-level unit of this type would typically rent for $230 per week which translates to an extremely attractive gross rental yield of 9.5%. At a step slightly higher in value, a recent three-bedroom, two-bathroom sale of a semi-modern inner-city unit in Stuart Park sold for $265,000. This unit sold with a gross rental yield of 7.8%, a strong indication that there are opportunities for investors to get a solid return on investment. These returns in the private sector are subject to market movement and susceptible to the particular terms of the landlord and tenant, factors which must be taken into account. These types of leases are typically for periods of one year, with management fees of around 8% to 12% per annum.
So how does Darwin fare for investors? Looking purely at returns, Darwin does offer attractive options being on average slightly stronger than the other capital cities (source: Core Logic, April 2019).
The economic downturn has made a significant change in the property landscape, greatly decreasing values across the board and therefore increasing the opportunity for a good buy. Coupled with traditionally strong rentals, we do consider Darwin a good place for investors if they are willing to put the time and effort into researching the prospective purchase. Southern investors wishing to chase a capital return may face some dilemma however, with limited growth expected in the short to medium term.
Speak with a Darwin Mortgage Broker today.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.