By Herron Todd White
The last few weeks has seen an increasing number of COVID-19 community transmissions in Melbourne and then Sydney. Whilst, at the time of writing, Sydney has not seen a return to the lockdowns experienced in March and April, there is no doubt consumer confidence is again starting to decline as a result of an apparent ‘second wave’.
Home values across Sydney have continued to decline over the past month, dropping by 0.9% over that time according to CoreLogic. Whilst values are still up by 2.8% since the beginning of 2020, if the current trend continues, it would mean prices falling a further 5 to 6% by the end of the year.
Auction numbers and new listings continue to remain fairly strong for this time of year, although auction clearance rates have eased to around 60% over the past few weeks. The clearance rate at in the same period last year was above 70%, although with a lower number of auctions, as the market began its recovery at the time.
And now onto the property investors playbook.
The residential property investor market has had some significant hurdles placed in front of it in recent years. Tougher lender and regulatory requirements around investor loans, and the threat of removal of negative gearing and capital gains tax allowances prior to the federal election in May last year, significantly reduced the number of investors looking to get into the market. As these lending restrictions eased and the threat to tax allowances was extinguished, the investor market began to recover along with the wider market as prices started to rise.
That recovery has now come to an abrupt halt as a result of COVID-19, as asking rents have fallen sharply, while vacancy rates have climbed, across many parts of Sydney.
According to CoreLogic, across the financial year to June, Sydney dwellings saw an average 16.7% return with 13.3% of that through capital growth. Houses enjoyed a 17.7% return with 14.5% capital growth, while units had a 14.7% return with 10.6% of that being capital growth.
However with prices now falling and rental yields also under downward pressure, returns in the current financial year are likely to be significantly leaner.
As can be seen from the table below, vacancy rates in the Inner and Middle ring suburbs have been particularly hard hit since March, while the Outer suburbs have continued to see a tightening vacancy rate.
The Inner ring suburbs have seen an increasing supply of properties, particularly units, as previous holiday-stay properties were switched over to the long term rental market, and new unit completions have continued to hit the market. New unit completions are also impacting supply in some middle ring suburbs.
Demand levels are not increasing at the same levels as supply as immigration has been stopped and is likely to be impacted for some time to come. Demand from international students has also dropped dramatically as a result of COVD-19.
With values at the lower end of the market holding up better than other price points, and vacancy rates continuing to tighten in the outer ring, Western Sydney is looking like the best place for investors for returns in the short to medium term.
Agents within the inner city/east are reporting only a slight drop in listing numbers for owner occupier type properties, with an increase in off market activity within this market segment. However, investor activity appears to have dropped sharply, particularly in more homogenous medium and high density areas such as Haymarket, Zetland and Forest Lodge. This is largely driven by declines in rental demand pushing rents lower and therefore reducing overall returns. According to SQM Research residential vacancy rates for Zetland peaked in May at a record high of 6.0 per cent and have slightly reduced to 5.7 per cent throughout June. A similar trend can be seen at Mascot with vacancy rates peaking in June at 7.4 per cent as per SQM Research. Across the city within the inner west suburb of Pyrmont house rents fell by 11.8 per cent over the past year (Domain).
The sharp reduction in rental demand within these locations is resulting in lower rents and extended vacancy periods, this ultimately has a negative effect on sale prices given that investors are concerned about rental returns and also whether there will be any upside capital growth in the next few years.
A recent sale of a two-bedroom apartment at 612/149-161 O’Riordan Street, Mascot is a good example of this. Previously sold during April 2016 for $800,000 and has recently been sold during July by the same agency for $790,000. This result demonstrates how investment grade properties within certain high-density locations are performing subpar when compared to owner occupier style properties such as freestanding homes or larger modern townhouse/terraces within the surrounding area. Current asking rents for twobedroom units within the building range from $600 to $700 per week.
Based on what we are seeing, and information from local real estate agents, it appears that more first homebuyers are entering the market which does help increase demand for some of the investment style apartments, however there is still an oversupply of apartments advertised for sale and lease within these locations such as Zetland and Mascot. Going forward it seems unlikely that this trend will significantly improve in the near future particularly while the impacts of COVID-19 are at play.
There are currently opportunities to purchase investment properties at prices similar or even lower than what they were sold for over the last few years, however this is assuming that someone can tolerate the reduced rental income and ‘ride out the storm’ until the market starts to recover.
On a positive note this region of Sydney is always going to benefit from proximity to the CBD, good infrastructure and various services and amenities which make the inner suburbs of Sydney a popular place to live and invest in property. The area is already well serviced for public transport, however the future Metro West and Metro City & Southwest lines will provide additional transport options for some of these inner ring suburbs.
As always we believe that the strongest investment properties over the long-term will be those that are well-positioned, quality-built/designed, lower density developments and freestanding/semidetached dwellings or the older properties that have renovation upside.
Investor activity has certainly reduced on the Northern Beaches as many local suburbs have a strong reliance on the Tourism and Retail sectors. The unit markets in Manly, Fairlight and Balgowlah have seen the biggest reduction in activity, having the largest drop in weekly rents and higher vacancy rates. SQM Research indicates weekly asking rents for units in Fairlight have been slashed from $895 in February 2020 to $690 as of July 2020. Capital values have not declined at similar levels thus reducing potential yields. A recent example of this reduction would be 1/40 Rosedale Avenue, Fairlight. This two-bedroom, one-bathroom unit was recently leased for $600 to $620 per week after being previously leased for $745 per week in 2019.
Investors range from local, out of towners and international buyers. Australia has performed quite admirably against COVID-19, particularly when benchmarking against other countries. A number of agents have noted stronger activity, particularly for housing, from international buyers and expats. As the uncertainty in the global markets make the Australian property market a relatively safer investment, and many expats are looking to reenter the market as an investment that they can turn into their family home should they need to return home. A recent example of this would be 139 Woodland Street, Balgowlah sold for $2.88 million in July through Cunninghams Real Estate with an original asking guide of $2.75 million.
Investors have traditionally been attracted to new units as their investment vehicle thanks to their lower entry price point than houses, location to essential services and low maintenance compared to a detached house in the suburbs. However investors must proceed with caution with many cases of settlement valuations not meeting the original price paid off the plan. This can occur years after the initial purchase has been agreed upon. If you have concerns, our advice is to engage an independent valuer to provide a valuation on the property.
An example from Sydney’s central west is 114/9 Paddock Street Lidcombe, a 2 bedroom 2 bathroom unit which sold off the plan in March 2017 for $810,000 however has now relisted with an asking price of $700,000 to $750,000. Given the amount of proposed units to be built in the local area and the current market conditions this trend will no doubt continue in the short term.
In comparing rental returns of one and two-bedroom units, one-bedroom units in Parramatta have shown a higher annual return than their two-bedroom counterparts, as shown in the table below.
In the south, units in Mortdale and Oatley are still providing reasonable rental returns whilst vacancy rates in these suburbs have remained reasonably low compared to neighbouring suburbs along the railway line, which have had a greater supply of new units into the market. According to SQM Research, the vacancy rate in June for the Mortdale/Oatley postcode was 1.7 per cent, compared to 4.9 per cent in the Penshurst postcode and 4.7 per cent in the Hurstville postcode.
A two-bedroom, one-bathroom, unit with one-car garage, recently sold in Rosa Street, Oatley for $700,000. The 1960’s ground floor unit, with a dated but well maintained fit out, positioned within short walking distance to Oatley village shopping, cafes and railway station. The unit was leased to a long term tenant for $520 per week, providing a rental yield of 3.9%.
The residential investment market is currently in uncharted territory with the Corona-virus pandemic hitting many households. Whilst state and federal government initiatives have helped keep some calm in the market, there is a lot of speculation from property professionals that the longer this pandemic goes for the more stress there will be on both tenants paying their rent and investors paying their mortgages. As a result this potentially could see an array of properties hitting the market within a short period of time which could put downward pressure on property prices.
However, at the time of writing, Western Sydney has experienced a lower impact from COVID-19 in comparison to other areas of Sydney such as the inner suburbs which have a higher apportionment of renters and unit supply.
In the greater west, a popular investment option comes in the form of a house and granny flat which can provide a second rental stream and depending on the location, potential for longer term capital growth. An example of this is 1 Kipling Drive, Colyton, located nearby to St Mary’s which is set to be a major transport intersection linking the existing rail line to the Western Sydney Aerotropolis at Badgerys Creek. The property is a partially updated 3 bedrooms, 1 bathroom on 632 sqm of land. Detached at the rear is a 2 bedroom, 1 bathroom, self-contained granny flat. The property sold in May for $659,000, with a combined rental potential of $700 per week, calculating to a gross rental return of around 5.5%.
As seen in other parts of the city, new units can quite often sell below the previous purchase ‘off the plan’, even after several years. An example of this is 725/1-39 Lord Sheffield Circuit Penrith, a two-bedroom, two-bathroom unit which sold off the plan in February 2017 for $584,000 however re-sold in March 2020 for $505,000. The off the plan purchase was unable to be supported even in 2017.
The investor market across the South Western Sydney suburbs, in particular the Liverpool LGA, is generally very active as it offers a range of investment opportunities across a variety of asset classes.
The rental market is very competitive which has seen rentals stagnate and in some areas fall. The capital growth in property that has historically driven investor interest is no longer prevalent with some asset classes’ showing a decrease in value from the peaks of the 2016 and 2017 period.
Currently on realestate.com.au there are approximately 99, modern two-bedroom twobathroom units available and approximately 160, three-to-four bedroom homes available for rent within the Liverpool LGA.
The entry level of the investment market is driven by affordability and low risk. This is where you typically find your Mr and Mrs Citizen well represented as they are looking to park their savings into the property market rather than in a low interest bank account.
Popular investment opportunities for this market are modern units in the sub-$600,000 range, a single house in one of the modern estates in the sub-$750,000 range, or a house and granny flat set-up. All three property types achieve reasonably safe returns and can come with some tax benefits as well.
Notwithstanding the below examples, duplex pairs and small unit blocks provide additional investment opportunities however they require a larger capital outlay.
A two-bedroom, two-bathroom unit in 12-14 George Street Liverpool sold in March for $460,000, with an assessed gross yearly rental of $20,650, representing a 4.5% yield. However the previous sale in March 2016 was for $519,000, meaning an 11% decrease in value over four years.
A modern four-bedroom, two-bathroom house in a new estate in Edmondson Park sold in April for $730,000, with an assessed gross yearly rental of $26,400, representing a 3.6% yield. Whilst the rental return is not as strong as a unit may be, this type of property traditionally will show superior capital growth.
A recent sale of a house and granny flat in Lurnea in June for $835,000, would likely achieve a gross combined annual rental of $38,400, representing a 4.6% yield.
Moving away from your traditional investment classes, the rezoning of land in the South West, particularly in designated Growth Corridors and the Aerotropolis Precinct has seen property prices skyrocket. For the broader residential market you have most likely missed the boat, but for those lucky enough to have owned land prior to any hint of rezoning taking place, developers are paying well above what could have ever been imagined for these traditionally rural areas. Nowadays these areas are occupied by developers and established land bankers.
A recent sale of a one-hectare site in Austral, sold in April for $2.625 million. The previous sale of this property was back in 2014 for $1.855 million, a 41 per cent increase in six years. Another property in Bringelly sold in May for $2.3 million. The previous sale was back in 2015 for $1.15 million, a 100 per cent increase in five years.
Western Sydney is currently considered the best place for returns, given the varied properties to invest in. We believe a well located house and granny flat provides a great option for their higher yields and depending on the location, future development potential given the land component.
In other parts of Sydney, investors can look to play the long game and bear the short term loss of rents, for the ability to secure a property at a discount, and also take advantage of current low interest rates. There is value across all levels with strong medium to long term capital growth opportunities.
Speak with a Sydney 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.