By Herron Todd White
Rental yields in Sydney have been on the decline over the past decade, as rents have failed to keep pace with increasing property prices. According to SQM research, average yields for houses in Sydney fell from 3.7% in August 2009 to 2.8% in August 2019, while units fell from 4.9% to 3.7% over the same period.
While prices were rising, investors were happy for the capital growth to offset the declining rental yields. Unfortunately, as prices began to fall over the past two years, rental yields did not climb as expected, as increasing rental vacancies put downward pressure on asking rents.
Obviously Sydney is a large city and rental yields will differ across its many regions. So which regions are currently providing the best average yields? For houses, the Lower North Shore has the highest average yield at 3.5%, while south-western Sydney and western Sydney enjoy a 3.3% yield. On the unit side, the CBD is the clear winner for average rental yield at 4.4%, while the Hills Districts, southwestern Sydney and western Sydney were at 4.1%.
So with yields at ten-year lows across most parts of Sydney, investors are looking at alternatives to the standard house or unit to help improve their potential yields.
Western Sydney Property Updates
In recent years, the humble granny flat has come back into vogue as it allows an investor to maximise the potential yield available on a suburban block of land. Depending on the position of the main dwelling, builders are able to construct a 60 square metre detached granny flat with fast track council approval. Houses with a second area of occupancy are popular with larger multi-generational families, investors wanting a higher-yielding property as well as mum and dad investors wanting some assistance with paying the mortgage or to provide some extra income in retirement.
An example of this higher return is a brick three-bedroom, one-bathroom dwelling renting for $430 per week in Colyton with a detached modern two-bedroom, one-bathroom granny flat rented for $300 per week. This property recently sold for $660,000 reflecting a gross yield of 5.75%.
With the median house price for a three-bedroom dwelling in Colyton at $577,500 (source: realestate.com.au), a rental of $430 per week results in a gross yield of 3.8%. This highlights just why so many people are chasing yield via granny flats.
The appetite for higher-yielding properties is so strong that buyers are willing to turn a blind eye to unapproved structures such as garages, storage areas and main dwellings illegally converted into self-contained flats. Unfortunately for them, valuers don’t turn a blind eye to these modifications and appropriately risk rate and comment regarding these unapproved works.
In the highrise unit world, the emergence of dual key units is proving a popular addition to the investor portfolio. Offering a similar potential dual income, in Western Sydney, these units generally provide a one or two-bedroom unit upstairs with a self-contained studio downstairs with separate access.
The dual key market experiences more limited growth compared to the broader market due to the unconventional floor plan limiting broad market appeal, the restrictive lending policies of some banks to this asset class and changing lending policies towards investment properties by financial institutions.
CBD Fringe Property Updates
Investors within the inner and middle-ring suburbs of Sydney have generally been focused on capital growth, particularly within the recent years of 2015 to 2017 where most properties saw double-digit growth year on year. However, since mid to late 2017, we have seen values decline in most property types and locations across Sydney with certain property types and locations hit harder than others. In addition to this, we are at record low-interest rates and in an environment where capital growth or decent yields are difficult to find.
Investment grade home unit style properties within inner Sydney can generally return gross annual yields in the order of 3% to 5%, however, this is dependent on many of the usual factors that affect property such as location, property type, condition, quality, views and parking. It is also important to remember that these yields are gross and therefore have not been adjusted for outgoings, in particular strata levies which can be substantial, particularly if the unit is located within a high-density apartment building with common facilities such as pools, gyms and lifts.
A dual key apartment is commonly defined as having a self-contained studio accessed by a door, inside the main apartment. There is a shared common hallway, but separate lockable doors to each home.
A dual key unit in Central Park at Chippendale sold in May for $1.2 million. The property was a two-bedroom dual key apartment with each area comprising one-bedroom, bathroom, kitchen, laundry, lounge/dining and balcony. The unit also enjoys extensive common facilities such as pools, gym, spa, rooftop garden and concierge. The advertised rental was $1,330 per week combined which reflects a gross yield of 5.76%.
As mentioned it is imperative to note that this above-average yield is a gross return and all outgoings need to be considered. In this instance, the advertised strata levies are approximately $13,552 per annum or $260 per week. Depending on the specific needs of each investor, it could be more beneficial to focus on units within smaller-scale developments or entry-level Torrens title properties such as terraces or free-standing dwellings. These options would be beneficial in terms of not having to pay high fees for common facilities and there is opportunity to add value via renovations. Smaller-scale unit developments and Torrens title properties also tend to have stronger capital growth over a long term period.
Inner West Property Updates
The past decade of strong capital growth has resulted in properties with large land allotments experiencing greatly declining yields. This applies in particular to properties with poor improvements where the value is predominantly underpinned by the land content. Investors in suburbs where this is the case typically rely on capital growth as an investment strategy, rather than the yield they are likely to receive.
Taking the suburb of Drummoyne, if yields are of utmost importance, the unit sector is predominantly a better investment, with close proximity to infrastructure along with all the other usual drivers of yield in this sector.
Drummoyne land values have risen dramatically over recent years, with consequently decreasing yields, so investors either have to accept this or get creative. This creativity has been in the form of utilising the current improvements to increase the rental income received.
A great example of this is a property recently advertised in Drummoyne. The land area was 920 square metres and the residence was an original circa 1920 bungalow in average overall condition. The main dwelling was accessed at street level, providing three-bedroom plus one-bathroom accommodation and appreciating restricted water views, currently renting for $750 per week.
A second area of occupancy had been built below the main dwelling and accessed from a separate entry via the side pathway, comprising a modern three-bedroom plus one-bathroom accommodation, currently renting for $550 per week.
At the rear of the property was a circa 1970 high clearance garage, accessed via the rear lane. This garage had been converted into a large two-bedroom plus one-bathroom modern flat, appreciating water views and a single off-street car space, renting for $700 per week.
Although there was some cost in the capital improvement of the property, the utilisation of separate areas of occupancy has significantly increased the rental income. The current passing rent for the combined occupancies is $2,000 per week, equating to a yield of 4.6% (the value of the property is approximately $2.25 million).
This yield may not set any investment records, but it is a dramatic improvement on what other properties are yielding in the area, relying on a single occupancy rental income. It allows investors to reduce their holding costs for such a property, while waiting for capital appreciation, or alternatively while Development Approvals are sought for future development.
Northern Beaches Property Updates
The housing market on the Northern Beaches is heavily owner-occupier driven given its entry costs and lower than average yields – 2.9% for houses in August (SQM Research). The desired yield ultimately comes down to investment strategy. Higher yielding properties typically offer lower capital growth prospects. If you are not predicting market conditions to improve over the short to medium term, it may be a good opportunity to capitalise on a high yielding property, generate cash flow and achieve a higher annual rate of return over the short to medium term.
A severe lack of short-term accommodation options has resulted in Airbnb becoming a popular and lucrative investment model on the Northern Beaches, particularly when you consider how popular a destination the area is for weekend getaways, weddings and events.
A popular investment product due to its entry-level price point, prime location and strong rental marketability is 22 Central Avenue, Manly. The complex offers a mixture of studio and onebedroom apartments and gives a great indication of just how much short-term leasing can boost your yield to maximize cash generation.
809/22 Central Avenue, Manly sold in August 2019 for $870,000. The property would lease on an annual basis for $600 per week, equating to a gross yield of 3.58%. A near identical unit is currently on Airbnb for $150 per night. This annualises to a potential fully let gross yield of 6.2%. Obviously not entirely realistic, but if we were to annualise the current bookings in the fourth quarter of 2019, the gross yield equates to 4.75%. Factoring in subsequent bookings through this period, a 5% gross yield is not out of the question and a tidy increase on the traditionally leased 3.58% yield.
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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.