Melbourne August 2017

The month in review: Melbourne

By Herron Todd White
August 2017

Investors typically operate at the lower end of the market segments within this area. While this can vary significantly depending on the asset type, investors do not typically choose to up spec dwellings, often opting for entry level or builder’s range fixtures and fittings.

Within the inner, middle and outer locations, investors appear to be typically seeking higher yield properties with the underlying expectation of capital growth. Off the plan purchases should be approached cautiously as there is a growing trend of contract prices being difficult to support at settlement. High growth areas such as Craigieburn and Mickleham appear to be attractive to investors. Inner suburban locations are typically at a considerably higher price point with more limited investor activity occurring.

There has been a moderate increase in overall investor activity over the past few years as investors seek to take advantage of negative gearing, depreciation and superannuation arrangements. In the middle and outer developing suburban locations, speculative investors have taken advantage of the ongoing lack of readily available titled land, opting to on sell once the land is close to having title issued.

Given the predominantly owner-occupied nature of the middle and outer suburbs, a slow down in investor activity is not likely to have as significant an impact as some of the more investor dominated markets such as the CBD.

Investors should be aware of the current trends for off the plan purchases with values at settlement not matching contract price and the recent legislation changes limiting stamp duty concessions to owneroccupiers and property of less than $550,000. Additionally, investors should set clear objectives relating to the overall performance and expectations of their investments as simultaneous high yield and high capital growth is uncommon in the current market.

Middle to outer eastern suburbs

Units and apartments particularly appeal to investors within the outer eastern suburbs. This is similar for local and non-local investors however it seems that local investors prefer units and non-local investors prefer apartments. Generally we see investors operate in the $300,000 to $550,000 price range.

It seems investors prefer low maintenance properties with a high yield and that short term capital gains are not as important. We have seen investors being very active in new apartment buildings located close to amenities such as train stations. Suburbs such as Blackburn, Nunawading, Mitcham and Ringwood have appealed to investors with affordable entry level apartments and rental demand.

Investors are a positive for this market as they have increased development in the middle to outer eastern suburbs. If investor demand does decrease we could see apartments on the market for a longer period. Off the plan apartments have appealed to investors in the past due to the decrease in stamp duty. However with this benefit being removed we could see investors looking at alternative options.

Investors looking for long term capital gains should consider dwellings on larger allotments. This is due to the lack of supply of land which is likely to cause values to increase. Although they may need more maintenance in the short term larger allotments could prove a better investment.

Western suburbs

Within the inner western suburbs, investors tend to focus their attention on either off the plan apartments or newly constructed units. These options tend to favour overseas investors, many of whom would purchase such investments through trade shows or overseas campaigns targeted specifically at them.

Given the increased supply of apartments and units within these suburbs and therefore subdued capital growth, investors tend to purchase investment properties with a view to holding them for the medium to long term in the hope that Melbourne’s popularity as a place to live continues to increase.

To the year to 30 June 2017, the average price of a unit or apartment in Yarraville was $582,000 with a rental yield of 3.8% and annual growth of 3.9%. By comparison, the neighbouring suburb of West Footscray offered investors a more affordable option, with the average price being significantly lower at $418,000 and a marginally higher rental yield of 3.9% but slightly lower annual growth of 3.2%. With the abundance of new apartment and unit developments in Footscray, the result has actually been a decrease in the average price of an apartment to $405,000 as at 30 June 2017, whereas a year ago investors would be expected to pay around $435,000. However, rental yields have remained relatively steady at 4.4% and therefore the suburb remains popular with investors.

In some ways, the presence of investors in the inner western suburbs is regarded negatively in general, due to the fact that they compete with many first home buyers and that the quality of the apartments and units constructed has diminished considerably in comparison to properties built specifically for owner-occupiers. On the reverse side however, the presence of investors particularly in suburbs such as Footscray has ensured that rents have remained at a fairly consistent level for the past five years. In 2012 this was $310 per week, while in 2017 this has increased marginally to $325.

The key piece of advice for potential investors is to remember that location is of paramount importance. Properties located within a short walking distance to local amenities, schools and other services will always be in demand and looked upon favourably by potential tenants.

Inner city

The Melbourne CBD and inner city suburbs apartment market continues to be popular with investors, both international and local, but is showing early signs of slowing down due to tighter lending policies imposed by APRA, the State Revenue Office and the federal government.

A few years ago, international purchasers, further encouraged by historically low interest rates, were able and willing to purchase 1- and 2-bedroom apartments off the plan in Melbourne CBD and surrounding suburbs, such as Southbank and Docklands, encouraging developers to drive up the off the plan purchase price. The changes introduced this year however are aimed at limiting international investment in order to increase housing affordability.

Investors in the Melbourne CBD and inner city suburbs are looking to maximise yields rather than generate significant capital gains, as the apartment market has been stable for the past several years and generally recorded no significant price growth. REIV reports an average median price increase of 1% for apartments in Docklands and a 1.8% increase for Southbank compared to last year, while median apartment prices in the Melbourne CBD and South Yarra rose by 4.2% and 5.5% respectively.

Similarly, inner city annual rental yields have seen moderate increases year on year according to REIV, with the median rent for 1-bedroom and 2-bedroom apartments growing by 2.9% and 2.2% respectively.

The Victorian Government is hoping that new financial restrictions imposed on investors and developers will reduce international demand in the Melbourne property market and therefore cool the market, while simultaneously increasing the number of apartments available for rent. Should this be the case, vacancy rates are likely to go up while rental yields drop due to increased competition.

We implore investors to be cautious when buying apartments in the Melbourne CBD, especially when buying apartments off the plan, as these properties are often sold at an inflated price pegged to a future completion date and are later re-sold in an open market to a genuine buyer at a loss within 12 to 18 months.

South-east

Property investment in outer south-eastern suburbs has yielded strong results in recent times. With property prices for the area deemed more affordable than inner city suburbs, the region is popular with investors wanting to get into the property market.

Location is crucial for investors in the outer southeastern market. As a substantial part of the region is still developing, location within close proximity of shopping amenities, schools and public transport options is essential for a higher return.

Investors in the area are attracted to off the plan, relatively new or recently constructed dwellings and townhouses. Being near new or only a few years old, the likelihood for maintenance works is reduced and therefore appears to be less of a financial burden on landlords, thereby increasing their return on investment.

Suburbs such as Clyde, Clyde North and Officer have seen strong rental yields of between 4.5% and 5% recently which would appeal to many investors who are not able to achieve this yield in bay side suburbs.

Statistics show that almost a quarter of the outer south-eastern suburban population are renters which also demonstrates the strength of the property investment market for the region. Whilst sacrificing their proximity to the Melbourne CBD, the area is popular with young families due to its relative affordability compared to inner city properties, the luxury of more space and no shortage of schools, parks, shopping amenities and sporting facilities.

Share on:

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.