Sydney August 2017

The month in review: Sydney

By Herron Todd White
August 2017

It has been well documented that the Sydney market has gone from strength to strength over the past number of years due primarily to a supply versus demand imbalance as more and more players look to enter the market and maximise strong capital appreciation opportunities. With record low cash rates, strong employment opportunities and a wide range of property types, the Sydney market has property at a price point to suit many.

Sydney has long been a favourite for investors, whether local, interstate or overseas. Corelogic data from April 2017 indicates that 55.3% of mortgage demand that month in Sydney was from investors. If one in two mortgages is being driven by the investor pool, it stands to reason that this important segment has had much influence on the overall position of the market.

Sub $1 million dollars is still a driver for the broad market and in this segment the investor is really competing against the first home buyer. With housing affordability a recurring media topic, the federal government has introduced initiatives to help the first home buyer and limit the overall buying power of the investor. Whilst it is still too early to track the success of these initiatives introduced on 1 July 2017, the tightening of lending ratios and terms for investors has been slowly occurring since early this year and our queries with both agents and brokers are telling us that the impact is starting to take effect. Whether the restrictions will have a long term effect on the market is currently unknown.

Historically investors have been attracted to areas that offer strong rental demand and the possibility for solid future capital growth. Traditionally these areas tend to be located within close commuting distance of the CBD and around universities, hospitals and areas with good infrastructure and public transport options. To meet this demand, there has been a significant change in the town planning requirements which has been driven by the state government. Sydney is fast becoming a vertical city, with a change in buyer expectations and a surge in demand for apartment living. Modern, medium to high density zones are becoming increasingly common with many notable precincts springing up across the city including Green Square at Zetland, Harold Park at Forest Lodge, Discovery Point at Wolli Creek, Central Park in Chippendale as well as developing precincts in Erskineville and Camperdown (to name a few).

Another example of an investor hot spot is the area known as Kings Cross. Kings Cross is one of Sydney’s highest density precincts and covers the suburbs of Potts Point, Elizabeth Bay and Rushcutters Bay. It is well established, being within two kilometres of the CBD, and has a train station, light commercial buildings and retail spaces. Recent changes to laws governing the opening hours of entertainment establishments in the area has allowed the precinct to begin to shed its reputation as a somewhat unsafe nightlife district allowing it to become increasingly popular with investors. Investors targeting this area in the past have been seeking the strong rental returns offered by the many small studio and 1-bedroom units. It seems to be the trend however that many small studio units have lower levels of capital growth than standard 2-bedroom units for example which we assume is also due to the broader market appeal.

In western Sydney the new apartment market continues in various degrees throughout all major regional zones with the Liverpool/Fairfield areas as well as Parramatta and The Hills district in particular seeing substantial development. The Norwest Railway line currently under construction from Rouse Hill to Epping has resulted in a significant increase in unit developments approved or under construction in what is typically considered the burbs, with unprecedented construction occurring particularly in Kellyville. This list in western Sydney is continually growing with a record number of unit approvals passed over recent years. What these areas have in common is that they all appear to have a high investor contingent although the future of some will depend heavily on an unknown tenant pool with oversupply perhaps becoming a future issue.

With Liverpool being the CBD of the southwest region, it has seen a large number of new developments completed in recent years. An example of this includes the 30-level Sky Haus development in Liverpool (420 Macquarie Street) which includes dual-key units selling on high yields of over 6% in some cases. Investors is this area commonly seek above average returns however it comes with limited capital growth in comparison to superior locations closer to Sydney or the Parramatta CBD. Many see it as an area of future potential however given its proximity to Parramatta, the M5 and M7 motorways and of course the future second airport at Badgerys Creek. A good entry point for investors in the Liverpool/Fairfield unit market can usually be found between $400,000 and $600,000.

Another popular option for investors in western Sydney is adding a granny flat to the rear of the allotment.

This not only adds value to their existing investment but can also increase yield substantially with a dual income when configured correctly. The areas that appear to have a high proportion of granny flats are generally the outer rings of western Sydney particularly within the LGAs of Penrith and Campbelltown. The comparatively lower initial entry point for the main dwelling, larger sized allotments suitable for granny flats and consistent rental demand in the area make these locations popular. Currently rental yields are approximately 2.9% within greater Sydney (as per CoreLogic Housing Market and Economic Update July 2017), however our own market knowledge indicates that dual occupancy properties (main dwelling and granny flats) in these outer ring suburbs have been selling at yields of approximately 5% in recent times. The granny flat trend has really gained momentum over the past five years with owners initially achieving higher returns but due to strong capital growth for the parent parcel and relatively stable rentals, yields in these areas have compressed.

While the positive cash flow provided by a strong yield is always a benefit, in the past year returns from capital gains have been significantly more profitable for investors who have the option of using the growth in equity to fund an additional investment property. In the future however, it may be wiser for investors to seek out strong rental returns as capital growth begins to plateau and banks continue to tighten lending criteria and increase interest rates.

The best advice we could offer to future investors is to do your research. Important aspects include good access to services and low levels of unemployment. Check your suburb profile, speak to local rental agents about demand, check if any major changes are on the cards such as future large scale infrastructure projects, re-zoning etc. Is it an area tipped for gentrification? Check the history of the developer – have their other developments proven to be popular with second buyers if you must sell quickly? Whilst investments are generally not as emotionally driven as the purchase of an individual’s home, be conscious that if you want a tenant to live there, it has to be appealing especially if the tenant pool has plenty of options. Sunlight, privacy and aspect in large scale unit developments could be crucial to getting a long term tenant which is a benefit to maximise your overall investment strategy. Be thorough with your research and focus on a strong rental yield with a view to a longer term investment as the days of annual capital growth exceeding 15% are no longer expected.

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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.