Home' API Magazine : August 2014 Contents Rent is the bread and butter of investors, providing a regular
and usually reliable return. Best of all are those areas
providing a positive cash flow where the income from rent
exceeds all expenses, including interest repayments and the
property is paying itself off.
We can actively raise our rent returns through cosmetic
improvements, renovations, adding a granny flat or engaging
in student stacking, but finding genuine passive cash cow
locations is often difficult with the research waters muddied by
rental guarantees and high yields caused by falling prices.
Even the experts can misjudge rental demand with disastrous
consequences for investors who follow their predictions. Only
two years back, locations such as Gladstone and Moranbah
were being touted as Australia’s hottest investment locations
with claimed rental yields of more than 20 per cent. The causes
of growing rent demand in such towns was usually attributed
to high population growth resulting from new resource projects
providing more jobs and resulting in a shortage of properties.
As Figure 1 shows something went horribly wrong in many of
those areas with prices and rents failing to rise and even falling
dramatically in some cases. The current outlook for investors
in these locations isn’t good either, as they all have surplus
rental stock and housing markets which are currently neutral
or worse. Why were the optimistic rental market predictions for
these areas and many like them so completely incorrect? To find
out, we need to look at the dynamics behind these markets and
understand the mindsets of renters.
¿ RENTER DEMAND IN CAPITAL CITIES IS FAIRLY CONSTANT
Unlike owner-occupiers who are motivated by the desire for
security and stability that home ownership provides or investors,
whose aim is profit from property, renters either can’t afford to
buy a property or don’t want to.
The benefit of living in a particular dwelling or area is related
more to the suitability of the area, proximity to work, recreation,
friends and entertainment and has little to do with the property
apart from its facilities, aspect or views and the weekly rent. Yet
renters are important to investors not just because of the rent
they pay but also because of their frequency of movement.
Owner-occupiers tend to move on average once or twice every
five years and then settle into a family home for 15 years or
longer, but renters move much more frequently. Every year we
receive nearly 250,000 permanent overseas arrivals, with most
renting in ethnically friendly suburbs, growth corridors and the
inner suburbs of our major cities. Their aim is to buy a home of
their own as soon as possible, and so their rental experience is
as short as they can make it.
The next biggest group of renters is the 150,000 younger
people who leave home each year and start their own
households, choosing to live mainly in high and medium density,
modern inner urban apartments for convenience and lifestyle.
As Figure 2 indicates, the percentages of these renters are high
enough in the inner urban areas of our major cities to form a
majority of the households in many suburbs. And because they
move far more often than owner-occupiers, their influence on
housing demand can be profound.
The supply of new renters into these areas is fairly consistent
so the main volatility to prices or rents is generated by high and
medium rise unit over-development rather than falls in demand,
but even in the most developed precincts of our capital cities
rents tend to rise over time, as Figure 3 shows.
¿ RENTER DEMAND OUTSIDE CAPITAL CITIES IS
Outside our capital cities is another group of renters who don’t
want to buy and only rent in particular locations because of
the opportunities the areas offer. This could be for education in
country university towns, or for an attractive lifestyle combined
with easy-going part-time work in coastal and mountain
Other renters accept the penalties of long hours and rosters in
remote mining towns for the compensation of high income. Even
API AUGUST 2014
AUGUST 2014 API
How to find cash
FIGURE 1: HOTSPOTS THAT HAVE GONE OFF THE BOIL
- 35% STRESSED
- 67% SURPLUS
- 2 6% SURPLUS
FIGURE 2: PERCENTAGES OF INVESTOR OWNED PROPERTIES IN INNER URBAN AREAS
City of Sydney
City of Melbourne
RESEARCH // JOHN LINDEMAN
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