A two-speed rental reality

PORTFOLIO POINT: While Australia’s rental market is strong overall, there are differences between (and within) cities due to variations in supply.

With all the talk of a two-speed economy, we’ve become attuned to the varying rates of economic activity across the nation. Well, the state of the rental market – a matter of keen interest to property investors – is no different.

Overall, from an investor’s perspective, the rental market appears to be in rude shape. Nationally, rents are growing around 5% year-on-year, according to the Australian Bureau of Statistics, with a rental vacancy rate that sits below 2%.

However, dig a little deeper and we see that Sydney, Perth, Canberra and some regional areas are doing especially well, while the rental markets are more variable in Melbourne, Adelaide, Hobart and Darwin.

According to Australian Property Monitors senior economist Andrew Wilson, the main driver for the difference in performance is the supply of rental property. “The Sydney, Perth and Canberra rental markets have been characterised by chronically low vacancy rates and, with ongoing low levels of new construction, this situation is expected to continue with upward pressure on rentals.”

Michelle Galletti, managing director of Just Rent Sydney, confirms strong demand for rentals in the Sydney market. “The market is as strong now as I have ever experienced. Demand for rentals is very high. We are seeing people crawling over each other to secure rentals. We can't see things changing anytime soon,” she says.

Galletti advises that inner west of Sydney – where the bulk of her listings are – is especially tight. “We are experiencing vacancy rates of approx 1% in the inner west. As long as the property is priced right it will lease very quickly. The inner west is increasingly becoming a hot destination for a wide demographic, due to access to the city, lifestyle factors and smaller, more manageable properties.”

In contrast, Melbourne tenants have the upper hand, says Wilson. “Melbourne continues to be Australia’s most tenant-friendly rental market, with a wider choice of properties courtesy of nation-leading dwelling construction.”

Indeed, whilst the overall vacancy rate in Melbourne hovers around 2.4%, according to the Real Estate Institute of Victoria, or 3.5%, based on property data provider SQM Research’s numbers, the CBD market and some fringe western Melbourne suburbs – such as Point Cook, Tarneit and Melton – have far higher vacancy rates. SQM Research is recording vacancy rates of around 8% in the western fringe suburbs and 5.5% for the Melbourne CBD. This shouldn’t be surprising as these are the areas that have seen a large rise in dwelling construction in recent years, and limited demand from tenants and owner-occupiers.

Alicia Auranaune, portfolio manager for Nelson Alexander in Melbourne, points out that while the wider Melbourne rental market has softened a little, the inner suburban market remains reasonably tight. “Our vacancy rate is still around 2%. Properties are taking between two and six weeks to lease, which compares to two to four weeks in a really strong market. Similarly, we’re still able to negotiate rent rises of around 3 to 4% now, compared to 5% in good times.”

Despite improved affordability in the property-buying market, this does not appear to be affecting the rental market, according to Auranaune, who operates in inner northern Melbourne suburbs such as Carlton, Collingwood, Fitzroy, Fitzroy North and Northcote. “In my patch, despite recent softening in values, the price of housing is still very high. So while some renters in this area may opt to give up the inner city lifestyle and move further out in order to buy, others who can’t afford the inner urban buy-in price will continue to live here and rent.”

It is this need for affordable rental accommodation that sees properties in the lower end of the market in most demand in both Sydney and Melbourne. “Units are in slightly higher demand than houses, mainly due to the lower cost of renting a unit,” says Galletti.

“If a 2 or 3 bedroom house is priced well, that will generate a lot of interest,” says Auranaune. “The higher priced rental properties are taking a lot longer to lease than in years gone by.”

I asked Auranaune to characterise the typical inner suburban renter. “The market remains dominated by the 23-35 age range, be they students, lawyers or café workers.” So notwithstanding a trend for some older people to downsize and move closer to our CBDs, it is younger people who most want or need to rent close in.

Nevertheless, Auranaune warns investors looking for tenants in Melbourne not to be too prescriptive about their choice of tenants. “Be realistic in your pricing and be open to a variety of tenants, be they students, couples or families.”

I agree that one shouldn’t be overly restrictive during the tenant selection process, but do ensure that prospective tenants have good references and ideally evidence of a good tenant history. Be aware that as an investor, you want to be as sure as you can that the tenant will treat your property with respect and pay the rent on time. And if you have a great tenant, it is far better to keep the rent reasonable than lose the tenant for the sake of a few dollars. High turnover is undesirable in any market.

So except for the over-supplied fringe suburbs and inner city market, the state of the rental market is another facet of today’s remarkably benign and becalmed property market. Moreover, the divergence in performance of inner suburban markets compared to fringe suburbs and the CBD is just another great indicator to investors of where our most resilient investment locations lie.

Property Q&A

This week:

• I'm 22 and have to start paying rent – should I buy?
• Spending $2.5 million.
• How do I purchase property through a family trust?
• Trying to time the market.

First-time buyer

I am 22 years old and having recently graduated from uni, my parents are going to start charging me rent to live at home. I have about $90,000, of which I would be happy to invest $80,000, and I am currently earning $60,000 a year. Should I start looking to invest in my own place rather than throwing it away on rent? Living in Wollongong, entry to the market is much easier to achieve. There are two-bedroom units available for about $230-270,000, or modest three-bedroom houses starting at about $375,000 . Any thoughts would be greatly appreciated.

This is a great position to be in. Initially, you’ll want to do some more research. Sit down with a mortgage broker and work out what you are able to borrow, including the associated repayment costs, and factor in a margin for higher interest rates. From this, you’ll then need to make a judgement about how much you are comfortable borrowing. Then take a close look at typical rents for residential leases in Wollongong. You’ll then be in a position to determine the relative outgoings of renting (be it with your parents or in your own place) versus buying.

Another factor to consider in deciding between renting and buying is how long you expect to live in Wollongong. For the foreseeable future? Or might you find yourself in, say, Sydney in two to five years’ time?

If you think you might only be in Wollongong for a few years, then you may want to focus on properties that are in demand by renters – that is, close in to the city centre and/or accessible to Sydney for those who wish to commute there from Wollongong. This way, when you eventually move out, you have the option of leasing the property.

Because Wollongong is a larger regional city, you can expect reasonable capital growth, but not as much as you would achieve in a capital city like Sydney. So if you are to buy in Wollongong, do focus on building up your equity through paying down the debt as quickly as you can. You may then be in a position to use the equity in the Wollongong property to buy a further investment property or indeed a home in a few years.

Unit... or house?

Mosman: should I invest in a $2.5 million unit or house?

The premium end of the property market has been soft in Sydney since the GFC and there are few signs it will pick up any time soon, unless there is a strong recovery in the financial services sector – a source of many buyers in this rarefied category of properties. Further, putting this much money into one investment property is usually not a good idea from a diversity perspective.

Consequently, I don’t see this as a good investment opportunity. Instead, I suggest you consider two or even three high-quality properties across a wider geographic area that encompasses different parts of inner suburban Sydney and different property types. With $2.5 million, you can effectively construct an instant portfolio. I suggest at least one good, small period-style house in a premium location and possibly two further apartments; a one-bedroom and a two-bedroom, each in different locations. Alternatively, you could go for two houses.

Whichever way you jump, be sure to seek the advice of an independent property advisor, as you have a remarkable opportunity to take advantage of today’s market conditions. Finally, it’s a good idea to have some equity in your assets, so be a little conservative with your borrowings.

Family trust

How does one buy a property via a family trust?

Family trusts can be a tax-efficient way of holding assets. The growing popularity of self-managed super funds buying properties – where they undertake a purchase through a legal entity rather than a personal name – has also seen more family trusts being set up.

It is a complex area and the likely benefits depend on individual circumstances. I recommend you speak to your accountant and solicitor about the pros and cons of setting up a trust.

According to Bernie O’Sullivan of Bernie O’Sullivan Lawyers, when buying property intended for a family trust, it can either be bought directly by a director of the trust or the contract can be signed in your own name, with the words 'and/or nominee’ added, and the property transferred to the family trust pre-settlement. Check with your accountant or solicitor about which is preferable in your circumstances.

Waiting to buy

If the market is going to be flat for some time, why not wait for 12-24 months to buy?

Do you really know that the market will flatline for up to two years? The reality is, if you’re looking for firm empirical data, it is probably three to six months after the market has actually bottomed and is turning up again that the evidence is conclusive – by which time you have missed some of the subsequent capital growth and are now competing against many more buyers.

My sense is that the market has indeed bottomed and that any upward momentum will be slow and modest this year. Buyers currently have time to do their research and choose the best asset. However, it is possible that the market will eventually pick up momentum and property may be significantly more expensive in 2014 than it is now. An unforeseen factor could kick-start the market as it has many times in past cycles.

So stop trying to 'pick it’, because no one, not even the professionals, get it spot on. By all means, be measured in your deliberations, but don’t be tardy. Ultimately, one should buy when you can afford to get in, rather than trying to time the cycle.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au