Rental Crisis Spurs Property Investor Boom

On the other hand a long-awaited increase in property values for the year, has pushed the great Australian dream of owning a house further into the distance. Agents say an increasing number of would-be home buyers have accepted they have missed the boat this cycle, and are settling into life as a tenant, at least for the next 12 months.

The situation is welcome news to investors – many who have waited five years for the market to turn in their favour.

In fact, so attractive is the combination of rising rents and rising property values to investors, that Victoria has become hot property locally, from interstate and overseas.

Run Corp chief executive Nathan Cher said recently that of the 1450 properties it re-let earlier this year, 85% were struck at higher rents than the outgoing tenants were paying.

Woodards chief executive officer John Piccolo agrees, saying most of 1800 lettings his agency managed this year saw rental increases. “Over the month of November alone, 88% of these had a rental increase with some properties achieving an increase of up to 35%.”

Hocking Stuart agrees, saying landlords hold more power than they have in a long time. It said vacancy levels on its rent roll has been as low as 0.85% for some months of the year. This is less than the 1.7% average recorded last year, and 2.5% recorded three years ago.

“Rents have stagnated for so long that there has been limited growth,” said Mr Piccolo. “This along with the recent slow down in new building construction has created an imbalance in the market.”

“Because of the lack of new supply there is been an increase in yields so investors are more confident in the market.”

“There are now compelling reasons for property investors to re-enter the market and take advantage of rental gains,” said Hocking Stuart managing director Greg Hocking.

He said investors realise that yields (annual rent divided by a property’s value) were on the up. Combined with solid capital growth (the amount a property increases from one year to the next), Mr Hocking says the residential property market is once again a competitive investment sector.

“We are now entering into a professional, income driven phase of the market cycle which is good for the property market and will not overcook prices as it did in 2003,” said Mr Hocking.

He predicts 2007 will see a record median price for Melbourne with the $380,000 barrier expected to be smashed in the first half of next year. This is despite two interest rates rises putting a lot of property’s back on the market this year.

“When interest rates go up people sell and rent, when interest rates go down people buy and stop renting,” says Angelo Nicosia, manager of the property manager department of Raine and Horne real estate in the inner city suburb of Brunswick.

He says that because more renters are in the market, rental levels have increased. He said the anticipation of rising interest rates gives some investors confidence that rents will increase even more.

“The rule of position applies to the rental market too,” says Mr Nicosia.

“Inner suburbs near the CBD and universities attract more renters and higher prices,” he said. “Rents can increase by as much as 20% in January through to April because of university students from the country and overseas”. He said students drive inner city markets from studios to 5-bedroom homes, as people like to share.

Agents say investors are predominantly using unlocked equity in their homes, or other investment properties to fund new purchases. An improving share market, and generous company bonuses are also “cashing up” an army of investors, according to agents.

Research by the Office of Housing says that for the June 2006 quarter (the most recent figures available) rental increases were strongest in the area defined as Inner Melbourne, which includes Carlton and Richmond, and Southern Melbourne, which includes South Yarra and St Kilda.

For two bedroom apartments, Southbank and Docklands command the highest rents with a median of $400 per week. This is followed by Fitzroy ($370 per week), the CBD, St Kilda Road, Port Melbourne and South Melbourne ($360 per week) and Richmond which averages $340 per week.

The statistic is the strongest sign yet that Melbourne’s inner city apartment market is rising out of the doldrums, which plagued it for so long.

It is the eastern suburbs of Melbourne however that recorded the strongest rental gains for the year, according to the Office of Housing, increasing 3.5%. It was followed by North-East Melbourne which recorded a 3.0% increase in rents. The Western region of Melbourne however recorded a drop of 3.7% in rents.

In provincial Victoria the Barwon-South West precinct recorded the strongest rise in rents, up 2.7% for the year ended June 2006.

Case study 1: Holiday Rentals

An increasing number of investors are finding they can have an each way bet, by investing in provincial Victoria.

Leanne and David Lenassi bought an investment property in the coastal village of Rye, about 90 minutes south-east of the city a couple of years ago. It is across the road from the Rye back beach and comes with a swimming pool, an entertainment deck, three bedrooms, two bathrooms, a lounge room, family room and dining room.

Agents say the property is returning the Lenassi’s strong returns as a holiday rental property. Being by the coast, it’s also netting the couple a healthy capital gain which coastal agents say is stronger than most metropolitan Melbourne suburbs.

“When we first purchased it I was worried about how tenants would treat it,” said Ms Lenassi. “But they’ve been really good and the rental achieved covers any wear and tear the property might face.”

“I can’t fault it as an investment, we’re considering buying ourselves another coastal property.”

Kay & Burton’s Andrew Hall, who manages a busy rent roll in Portsea, said there’s always a shortage of stock particularly for the first few weeks in January. “Everybody wants to be here for New Years.”

The most commonly sought after properties are at the “top end” of the market, according to Mr Hall. These homes typically include a tennis court, swimming pool, and ocean views. “Renters realise that they need to book accommodation in February for the following December, or risk losing the best properties.”

Case study 2: Wentworth Property

So confident are investors about Melbourne’s property market, one of Melbourne’s richest men is getting into the game.

Billionaire Richard Pratt, of Visy recycling fame, owns just over 10 per cent of Wentworth Mutual, a new real estate agency making a big splash in the Melbourne market.

Wentworth recently purchased eight established real estate offices, with rent rolls in Melbourne. This includes the lucrative Century 21 business in Brighton and St Kilda. It has been buying agencies at the rate of one agency every fortnight and plans to have 70 agencies in Victoria within a couple of years.

Westpoint chief Mark Silveira says there’s been an increase in the number of investors dipping their feet into the Melbourne market this year, both from other states and overseas. “In particular we’re getting lots of investor inquiry from Western Australia, where the property market is so hot and opportunities are harder to come by.”

“Australia has a culture of investing in property as opposed to other forms of investment.”

He agrees with most agents that interest rates have not appeared to have dampened the investor market, saying that rates of between 7 and 7.5 per cent are considered reasonable, and will not dent their attitude to investing in real estate.

 

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of realestatesource.com.au.

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