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Investing wisely during a soft rental market - June 2020

By Rich Harvey, CEO & Founder, propertybuyer.com.au

For the first time in a long while, it’s a very good time to be a tenant in Australia’s major capital cities.

Rents have fallen to their lowest point in seven years in Sydney and vacancy rates are on the rise, with a similar situation unfolding in Melbourne and Brisbane. Landlords are offering attractive discounts to keep good tenants, but they’re becoming increasingly hard to woo.

Empty properties are at risk of hitting the market with little interest due to the difficulty in securing a tenant which means the potential for sharper discounting on asking price from the seller.

An exodus of renters, coupled with a rise of new dwellings due to coronavirus, is putting the pressure on. For would-be investors, it’s a confusing and unsettling time.

Should you jump in now at a time when your expected income is lower, and could potentially fall further?

Well, that question depends, as usual, on location and property type.

There are suburbs that are well-positioned to weather the storm, making them more secure options. Finding them can be tricky though. As you’ll see below, it’s not as simple as looking at the data and avoiding those pockets where vacancies have risen the sharpest and picking those where they’re tightening.

And in the mid to long-term, the wrong decision could be very costly.

 

What’s happening right now

Bumper construction activity in Sydney, Melbourne and Brisbane over the past few years saw supply surge, just as demand slowed. There are still buyers out there, and they’re motivated, but many are nervous and choosing to sit on their hands.

Millions of Australians are facing tough times, and it’s causing some difficult decisions to be made – including about housing.

But a major contributor that’s lifted vacancies and put downward pressure on rents is the Airbnb factor. Properties that would normally be listed on the short-stay accommodation platform have been rapidly returning to the normal rental market.

Months of restrictions on travel as well as social distancing measures due to coronavirus have had a significant impact on the holiday market. Owners of Airbnb dwellings haven’t had any visitors and have pivoted.

Estimates are that 30,000 properties were converted from Airbnb listings to long-term rentals in just a few months.

In a report about the rental market, the firm SQM Research said it believes the surge of Airbnb properties seems to be over for now.

Restrictions are easing, and people are eager to get out and about after months in lockdown. The inability to go overseas will also see many explore their own backyards. Short-stay property owners will look to a return to business as normal.

SQM Research has also noted the beginning of a decline in total rental listings in June.

But vacancy rates are likely to remain high for some time to come, because of the pipeline of new housing supply due over the coming year. At the same time, the effective ceasing of international migration means there won’t be tens of thousands of new residents eager to fill them.

 

A topsy-turvy rental market

We’re in a strangely counter-intuitive rental market at present.

Let me explain.

If you looked at a list of suburbs where vacancies are tightening right now and rents are on the up, defying much of the rest of the market, that’s where you’d invest… right?

Probably not.

On paper, the rental decreases we’ve seen of late seem defy our conventional wisdom that blue-chip areas always perform well. That’s where some of the most evident declines in rents over the past six months have been – sought-after suburbs, like Sydney’s eastern pockets and those on the North Shore.

But if you think a little more laterally, it makes sense.

The economic tremors due to COVID-19 have caused people to tighten their belts – cutting costs in order to give themselves some breathing space. There are also anecdotal reports of younger people ditching their cushy inner-city rentals to move home with their parents to save money.

And a lot of those Airbnb properties suddenly entering the rental market are in prime areas too.

Should you avoid those areas just because rents are currently lower and vacancy rates are high? Not necessarily. It depends what your long-term goals are, and the upside from an area with strong future growth prospects will usually be better than the ongoing income.

If you look at the areas where vacancies are shrinking, and prices are rising, you’ll note that they’re probably only benefiting in the short-term. In Sydney, many are in the outer-western suburbs.

To me, that indicates people who lived in the inner-east last year have moved far away in search of affordability. They’ll be back when the economy – and the world – starts to stabilise, I suspect.

That’s not to say that some of those suburbs don’t present good buying. My point is, you shouldn’t base investment decisions on short-term and rapidly shifting market factors.

But if you’re targeting a suburb for the future investment potential but also want a rental income that’s steady and stable, look beyond the postcode and toward its fundamental values.

Take the blue-chip suburbs. There are rental property types within these temporarily depressed areas that are holding up better than others. Doing your homework can reveal the best opportunities.

For example, check the demographics of a suburb to see if it skews towards young families and, if it does, consider looking at dwellings with a bit of room to grow and some outdoor space. Also, scope the neighbourhood for good schools, nice parks and quiet, pleasant streets.

 

Getting practical

If it’s an area with good transport links to major employment or education hubs – a CBD, a hospital, a university – consider affordable but decent dwellings that are low-maintenance for you but not a constant burden for tenants. Look for investment opportunities close to lifestyle amenities.

In short, consider the demand right now and into the future from tenants, as well as the long-term fundamentals for value growth.

Many would be investors have been scared off from investing thinking that it’s just too hard to get a tenant. Sure, rents have softened but properties are still leasing well. You may need to be pragmatic and take say $50 off to secure a good tenant then once the market is back to normal, increase the rental back up again. The capital growth you make on the property long term will far outweigh the short term loss on temporary soft rental market.

 

Of course, your ace in the hole should be seeking advice from an independent, experienced property professional such as a buyers' agent. Not only can we help unearth suburbs with the right fundamentals, we can also advise on the best property types to fit your specific portfolio needs.

Opportunities are there for investors ready to act, but a comprehensive understanding of exactly what’s happening is key to success.


 

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