Inner West Sydney properties with large land allotments experience declining yields: HTW residential

The past decade of strong capital growth has resulted in properties in Inner West Sydney with large land allotments experiencing greatly declining yields, according to a recent Herron Todd White (HTW) residential report. 

This applies in particular to properties with poor improvements where the value is predominantly underpinned by the land content.

The valuation firm took a look at the rental yields across the country to dissect where to find the best returns in residential markets. 

"Investors in suburbs where this is the case typically rely on capital growth as an investment strategy, rather than the yield they are likely to receive," the valuation firm said. 

Taking the suburb of Drummoyne, if yields are of utmost importance, the unit sector is predominantly a better investment, with close proximity to infrastructure along with all the other usual drivers of yield in this sector.

Drummoyne land values have risen dramatically over recent years, with consequently decreasing yields, so investors either have to accept this or get creative. 

This creativity has been in the form of utilising the current improvements to increase the rental income received.

According to the HTW report, a great example of this was a property recently advertised in Drummoyne.

The land area was 920 square metres and the residence was an original circa 1920 bungalow in average overall condition.

The main dwelling was accessed at street level, providing three-bedroom plus one-bathroom accommodation and appreciating restricted water views, currently renting for $750 per week.

A second area of occupancy had been built below the main dwelling and accessed from a separate entry via the side pathway, comprising a modern three-bedroom plus one-bathroom accommodation, currently renting for $550 per week.

At the rear of the property was a circa 1970 high clearance garage, accessed via the rear lane.

This garage had been converted into a large two-bedroom plus one-bathroom modern flat, appreciating water views and a single off-street car space, renting for $700 per week.

Although there was some cost in the capital improvement of the property, the utilisation of separate areas of occupancy has significantly increased the rental income.

The current passing rent for the combined occupancies is $2,000 per week, equating to a yield of 4.6% (the value of the property is approximately $2.25 million).

"This yield may not set any investment records, but it is a dramatic improvement on what other properties are yielding in the area, relying on a single occupancy rental income," the valuation firm said. 

"It allows investors to reduce their holding costs for such a property, while waiting for capital appreciation, or alternatively while Development Approvals are sought for future development."