The best investment properties are those with the best rental returns: Michael Matusik

We all know that the vacancy rate remains tight.  But few realise just how tight it has become.  Of the 1,600 odd postcodes across Australia with rental properties in them, 475 or 30% have a vacancy rate under 1%.  Seven out of 10 postcodes have a vacancy rate under 2%, and nine out of 10 (87%) postcodes have fewer than three out of every 100 rental properties vacant.

The vacancy rate across the whole country – except for Victoria– is tight, with an average vacancy rate of 1.7%.  In Victoria, the vacancy rate is close to 3%.

It has been this way for some time, but I suspect we are reaching some tipping point.

Since 2008 the rental component of CPI has been rising faster than the average inflation rate.  This is the first time this has consistently happened since the ABS separated out a rental housing inflation in the early 1970s.

According to the ABS CPI rental index, weekly rents have been rising by 5.7% per annum across Australia since mid-2008.  Brisbane has enjoyed a 6% annual gain, compared to, say, Melbourne’s 4.8% yearly increase.

Gross rental yields, as a result, have increased across the country, with traditional suburban detached housing approaching 4.5% and attached products (small-lot housing, too) often exceeding 5% these days.

Rental yields across many parts of Queensland – reflecting the state’s undersupply of new housing – now exceed 6% gross.  Hot rental spots in Queensland include Roma, Emerald, Calliope, Gladstone, Toowoomba, Mackay and Brisbane’s inner-western suburbs.  Even the southern part of the Sunshine Coast and northern suburbs of the Gold Coast have seen weekly rents lift higher than the statewide average (6% per annum) in more recent times.

There are 440,000 residential rental properties across Queensland, which is up 7% or by 31,000 investment properties over the past 12 months.  After the GFC, and with it all the scaremongering, too many residential investors tried to sell their investment properties, and to no avail.  The wise among them have now reset their plans and are renting their properties out again; hence the lift in available rental properties.  Yet despite the 31,000 increase in supply, the vacancy rate is falling and rents are rising.

The biggest increase in recent supply has been in those areas – Gladstone, Mackay and around Toowoomba – with the largest increases in weekly rent.

Median weekly rents have risen by 45% over the last 12 months in Gladstone.  They are up about 25% in Emerald; 20% more in Roma; 15% higher in Mackay and up about 10% across Brisbane’s inner west.

While certain geographical areas across Queensland are doing better, rent-wise, the upward trend is consistent across product types, again reflecting the tight overall rental supply.  Weekly rents for one-bedroom apartment stock are up 6% on last year; two-bedroom apartments up 5%; ditto for three-bedder units and three-bedroom detached houses.  Larger houses have enjoyed a 6% lift in weekly rents, and Queensland townhouses are up 4% on last year.

About 40% of Queensland’s rental stock is now apartments; half are detached dwellings and 10% are townhouses.

I have been saying in my market overview presentations that investors should treat capital growth as a bonus.  Income is certainty.  The best residential investments, for mine, will be those with the most secure rental returns.

So how do you get a better rental return?  Of course you should buy well.  Investment property in a key location – supported by infrastructure, close to a growing workforce, designed to be shared (think beds and baths), with adequate storage/parking and is easy to maintain – usually rents out well and enjoys consistent rental growth.

And for those who already own an investment property, the best thing you can do to improve your rental return is try a new property manager.  More on this in a moment.

Rising rents have not yet translated to price growth.  But they will.  Once we get over our collective mopes, investors will start buying again and this, in turn, should lift prices.  We anticipate residential prices to rise by between 2% and 4% per annum across Australia over much of this decade.  Property prices in Queensland, Western Australia and across much of Sydney are likely to lift higher than, and maybe twice as fast as, the Australian average.

Traditional property managers are the main bugbear of investors – the chief complaints by investors being lack of communication, lack of action, lack of rental increases and lazy service.  Most companies that manage residential rentals do so as a side business – “it helps pay the rent” as the saying goes – rather than it being the sole focus.

Wise Realty, which started over a decade ago, is one of the largest family-owned property management agencies in south-east Queensland.  Wise Realty is a stand-alone property management company.  I have known Lionel Morris, a director of Wise Realty, for more years than we wish to remember.  The rents that Wise Realty achieves are some of the highest in the industry and their tenant turnaround is second to none.  Wise now has about a thousand properties under management.

Here are some recent statistics for the first three months of 2012.  These apply to 35 new rental listings taken over by Wise.

• For detached houses, Wise got an average $100 more per week – up 16% – than the previous rental agreement.  The property remained vacant for just four days.
• Wise got $60 more per week (an 11% increase) for their new townhouse listings.  Again, the properties in question leased out in four days. For apartments, the average lift was 14% or $65 more per week.  These remained vacant for just three days.
• By way of comparison, the average increase in weekly rents in the same area over the last 12 months was just 5%.  The average time to find a new tenant was 14 days.

Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive. The Matusik Missive is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.

Apartment photograph by Alex Proimos, courtesy of Flickr.