With capital growth evaporating across Australia, now is the time to focus on rental return

With capital growth evaporating across Australia, now is the time to focus on rental return
With capital growth evaporating across Australia, now is the time to focus on rental return

Landlords in New South Wales will be limited to seeking rent renewal increases once a year under proposed state government legislation.

There will be no rental hike price restriction, just a 12 month period before any rent increase can be sought from existing occupants, as part of what Matt Kean, the Better Regulation Minister, heralded as "sweeping reform for tenants' rights".

Less frequent rent increases will certainly help tenants plan for their cost of living pressures.

But there will be some ramifications.

The restrictive new law, which is yet to be passed by parliament, could see some investors sell up and exit the market.

Others maybe be tempted to try the short-term accommodation market.

At a microeconomic level, some landlords will now insist on six month rental agreements, with the possibility of tenant turnover potentially allowing a higher rent.

Ofcourse, it is one thing for the investor landlord to seek rent increases, the other is the economic circumstances to be able to get it, and without losing weeks in an empty property.

On the macroeconomic front, prospective investors who will be calculating revised potential yields, are not going to spend as much to initially buy their Investment Property.

The cap on the timing of rental increases mimics the policy implemented by the Labor Government in Victoria, whose aim in a much broader reform package was to reposition investors as housing providers with responsibilities.

The historic primary aim of property investors has been wealth creation through finding and holding a property for the long term, without undue interference from government intervention.

With capital growth on Investment Property currently slowing across Sydney, the Bellevue Hill proposal comes at a time when investors are sharply focused on their rental return.

And landlords don't need to be reminded they aren't that flash.

From rentvestors to experienced property investors, it was easy to overlook the significance of rental yields when Sydney property were rising with annualised 15% growth.

Rental markets remain relatively subdued across Sydney, partly due to an increase in rental supply accompanying the surge in apartment construction.

It is also because there has been a reduction in demand as first home buyer numbers have risen.

CoreLogic recently noted Sydney rents were down 0.9% over the past 12 months.

CoreLogic expect rental yields will continue to be sluggish.

The Sydney gross rental yield is tracking at 3.2%. 

It is 3.8% for apartments, and just 3% for houses. 

The national gross rental yield is tracking at 3.73%, lower than the decade average of 4.27%. Nationally it is 4.2% for apartments, and 3.6% for houses.

Slowing price growth, the conversion from interest only loans to principal and interest, and the prospect of interest rate rises could see tolerance from investors wear thin.

And the Sydney rental market vacancy rate is rising, according to the Real Estate Institute of New South Wales.

The vacancy rates across the Sydney metropolitan sits at 2.8%, up from 2% this time last year, with inner Sydney at 2.7%, middle Sydney at 2.9% and outer Sydney at 2.7%. 

Tim Lawless at CoreLogic says the recovery in rental yields is likely to be drawn out.

This article first appeared in The Daily Telegraph. 

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

Rental Yield Investment Strategy

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