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Rental shortage creates good opportunities

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  • Rental shortage creates good opportunities

    Rental shortage creates good opportunities

    Majella Corrigan | March 29, 2008

    HIGHER interest rates have led to more nervousness than many in the real estate industry like to admit, but for potential investors in either Sydney or Melbourne, the continuing rental shortage may be hard to resist.

    Vacancy rates keep falling in these capital cities. But of the two capitals, Sydney has had the lesser price growth, with a slim increase in the December quarter of 1.48 per cent.

    It's hard to make a call on the Sydney market, because it's so big and varied. It also depends on what investors are buying for - capital growth or yield.

    PK Property Search and Negotiators, a Sydney buyers agency, says in its recent newsletter that Sydney is ripe for the picking for investors wanting to get into some of the established areas at good prices.

    It says yields of 5 per cent are not far away, with rents expected to rise between 15 and 25 per cent again this year and vacancy rates at a 33-year low.

    The reason property in established areas is holding its own in a turbulent market is that there is simply no rental stock, it says.

    That's no exaggeration. Sydney (and Melbourne) now have a rental vacancy rate of 0.9 per cent, reflecting in part the return of university students during February.

    A reasonable balance between supply and demand is thought to be about 3 per cent.

    PK Property says investors are turning back to Sydney for units priced from $450,000 to $1.2 million, and achieving rental yields between 3.8 and 4.5 per cent.

    Valuer Herron Todd White, in its March newsletter, also points towards more rental and capital growth for certain areas of Sydney, but notes that investors need to look at where a suburb fits within the growth cycle.

    Lower prices don't necessarily mean higher rental yields.

    For example, there has been limited rental growth in the southwest and west of Sydney, despite weaker sales prices there, it says.

    However, somewhere like Bondi Beach, with a broad range of both tenant types and investment properties, is not as volatile or susceptible to external factors and can look forward to growth in rentals and prices.

    The smaller units in Bondi offer good rental returns while the high-end properties, aimed at the executive market, have higher rentals and potential for stronger capital growth.

    HTW also mentions Willoughby, on Sydney's lower north shore, as a suburb that had solid gains last year with the same expected this year, and rental returns of about 4.8 per cent.

    From a rental viewpoint, it has good infrastructure and public transport, a family atmosphere, is close to established schools and has a limited supply of rental properties.

    Investors interested solely in rental yield should be aware that capital growth is expected to outstrip rental growth in this suburb, so yields will be affected.

    Many Sydneysiders would be pleased to have that problem.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx