Residential property is still not attractive enough to lure back investors. Research reports from Michael Matusik and Standard & Poors show returns are not high enough.
Matusik Property Insight’s Michael Matusik said stories of the surge of investors returning to the residential market are not going to happen anytime soon.
“Last week’s financial press, again, carried stories about rising rents and the expectant surge of investors back into the residential market as yields improve.
“However, given the large gap between current rents and end values it is likely to take some time until rents are at a level to make residential investment attractive again to an investor,” he added.
According to Matusik, it will be another 12 months before apartment rents are high enough to get a 5% gross rental yield and up to two years for the same for detached houses.
Investors at present, at least, are not interested in buying a residential property offering a gross rental yield below 5%.
In Sydney, Melbourne and Brisbane, Matusik predicts it will take another three, two and 12-18 months respectively before investors return to the market.
In addition, he believes a 34% or $130 change in rent is needed and 21% or $70 and $60 for Melbourne and Brisbane respectively.
According to S&P’s Asset Allocation Economic and Investment Strategy report, if rents were expected to grow in line with inflation, then current yields would have to be higher than cash to compensate for future economic risk.
“If on the other hand we expect capital gains over and above inflation, then we might be willing to invest at a yield less than cash as long as the inclusion of capital gains means that the final return will still be well above the cash return,” S&P’s director of investment consulting Simon Ibbetson said.
“If we assume that inflation and interests will be stable then it is merely a case of taking current yields and adding some other number between zero (rents increase in line with inflation) and expected real GDP growth (rents grow in line with the economy),” he added. “That would imply a return of somewhere between just 3% per annum (current rental yields) and 6% (assuming an additional 3% of real GDP growth). Obviously one can immediately receive a similar return from a cash management trust with much less risk (not to mention less heartache).”
Ibbetson went on to say expectations of increased rents as a result of low vacancy rates and housing are wishful thinking.
“Besides, past increases in population growth have failed to have a noticeable impact on rent levels. Low vacancy rates are also considered a catalyst for surges in rents although the last time they were this low (in the early 1990’s) rents continued to decline in real terms, after being influenced more by economic activity (and hence tenants’ ability to pay) than the wishful thinking of landlords,” he added.
“Supply and demand is obviously a highly relevant factor in any investment decision… But unfortunately, rents tend to be stickier than asset prices. In other words, there are structural reasons why yields are unlikely to adjust upwards in a great hurry.
“These reasons include legislation that protects tenants and the existence of contracts which will, at the very least, slow down any increase in rents. While rent levels can and do move over time the following graph shows what happens to aggregate rent expenditure once we have adjusted for inflation – not very much,”
Ibbetson said furthermore, the other factors often mooted as underpinning capital values are on closer examination less reliable indicators.
“Take population growth. It is predicted (by the Government) to slow down as the demographic impact of an ageing population more than offsets any increase in immigration. Besides, past increases in population growth have failed to have a noticeable impact on rent levels.
“Finally, while housing starts may be down from the cyclical highs of a few years ago they are still above the historical average, even during periods consistent with higher population growth and lower vacancy rates,” he concluded.
Matusik said something drastically needs to be done to encourage more investors into the residential market.
At present there is a shortfall of around 15% between the demand for and the supply of new investment housing across
“Reducing stamp duty or increasing grants to first home buyers will only translate into higher prices for owners (and tenants) unless the supply of land is improved relative to demand.
“Hopefully we will see some real relief in the upcoming May Federal Budget. Initiatives which include tax breaks to invest in residential property; an increase in the supply of urban land and the building of affordable housing by government,” he added.
Australian Property Journal
