The balance of rental yield and potential capital growth

Posted by Jack Guthrie

First time and experienced property investors alike, often misjudge the significance of rental yields. They look for a market that they perceive will create strong capital growth and jump to conclusions about a property’s potential, overlooking its week to week costs. It is decisions like this that lead to ineffective investments and often cause buyers to offload their property before it can prove fruitful.

The primary goal is to find our clients investments they can hold for the long term. The key to doing this is through holding a property. To do this, it is critical that our clients are not only investing in markets where yields enable them to minimise costs but markets which are less susceptible to the risk of volatility in vacancy and yields.

For many investors the past few years has seen them buy into the hype and invest in the Sydney market. Not only are they likely to experience a lengthy period of stagnation but the underwhelming yields will make the property far more difficult to hold than a property in one of Australia’s more promising markets.

We’ve had a look at the rental market of all the capital cities.

Capital City	Vacancy Rate	Average house rental yield	Average apartment rental yield
Sydney	2.5%	2.7%	3.7%
Canberra	0.8%	4.0%	5.5%
Darwin	3.5%	4.8%	5.5%
Brisbane	2.9%	3.8%	5.0%
Adelaide	1.3%	3.9%	5.2%
Hobart	0.7%	4.2%	6.0%
Perth	4.1%	3.2%	4.3%
Melbourne	1.4%	2.8%	3.9%

Of course, each region and suburb within each city presents an individual rental market that needs to be considered.

The importance of a selecting a market with stable rental returns cannot be overstated. Brisbane and Melbourne remain approved macro markets for Blue Wealth, partly due to the strength of demand within their overall rental market.

Brisbane’s market is benefited by exceptional yields. Investors can hold quality properties more easily here, than many other capital market in the country. Data presented by SQM research indicates that the Australian capital city average yield is 4% for units and slightly above 3% for houses. Comparatively, Brisbane’s apartments and housing yields have stayed above 5% and 4% respectively since 2011. The strong rental market and lower purchase prices often allow investors to retain properties for less than $10 a week, providing a softer entry into the property market and a more feasible long-term strategy. With supply slowing in Brisbane and rising interstate and overseas migration, we are likely to see these rates improve further.

Contrastingly, Melbourne depicts a rental market in continually high demand. The macro market is categorised by low vacancies, causing long run rental growth. Broadly speaking, Melbourne does offer lower yields than Brisbane and many others in the country, however, the certainty around population growth and rental demand provides investors with the comfort of a low risk, low vacancy investment.

As seen above, there are various markets which offer comparably low vacancies and relatively high yields however, the primary driver for our market approval remains around the potential capital growth. Although markets such as Hobart and Canberra offer the lowest vacancies and highest yields in the country, their long term market driving fundamentals are not as strong as those in Melbourne or Brisbane.

There are many moving parts to involved with a successful investment, and the rental performance of your asset should be just as important as it’s capital growth. To provide our clients with the best opportunity for a soundly performing portfolio, our selected markets are approved through research and analytics rather than general sentiment.

Posted by Jack Guthrie, on 10th Jul 2018