Bricks & mortor property investment looking shaky amidst rental yield contraction

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RENT increases are failing to keep pace with rising house prices, piling extra pressure onto the nation’s two million-plus property investors.

Rental income yields have dropped in almost every capital city in the past five years, are 23 per cent lower nationally and down 30 per cent in some cities.

Once other costs are factored in, many investment property owners are battling to receive a 1.5 per cent income return on their investment, putting them thousands of dollars a month out of pocket.

For investors already dealing with rising interest rates, tough new bank lending restrictions and harsher tax rules, the income crunch is causing some to wonder if direct property is worth the effort.

Rental yields show a property’s rental income as a percentage of its value. Surging property prices in Sydney and Melbourne have reduced rental yields there, but even in Perth — where home prices have been falling — rental yields have dropped amid oversupply of homes.

QM Research managing director Louis Christopher said rental property yields had been falling in “pretty much a straight line” since mid-2012, caused by factors including easy money, low interest rates, strong population growth and falling investment yields globally.

CoreLogic head of research Cameron Kusher said with house price growth slowing and interest rates rising, more investors would have to consider rental returns and perhaps look beyond the boom cities of Sydney and Melbourne.

“If you have a lower yield, you are forking out more money each month,” he said.

Negative gearing tax benefits hand back some of the costs, but investors are still losing money if they get no growth.

Metropole Property Strategists CEO Michael Yardney said if prices stalled and interest rates rose, landlords would want to push up their rents, “but just because they want to, it doesn’t mean the market will accept it”.

“Some investors are saying, I better get a better yield — otherwise it’s not worth me investing,” he said.

As a result, many investors were seeking alternative investment options with exposure to residential property with a focus on yield.

Australian Bureau of Statistics Census data shows that in the five years to 2016 the nation’s median weekly rent rose from $285 to $335, up 17.5 per cent.

Mr Christopher said investors had been buying property for capital growth rather than rental incomes. “If buying now, you are buying in a very low-yield market,” he said.  Unfortunately capital growth is often offset by entry/exit costs and capital gains tax implications.

Since 2012, rental returns from Sydney houses have fallen from 4 per cent to 2.8 per cent, and in Melbourne they have fallen from 3.8 per cent to 2.9 per cent.

Source: Anthony Keane - Newscorp