Melbourne investors looking for high rental yields could buy close to universities and within the inner-city unit market, data shows, as experts suggest rental income could trump capital growth post-budget.
Caulfield East, a student hub near Monash University, and the CBD had Melbourne’s highest gross rental yields, both at 7.5 per cent in the March quarter, according to Domain data. Caulfield East had a median weekly rent of $430 and Melbourne $680.
The high-density, well-connected, unit markets of Southbank, Carlton and Docklands all made the top 10, but also all have weak capital growth, having lost at least 2 per cent in value in the past five years. Units in neighbouring West Melbourne lost almost 20 per cent.
Gross rental yield measures a property’s annual rental income, divided by the property’s value. It doesn’t include costs like owner’s corporation fees, maintenance, taxes or council rates.
Metropolitan Melbourne had a gross median rental yield for units of 5.9 per cent, with houses at 3.8 per cent, in the March quarter.
For those looking to invest in houses, Broadmeadows and Dallas have median yields of 4.7 and 4.5 per cent respectively, and both have median weekly rents of about $500. Units in 121 suburbs delivered higher rental yields than Broadmeadows houses.
Dr Nicola Powell, Domain’s chief of research and economics, said it was inevitable that the lower cost of units and a ceiling on rents meant unit investors could expect higher yields, which offset the risk of flat or declining prices.
“Ultimately a cheaper property price can lift that gross rental yield,” Powell said, noting units in the majority of the highest-yielding suburbs had lost value over the past five years.
“You find in some of these locations there’s also strong rental demand, so there’s tight vacancy rates and population growth, which can also help to push those rents higher.”
Powell pointed to the dominance of areas with large amounts of student housing in the list of highest-yielding suburbs. Student accommodation tends to be low cost, with high turnover – with the risk of gaps in income as students move around the university year.
“These are much higher-yielding than blue-chip family house markets … where owner-occupying families fight to get into some of these tightly held locations,” she said.
The properties with the lowest rental yield were houses in prestige areas such as Canterbury (2.2 per cent) and Sorrento (2.3 per cent), with Eaglemont, Balwyn North and East Melbourne not much higher.
“You tend to find that what drives capital growth and what drives rental return actually work at cross-purposes,” said Jarrod McCabe, director at property investor advisory group Wakelin.
House investors get the benefit of land value, which is likely to grow in value over time, whereas “from a rental yield and rental market perspective, tenants pay premiums for the actual property itself, including the fit out”, McCabe said.
Powell said the changes to negative gearing and the reduction of the capital gains discount proposed in this month’s federal budget might mean investors become more focused on rental yields, as capital growth is disincentivised.
“Historically, Australian investors have accepted low rental yields,” she said. “Because the real payoff was about strong capital growth, and the tax benefits from negative gearing, then the discounted capital gains when they actually sold their property. So they were OK in terms of being in a negative cash flow.
“But I think under the budget changes, investors will become much more focused on rental income.”
Angie Zigomanis, head of data insights at Quantify Strategic Insights, agreed and said investors looking at established properties would seek a lower price point.
“Some investors are going to seek to offset what they won’t get in negative gearing benefits,” he said. “And at the end of the day, a lower price translates to a higher yield. Because the rent won’t change.”
Beyond looking for lower property prices and high-demand locations, there is a way investors can increase their yields and mitigate their risk: looking after their tenants.
“A well-maintained property means you’re likely to keep your tenant for longer,” Zigomanis said. “Maintenance, at the end of the day, is maintenance … if you don’t maintain [it], something bigger is going to happen down the track as well. It’s common sense.”
McCabe agreed being a good landlord had always been “a good way to improve your yield”.
“And there’s opportunities to upgrade kitchens, upgrade bathrooms, paint, floor coverings, improve courtyard gardens or outdoor space, that sort of thing,” he said.
McCabe said beyond keeping tenants happy and lowering the risk of turnover, “what you’ll end up doing is increasing the value of your property”, which could lead to a higher asking rent when a valued tenant eventually left.
“With mainly cosmetic upgrades, the outlay that you spend versus the return that you’ll gain can be significant,” he said.
