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What’s better: rental yield or capital growth?

Property investment usually focuses on capital growth for wealth creation: the increased value of the property between its purchase and the sale. However, a rental yield can contribute to cash flow
and ensuring the debt on an investment property can be easily serviced.

Rental yield has been described as “a measure of how much cash an income generating asset produces each year as a percentage of that asset’s value.” To calculate the gross yield, divide the annual total rent by the purchase price. (The net yield includes ongoing costs as well). A gross yield of around 5% is considered a good figure.

With that in mind, CoreLogic’s 2019 Top Rental Performers Report on the ‘100 best rentals in Australia’ has revealed that suburbs in Queensland provide 42 of the top 100 best locations, based primarily in regional areas with links to mining. This is a result of a combination of the job market and the duration of the population moving through.

CoreLogic Research Analyst, Cameron Kusher noted that “to make the grade as a ‘top renter’ for this report a suburb needed to have a solid gross rental yield of least 5% for units or houses, plus consistent rental growth.”

The report stated that Central Queensland coal mining town, Blackwater, has a median property value of around $122,000, a median rent of $260 a week and an estimated gross yield of 11.7%. That yield rate matched second place holder, Broken Hill in NSW.

Houses offered higher yields than units, but while country areas provided higher yields than metropolitan areas, regional Australia didn’t provide the highest capital growth.

Property investment for the rental income versus for the capital growth/capital gain each as pros and cons. The former can require a lot more regular attention to detail to ensure the property remains occupied with good tenants; the latter is a long term proposition which may require a lot more research and an ability to accurately assess market trends.

Either way, seek some expert advice before making your move. You can contact United Global Capital today on 03 8657 7640 or email info@ugc.net.au for a no cost, no obligation consultation and learn how you can position yourself for success.

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Real estate news

The vagaries of the property market are never more perplexing than when the media is full of property news that seems contradictory.

This month we’ve had CoreLogic stating that the property market has stabilised in the last quarter,  with values rising in Sydney, Melbourne, Brisbane, Hobart and Darwin (though there have been drops in Adelaide, Perth and Canberra).

Yet at the same time, the lending approvals for new buildings have fallen to their lowest level in five years.  June’s figures were 1.3% lower than May’s and down 20% on 2018 approvals.

If the market is stabilising but fewer new homes are being built, what does that mean? As always, it’s down to demand and supply and the factors in population growth and the economy that influence those contrasting pressures.

The easing of lending restrictions and the continued growth in Australia’s population generally means there will be high demand for residential properties. 

At present, a lot of that demand is being met by apartments rather than houses, as apartments are less expensive for the entry-level home owners and investors.  New home sales rose 0.8% in the second quarter of 2019 – the first quarterly rise since the end of 2017 (even as building approvals fall)

Supply, however, looks like it will be declining for a while. With fewer new-build loans being approved, by the time those new dwellings are constructed, demand is likely to considerably outstrip supply, and price growth will be the inevitable result.

Of course, circumstances change and factors such as the growing population, strong employment figures and access to finance will have an impact on the demand vs supply equation. It pays to keep a close eye on the changing fortunes of the market. 

On the current trends, however, it’s likely that the next 12-18 months will see demand outstrip new housing supply and that the news looks very good for the housing market over the 18 month to 3 year period.

Brett Dickinson

Brett Dickinson

Director of Global Property at United Global Capital
LREA, DipFinServ
Brett is a Licensed Real Estate Agent and manages United Global Capital’s property projects and client acquisitions.
Brett Dickinson

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Cleaner air, less traffic, open spaces, lower cost of living…did we mention less traffic? There are any number of reasons to consider a tree change, but if you’re serious about leaving the bright lights behind, better do your homework first.

Housing affordability

Buying a home is more affordable in the country, and that goes for renting too. 

In Wodonga on the Victoria-NSW border, you can rent a 4 bedroom, 2 bathroom, modern family home for around $390 per week. You’d pay around $610 for a similar home in Melbourne’s Glen Waverley. 

You could buy a 4 bed, 2 bath home on a 1,000 square meter block in Orange for just over $500,000, while a similar dwelling 250 ks up the road in Hornsby, Sydney could set you back over $1 million.

While property is generally cheaper to rent or buy in the country you’ll need to consider other factors such as council rates. 

Some regional municipalities cover large areas – that equates to a lot of maintenance with fewer residents. This means council and water rates can be pricier than in the city. 

Another point to think about is bushfire zoning. If you’re in a high-risk area, insurance premiums can be more costly. When building a house in a bushfire-prone area you may be required to modify your building plans to accommodate the area’s fire rating. This will increase the cost of your project.

Make sure you do your sums. Talk to local councils about rates and levies. If buying land, read your Section 32 carefully and be aware of all zoning requirements.

Work

Government incentives encourage industries and businesses to move to regional areas. As employment opportunities in regional areas grows, so too does the economic well-being of its towns. 

This flow-on enables local governments to build and maintain community infrastructure such as parks and family-friendly spaces and resources, such as libraries, transport and shops. All of this provides a wide range of employment opportunities.

It’s a good idea, to check the job-market in the area, and if possible, have a job lined up before you make any final decisions.

Could you make it work?

Holidaying and living are two separate things. Try not to make the mistake of assuming an idyllic getaway will be your perfect permanent tree-change. 

On holiday you’re relaxed; you’re not a taxi for your kids’ weekend activities, you’re not harried by housework, school and work pressures.

If you’re serious about moving to the country and you’ve a location in mind, do your due diligence. Start by researching the following:

  • Schools

    • primary/secondary/tertiary

    • adequate facilities and teaching resources

    • good range of subjects

    • good location

  • Medical

    • hospitals, doctors, dentists 

    • ambulance service

  • Community

    • kids/adults sporting clubs

    • library

    • public transport

    • local theatre or art groups

    • swimming pool

    • well-maintained parks and gardens

  • Entertainment

    • bars, restaurants, cafes

    • theatre or cinema

    • shops

Australians are blessed with an abundance of wide-open spaces. If you’re dreaming of a tree change, do your research and draw up a plan; your dream could become reality. 

Sources:

www.realestate.com.au 

 Important:
This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. 

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Brett Dickinson

Brett Dickinson

Director of Global Property at United Global Capital
LREA, DipFinServ
Brett is a Licensed Real Estate Agent and manages United Global Capital’s property projects and client acquisitions.
Brett Dickinson

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property invest

As a property investor means it’s important to be familiar with real estate trends across the country. Interest rates and the economy as a whole can have broad effects across the nation, but local conditions can influence how property investments perform from suburb to suburb and town to town.

In June, Minus the Agent pointed out the factors that emphasise the investment potential of regional centres, including Geelong and the Sunshine Coast. These include infrastructure projects and strong migration to these regions, coupled with the relatively low property prices.

Some smaller towns can be talked up big when their economies are tied into booming industries and planned large-scale projects. A lower-cost investment property can be tempting too, but due diligence is required not only on the property – it has to encompass the long term impact of the industry or project on the local housing market.

Regional and rural centres wax and wane with local conditions, such as employment opportunities, infrastructure projects, and population shifts. 

Darwin is a case study in point. Almost a decade ago, infrastructure and resource projects created a huge demand for jobs and housing, and property prices rose by over $100,000. Now that the projects have been completed and are in maintenance mode, huge staff numbers are no longer required and the working population has moved on to new, more job-fertile pastures.  As a result, house prices have fallen below their 2011 levels. 

Mining towns have similar boom-and-bust cycles, making them shaky propositions for investment, which requires sustainable, long term growth drivers.

Sydney, Melbourne and Brisbane remain the major investment markets, but thriving regional areas with strong infrastructure and lifestyle assets – such as Newcastle, NSW – and that aren’t focused on one industry or project also have potential, as do large towns within commuting distance of capital cities.  

In the end, country properties may be cheaper, to begin with, but their potential to grow as an investment is a lot more fickle. Analyst John Lindeman reported in late 2018 that country properties’ rate of growth is around 2% less than the capital city housing market, on average, making them a less attractive prospect for the long term investor.

Brett Dickinson

Brett Dickinson

Director of Global Property at United Global Capital
LREA, DipFinServ
Brett is a Licensed Real Estate Agent and manages United Global Capital’s property projects and client acquisitions.
Brett Dickinson

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The Australian Prudential Regulation Authority (APRA) continues to work on both superannuation and the lending sphere in response to the commissions into superannuation and banking.

On June 18, APRA announced directions and additional license conditions for AMP Superannuation,  noting its concerns about AMP Super’s management of conflicts of interest, governance and risk; the processes for breach remediation; how poor risk culture is addressed; and ways to strengthen its board and mechanisms for accountability – all aspects of compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Under these new directions, AMP Super will need to engage an external expert to report on its remediation and compliance with APRA’s instructions.

APRA is casting its stern and watchful eye over what it considers risky loans as well, announcing capital guidelines for large and small banks on 12 June. The new guidelines come in the wake of its original proposals made in February 2018 and industry feedback on those proposals.

The guidelines target higher-risk, interest-only investment loans, which will now have tighter capital requirements than the principal-and-interest mortgages typically taken out by owner-occupiers. What this means is that, for the investment loans, banks will have to hold more capital to absorb any losses against those higher risk mortgages, which are among the biggest assets of the four major banks.

APRA’s directions affect small to medium enterprise (SME) business lending as well as the mortgage sector, with recommendations for additional types of collateral and more detailed risk assessments for SME loans. Credit cards and personal loans secured by vehicles will also be subject to lower risk weights. Smaller and less complex banks will have a more simplified framework.

APRA says its approach aims to keep outcomes competitive. Most changes won’t take effect until January 2022, ADIs currently using advanced models may need to implement the new requirements from 1 January 2021.

Image Source: Louis Douvis, The Sydney Morning Herald

Brett Dickinson

Brett Dickinson

Director of Global Property at United Global Capital
LREA, DipFinServ
Brett is a Licensed Real Estate Agent and manages United Global Capital’s property projects and client acquisitions.
Brett Dickinson

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interest rate cuts

On 3 June, the Reserve Bank cut the interest rate to a historical low of 1.25%. It was the RBA’s first cut since 2016 and some economists are predicting more cuts to come.

Assuming banks pass on the cut to their clients, this should be positive news for Australians with a mortgage. If you’re already in debt, one good strategy might be to continue making repayments at the higher rate to reduce the principal debt. It might also be a good time to borrow for investment: AMP reported the doubling of borrower activity with Lendi in the day after the cut was announced.

Bank Lending

The AMP also reported the suggestion that if the interest rate drops even further, banks will be less interested in lending. Of course, the flip side of a rate cut is that lower interest rates on loans means lower interest on investments, which affects retirees particularly.

While some see the cut as flagging trouble in the economy, there might be some bright spots in the gloom.

For example, the Australian Prudential Regulation Authority (APRA ) is making changes, including removing the 7% serviceability buffer on home loans and raising the second buffer against the interest rate paid by the borrower by 0.5%.

How It Affects Borrowing Capacity?

This change would bring a buffer of 6.5% – which would increase the borrowing capacity of the average person by 11%. If the buffer fell to 6%, people’s borrowing capacity rises to 20%. At that rate, people previously wanting a $500,000 loan could afford a $600,000 loan.

What could that extra $100,000 achieve for a borrower? They might buy a home in a higher price bracket. Perhaps some of that potential value could be spent on furniture and appliances in that higher-bracket home. Some could become an investment loan.

It’s true that the average Australian household is already heavily in debt, although a recent Finder.com.au article notes that the majority of Australian personal debt is “good” debt, taken on to build long term wealth, through real estate or investments.

Taking on an extra $100,000 in debt while rates are low may still be a risk, but that may be mitigated if it’s taken on with wealth creation in mind.  

Brett Dickinson

Brett Dickinson

Director of Global Property at United Global Capital
LREA, DipFinServ
Brett is a Licensed Real Estate Agent and manages United Global Capital’s property projects and client acquisitions.
Brett Dickinson

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