Super rush may coincide with city investor influx

Super rush may coincide with city investor influx
COMMENT
Majella Corrigan
June 23, 2007

JUNE 30 is nearly here, and as the window closes on the chance to put large sums of money into superannuation, it could also herald the much-mooted return of the investor to capital city markets.
In trying to make decisions, however, investors face mixed signals.

Yes, rents are rising and yes, there's a shortage of rental property in many eastern seaboard capital cities.

The big questions are where the strong capital growth will be, and how far away is that growth? According to valuers Herron Todd White, if interest rates remain static, or better still, fall, Melbourne's residential market is likely to outperform its eastern capital city counterparts.

Demographic and population change, yield growth combined with falling vacancy rates, and lagging building approvals are all good news for Melbourne.

So it should see the best growth of any capital city in the next few years.

"First homebuyers and investors should take notice and position themselves accordingly with the market poised to begin its growth cycle again within the next 12 months," HTW's review says. The big factor in Melbourne's favour generally is that last year its population grew by nearly 70,000 - more than any other capital city.

Not only is Melbourne a big destination for skilled migrants, but it no longer suffers a net loss in interstate migration, HTW says.

In the inner city and Docklands the apartment glut, synonymous with Melbourne for so long, has been mostly absorbed, the valuer says.

Any recovery is expected to be led by investors, who are now seeing vacancy rates dip to a 25-year low of 1.2 per cent (partly because those who can't afford to buy must rent) and returns increase for the first time in eight years.

While rents rose in 2006, so did interest rates, meaning there was no impetus for investors to buy.

Stable or lower rates will further improve cash flow, making it easier for investors to take the plunge.

Despite this, HTW says the average yield is still 4 per cent across the entire residential sector, so at least two years of rental growth of 10 per cent or more is needed to push yields up to their pre-boom levels.

Meanwhile in inner Sydney some agents are reporting zero vacancies, and rents have broadly risen 5 per cent. In the inner west, the rental increase is probably much higher.

In Sydney's outer west, the rental market is described as "red hot", because of a lack of investors. Units near transport are getting close to 10 per cent yields, but HTW says it's hard-pressed to point to any capital value growth areas in this apartment sector.

This is probably a good point for investors to remember.

There are dual reasons for investing - yield and price growth - and they both can't go up dramatically at the same time.

Buyers governed solely by yield could find capital growth elusive if they haven't chosen wisely.