Diminishing Yield: Returns headed to record lows

Yields on Sydney real estate are at all time lows. The gross return on many Sydney properties is down to 3.5%, meaning a net yield of less than 2% in many cases. Given interest rates are at record lows, it’s not a great surprise that investors have driven yields down by the same degree.

The under reported story of the property boom has been the decline in the rental market. In turn, yields have been decimated as investors have been asked to pay more, to receive less. Add to this equation APRA’s toughened stance toward investors and it’s no wonder new-coming investors have backed off entering the market.

A healthy market always has incoming investors to support prices. However, incoming investors seem to have taken a break from the Sydney housing market in recent months, digesting the many challenging factors.

The great challenge facing investors in the current market is where to invest cash. Sydney offers capital growth but low yield, whereas interstate markets offer yield but have barely increased in price, even though interest rates have been slashed in the past 3 years. Brisbane has been the huge underperforming market to date, with many continuing to predict it will be the recipient of excess money from Sydney and Melbourne investors.

Sydney investors already in the market have been duly compensated for their weak yield with increasing capital value. Their annual return on investment (net yield + capital growth) has them comfortably in the black in recent years.

In the next few years, the Sydney market is about to experience thousands of new apartments under construction being completed. As these apartments are finished, many will be listed on the rental market. Such an enormous injection of supply is likely to keep downward pressure on rents. Good for tenants, not so for landlords.

Investors entering the Sydney market have a clear choice to make. Do they believe the Sydney boom has further to run? Given the yields are at record lows, buying a Sydney investment property is buying into the story the boom still has legs in the years ahead. Whilst investors may be backing off the market, other segments of demand stand ready to act.

If apartment prices show any sort of value, rest assured, first home buyers will jump in and take advantage. Add foreign investors being attracted by the lower Australian dollar and Sydney’s property market is sure to experience strong support even if local investors back off.

Regardless of forecasts, predictions and analysis, ultimately, markets do what markets do.

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