Yield drops for Investors

Some stay the course, whilst many sell up.

Investors entering the property market are now doing so on the basis of lower returns. Much has been made of the buoyant selling conditions throughout 2013. But as property prices spectacularly shot higher, rents have quietly slipped during the year. The end result is investors are facing a much lower yield. The lower returns put pressure on the asset to return capital growth in the absence of a decent rental return.

Unsurprisingly, many investors already in the market have sold up in the last quarter of 2013, taking advantage of the high prices on offer.

However, just as many investors have jumped into the market in 2013, chasing capital growth, to balance the exodus.

With some forecasting Sydney real estate prices to jump 20% in the next few years, only time will tell if this is a good market to sell out of or a good time to invest in residential real estate.

Rising rents are one of the key structural drivers to capital growth. If property prices continue to rise in 2014 and rents stagnate or fall, investors would be well advised to remain cautious. Even though a low return in the bank is not everyone’s idea of a good time, buying at the top of the market is not an investment strategy of the rich either.

There is a great deal of supply due to hit the Sydney property market in 2015 as many major developments complete. This extra supply will first and foremost put pressure on rents in their immediate locations, as the investors look for a tenant on their brand new property at settlement.

There may be enough demand to absorb the extra stock on the market from 2015 onwards, but as an investor, it’s worth doing the extra research before jumping in. The O’Farrell Government has shown a clear preference for development in order to curb property prices.

Buying an investment property with a low rental return in the hope of capital growth may be optimistic at time when thousands of extra properties are due to hit the market. Even if it is purchased in your Self-Managed Super Fund and brings a few tax benefits with it.

There will be opportunities to secure a good investment in 2014, just not as many as there was in 2012 when rents were high and prices were low.

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