Why inner city units are set to boom

Published by Financial Review 19th May 2012 It appears the great Australian dream of owning a home on a quarter-acre block is well and truly a thing of the past. Experts are predicting a huge increase in demand for rental units within a 15-kilometre radius of CBD areas in the next decade, which will cause rental yields to soar in these locations. Close to the action Laing and Simmons chief executive officer Tony Anderson says in the next five to 10 years, home ownership as a total percentage of housing will fall dramatically, which will drive demand for rental properties close to where the action is. “The scarcity of capital, as well as the higher cost of ownership compared to renting and the lack of suitable premises, will drive rental yields north,” he says. “Unless local and state regulators change their approach to high density housing close to the city, there simply won’t be enough stock to satisfy rental demand.” Anderson says Generation Y’s preference for renting rather than buying, their predilection to live close to the city – and their means to pay for the privilege – will also help to lift rental yields. Rents to soar Anderson says this will lead to an 80 to 100 per cent increase in rents over the next five years. According to Cameron Kusher, RP Data’s senior research analyst, there is already ample evidence that demand for rental properties is pushing up yields. He says rental yields in Sydney, Brisbane and Perth are particularly strong, although the market in Melbourne and Adelaide is more subdued. “There’s been a big surge in property values in Melbourne which has held back yields, as have higher vacancy rates,” he says. Close to the CBD Another factor that is holding up rental yields is slow capital growth of properties. A comparison of rental yields across inner and outer suburbs in capital cities shows how attractive properties close to CBD areas have become. RP Data’s figures show a rental yield for a unit in the harbourside suburb of Millers Point, close to Sydney’s CBD, of 7.1 per cent, compared with a rental yield of 6.1 per cent for a unit in Auburn, 20 kilometres from Sydney’s CBD. The average rental yield for a unit in Melbourne’s CBD is 6.2 per cent, versus an average of 5 per cent for a unit in Craigieburn, 26 kilometres north of Melbourne. It’s a similar story in Brisbane, where the average rental yield for a unit in Brisbane’s CBD is 7.3 per cent, compared with an average rental yield for an apartment in Wynnum West, 16 kilometres west of the city, of 6.1 per cent. In the city suburb of Burswood in Perth, the rental yield for an apartment is 6.4 per cent, while units in the suburb of Gosnells, 20 kilometres south-east of Perth, yield on average 5.5 per cent. Adelaide the exception Only Adelaide and surrounding suburbs is bucking the trend. The average yield of an apartment in the city suburb of Richmond is 5.6 per cent, whereas an apartment in Para Hills West, about 16 kilometres north-east of the city, will yield an average of 5.9 per cent. Like Anderson, Kusher is expecting a continuing lift in rental yields in properties – especially units – close to CBD areas. “There are very low vacancy rates in most capital cities, and building approvals and commencements are dropping. We expect vacancy rates in CBD areas to continue to remain at very low levels as the population continues to climb,” he says.