We explore the opportunities in both direct and listed real estate.
2023 is a “landlords’ market” with asking rents reaching record highs across the country during the March quarter, a new report has found.
This, at a time when supply is dwindling – investors are sitting on the sidelines as interest rates rise, and new home approvals have been trending lower for months as soaring construction costs spook buyers and wreak havoc on the building industry.
The RBA’s financial stability review – released Thursday – estimates the construction sector accounted for around 30% of company insolvencies over the past year. Nearly one in every three.
Yet rental demand is strong, and there’s no sign of that changing any time soon as an influx of overseas migrants, students and temporary visa holders hit our shores.
Updated government forecasts released this week project 650,000 migrants will arrive over the next two financial years. Add that to the thousands of births in that period and Australia’s population will increase by 900,000 by 2025.
Limited supply, booming demand. The result: higher rents, and higher property values.
After declining for almost a year as rapidly rising interest rates took the heat out of the pandemic-driven boom – there are signs we may have reached a turning point.
Corelogic’s home price index rose 0.6% nationally in March, driven by Sydney and Melbourne, up 1.4% and 0.6% respectively.
CoreLogic research director Tim Lawless put the rise down to a combination of low advertised stock levels, tight rental conditions and additional demand from overseas migration.
“Although interest rates are high and there is an expectation the economy will slow through the year, it’s clear other factors are now placing upwards pressure on home prices,” Lawless says.
“With rental markets this tight, it’s likely we are seeing some spill over from renting into purchasing, although, with mortgage rates so high, not everyone who wants to buy will be able to qualify for a loan.”
With the RBA this week keeping interest rates on hold for the first time since May 2022, that could give buyers the confidence to jump back into the market.
So, is it time to invest in property? And what are the best ways to do so?
In this article we’ll explore the opportunities in direct real estate and in listed property assets, like REITs and ETFs.
Investing in housing directly
Domain's quarterly rental report found asking rents are at historical highs across the combined capitals and regions.
House rents have risen by $135 a week (or 31.4%) and unit rents by $140 (or 34.1%) nationally since the pandemic low.
Averages don’t tell the full story. In some capital city suburbs, rents have soared by more than 50% in just a year.
But investors have been sitting on the sidelines. They’re not necessarily selling in droves, but they’re rushing to buy either. At least, not according to the latest lending figures from the Australian Bureau of Statistics, which shows the number of new investor housing loans (excluding refinancing) has been trending down for months, to be back to where they were in early 2021.
If demand isn’t keeping up with supply, why would investors be sitting out the market?
On average, Corelogic’s head of residential research Eliza Owen says mortgage payments for new investment mortgages have risen faster than rents.
“Having high rent that exceeds mortgage costs is not the only reason investors take interest in property,” Owen says.
“Negative gearing exists to help investors purchase real estate and provide rental housing when operational costs of the property exceed rental income.”
But in return, investors expect capital gains.
“In the current environment opportunities for capital gains have been diminished by factors such as high interest rates and low consumer confidence. By the end of February 2023, Australian dwellings had seen a record fall of 9.1%.”
CBD markets are in hot demand with renters given many workers are returning to the office, and migrants typically settle in the capital cities when they first arrive. But data from PropTrack, REA Group’s data arm, shows intense competition is also forcing many further out from city centres.
It found, on average, more than 100 potential renters per available rental listing in some of the most popular suburbs, often within a one-hour commuting distance from a city centre. The data captured highly engaged renters, which are defined as someone who takes several high-value actions on a listing, like saving a property or booking an inspection.
Investing in listed property
Like the value of physical property, the share prices of listed property trusts have taken a hit over the past year.
Real estate investment trusts, or REITs, are companies that develop or buy portfolios of properties, such as office buildings, shopping centres, hotels, and residential houses and apartments. The properties generate income from rent and capital growth, and the REITs that hold these assets typically carry a lot of debt.
