Sticking to proven property investment models

Escalating demand for property in Melbourne and Sydney has made finding houses that fit precise property investment criteria more crucial than ever, reports Portfolio Management Services’ acquisitions team.

RP Data figures released this week show capital city median house prices increased 4.2 per cent across June, July and August, the strongest winter performance since 2007.

The biggest increases were in Melbourne (6.4 per cent) and Sydney (5 per cent), which recorded year-on-year gains of 11.7 per cent and 16.2 per cent respectively.

The figures also revealed property investors account for more than 38 per cent of all new mortgage lending. Commitments for investment property make up the largest share of new mortgages since 2003, as investors take advantage of historically cheap mortgage rates.

RP Data reported a fall in the typical gross yield on houses in the capital cities, from 4.1 per cent to 3.7 per cent over the past 12 months. The most significant yield compression occurred in Sydney and Melbourne, according to RP Data research director Tim Lawless.

“Over the past year we have seen Sydney’s gross rental yields fall by 47 basis points, from 4.1 per cent to 3.6 per cent,” Mr Lawless said.

“In Melbourne, where rental yields are even lower, we have seen gross yields fall by 32 basis points over the year to reach 3.2 per cent gross. Given the current rate of value growth and moderate rental growth, it won’t be long before Sydney yields have moved below those of Melbourne.”

Mr Lawless said property investors were mostly concentrated across the Sydney and Melbourne apartment markets, where capital gains had been strong but yields had been driven down.

Property investment in a vendors’ market

The bidding war between investors for new apartments and off-the-plan options is one Portfolio Management Services has deliberately avoided. The company typically buys established houses, often at less than replacement cost, with above-average rental yields.

Portfolio has successfully invested in property for more than 40 years; investment property bought and managed by the company has averaged total returns of 11.7 per cent per year since 1972 – in excess of the REIA and most other investment sectors.

Portfolio Management Services managing director Jock Bing said finding property in Melbourne and Sydney that fit Portfolio’s proven investment criteria was difficult but remained possible.

“We can always find something,” he said. “At the moment in Brisbane we might look at five properties and buy one. In Sydney we might look at 15, in Melbourne it is more like 20 to 40 before we buy one.”

“We have bought very little in the Melbourne market for some considerable time because the figures generally don’t work. Prices are well above replacement. As an investor you need to get the yield, assets and money right.”

Brisbane property investment opportunities

The best property investment buys in the eastern-state capitals were now typically in metropolitan Brisbane, Mr Bing said.

“It is still possible to get 5 per cent returns there, prices like-for-like are lower than in Sydney and Melbourne and the demand for accommodation is slightly higher.”

Discussing Brisbane property investment opportunities, Portfolio Management Services Property Acquisitions Advisor David Powell said it was still a good time to buy. Investors though needed to be “very picky” about where they were buying, with some suburbs and even pockets within suburbs outperforming those around them. Everything from vacancy rates to property replacement costs needed to be considered – particularly given current exuberance among property investors.

“We’re paid to do that research for our clients, to pick out those properties that are going to perform for them over the long term,” he said.

With a lot of apartment living options coming onto the Brisbane market, Mr Powell said Portfolio’s focus remained on established housing, where the company continued to perform exceptionally well.

For obligation-free expert advice on your property investment ambitions, speak to Portfolio Management Services’ acquisitions experts today on (03) 9621 1044.