11th March 2009
Low interest rates, strong rentals and more affordable prices are aligning to allow investment property to be self-funding
All of those familiar with La Trobe know that we specialise in mortgages. We focus on mortgages and are not involved in managing investments in any other asset class. And we only manage one investment fund - our Australian Mortgage Fund, with its four separate mortgage-related investment options.
However, as we have discussed in previous editions of Investment News, we are strong believers in diversification of investments, and when we see an interesting article on other investment strategies, we like to share it with our readers.
Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property, and she recently wrote an interesting article on investing in Australian residential property. Here is an extract.
"A window of opportunity looks set to open for property investors during 2009, created by an unusual combination of factors not seen since 1996. Interest rates are falling rapidly with the cash rate down to 3.25% p.a. and likely to fall further, perhaps by 1% by mid-year. At the same time, rent yields are strong, rental vacancies are low and property prices are in for a flat year. As a consequence, the gap between loan repayments and rental income is narrowing, ushering in a time when investors will be able to buy prime inner-urban investment property, which will be close to self-funding. In 1996, the window opened for about nine months; and if current conditions persist, that's how long it's likely to be open for in 2009.
What's created this opportunity? First, there has been a fall in new dwelling construction, down 36% across the board, while demand for housing from a growing population continues to rise. The supply/demand balance is now working in favour of investors, not against them.
Prices for prime inner-urban investment properties in our major capital cities (as distinct from the overall market) have eased 5-10% in the past 12 months. Quality assets are now a little more affordable for investors and home buyers.
Falling mortgage rates (from about 9.25% in 2008 to about 6.9% today, and expected to reach 5.5%) have left investors with a $300,000 mortgage better off to the tune of $470 a month than in September 2008, a figure that will rise with each rate cut - a pretty healthy incentive to invest.
At the same time, rents are very strong. Australian Property Monitors data for the year to June 2008 shows the asking rent for a unit rose 11% in Sydney, 13% in Melbourne, 9% in Adelaide and 25% in Perth! Brisbane was the only market with subdued rent rises, at just 3%. These rises are the result of a tight rental market, with vacancy rates at less than 2% in Sydney, Melbourne, Brisbane and Adelaide.
Cameron Kusher, the senior research analyst at RP Data, has noted that with fewer investment properties being built, "the shortage of rental property is likely to continue". There is some debate about just how low vacancy rates have become, but it is clear the market is tight on any historical measure.
The APM data confirms the experience of a tight rental market and improving rental yields. In June 2008, units in Sydney were returning a gross yield of 5.1%, Canberra 5.7%, while other major cities were between 4.5-4.7%, well above the levels of 2-3% of 18 months ago. The shortage of rental properties points to rents continuing to firm through 2009 and beyond".
As always, investors should consider getting professional advice to make sure that their investment strategies match their tolerance to risk, their time horizon, and their financial requirements. However, depending on your circumstances, now could be the time to consider investing in Australian residential property.
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Head of Funds Management
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Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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