Rental Yields Decreasing as Prices Increase

From RP Data CoreLogic:

"CoreLogic RP Data February Home Value Index results released today showed that Australia’s combined capital cities have seen dwelling values rise by a further 0.3 per cent in February taking home values 8.3 per cent higher over the past twelve months.

According to CoreLogic RP Data head of research Tim Lawless, dwelling values continued their upwards trajectory over the month of February by recording a 0.3 per cent gain over the month. This now takes combined capital city dwelling values 2.5 per cent higher over the rolling quarter and 8.3 per cent higher over the twelve months to the end of February.

Over the past twelve months the CoreLogic RP Data Index shows dwelling values across the eight capital city aggregate index are up 8.3 per cent. Sydney is once again the clear standout with dwelling values 13.7 per cent higher while Melbourne values are 7.4 per cent higher. Australia’s third largest city, Brisbane, recorded the third highest rate of annual capital gain with dwelling values up 5.9 per cent. In contrast, dwelling values have increased by less than four per cent in every other capital city over the year.

Evidence of compressed rental yields is continuing across each of the capital city markets. A year ago the gross rental yield for a capital city dwelling was averaging 4.3 per cent; by the end of February the typical gross yield has been eroded down to just 3.7 per cent - due largely to the consistent high rate of dwelling value growth relative to rental growth."

Brisbane apartment prices (to 28 February 2015):

February 2015 - up 0.5%

Quarter - down 2.3%

Year to Date - up 0.3%
Year on Year - up 0.5%
Median price based on settled sales of Brisbane apartments over the quarter - $385,000

So, Brisbane apartment prices over the past year have barely increased, and increased much less than detached houses in Brisbane.  Brisbane is still under performing compared with Sydney and Melbourne.  And if you purchased at the peak of the market in about 2008, you would still be well underwater.

Quay West Brisbane Resales

Recent sales for Quay West in Brisbane, at 132 Alice Street

• Apt 37, 1 bed, 1 bath, 1 car - 72 sqm - $456,000 in October 2014
• Apt 134, 3 bed, 2 bath, 3 car - 172 sqm - $1,350,000 in September 2014 sold to a QC
• Apt 68, 2 bed, 2 bath, 1 car - 126 sqm - $695,000 in September 2014
• Apt 43, 1 bed, 1 bath, 1 car - 72 sqm - $440,000 in August 2014
• Apt 47,  1 bed, 1 bath, 1 car - 72 sqm - $440,000 in July 2014

Rumour has it that Ken Woodley, who lives in this building, recently purchased a 1 bedroom apartment (402) in Quay West for himself or a family member, at $435,000.  Mr Woodley is an owner and managing director of developer Metro Property Group.  I wonder why Mr Woodley is not purchasing in a Metro building, but is buy an older apartment in a Mirvac building?  Does that tell you something about the market?

Valuer's view of Brisbane property

"Firstly, interstate migration is a long way off its heady peaks in 2003. It’s flat performance isn’t a total deal breaker for our state’s rising market, but certainly if these numbers were to pick up, you’d think good things are set to follow.

Recent sales evidence would indicate there has been a levelling of prices and values over the past quarter. There’s a little more urgency amongst buyers, which has led to growth in the 12 months to June 2014. Values are up around 10% for near-city detached housing, and entry level housing within 5 kilometres of the CBD remains a market that is outperforming other sectors.

We do seem to be entering a phase of upgrading – although this is taking form in increased sale numbers, and consequently values, for vacant land and renovating existing dwellings, not to mention the downsizers (but not downgraders) into the prestige unit market. The stagnation in the market during the 2010 to mid-2013 stalled the upgrader market – due mainly to them being unable to offload their existing residence before shooting for something a bit better.

Like the stone that drops in the pond, the ripple affect is real for Brisbane’s property market. Starting with inner/near city detached housing and extending from there, how far the wave travels is dependent upon the strength of the boom.

The only standout in the supply and demand equation remains the unit market. With a significant increase in supply on the way, coupled with low interstate migration along with existing tenants taking the opportunity to buy or enter the market, we believe this sector has potential for a rising vacancy rate in the short term."

Source:  HTW November 2014 Month in Review

October is a better month for Brisbane apartment median values

The RP Data CoreLogic Home Value Index registered a 1.0% capital gain across the combined capital cities over the month of October, however the annual rate of growth has continued to trend lower.

According to the RP Data CoreLogic Home Value Index, dwelling values across Australia’s capital cities increased by 1.0 per cent over the month of October. The data highlights that despite a slowdown in growth in September, values continued to rise, increasing by 2.2 per cent over the past three months. Although combined capital city home values were up by 1.0 per cent over the month, only Sydney (1.3%), Melbourne (1.9%) and Brisbane (0.6%) actually recorded value rises over the month.

Dwelling values rose by 2.2 per cent over the three months to October 2014 however, only half of the capital cities actually recorded an increase in values. According to Mr Lawless this result highlights weaker housing market conditions outside of Australia’s largest cities.

According to Mr Lawless, Sydney, Melbourne, Brisbane and Adelaide (which happen to be four of the five largest capital cities), were the only capital cities to record an increase in home values over the past three months. [Note - this does not apply to Brisbane apartments, which recorded a decline for this three month period.]  Sydney continues as a standout with home values increasing at a rate of more than 1 per cent a month, up 3.9 per cent over the past three months. He said that Perth and Canberra have clearly moved through the peak of their growth cycles.

Brisbane apartment prices (to 31 October 2014):

October 2014 - up 1.6%

Quarter - down 0.4%

Year to Date - up 2.6%
Year on Year - up 4.5%
Median price based on settled sales of Brisbane apartments over the quarter - $380,000

Tax for foreign investors on transactions involving taxable Australian property

On 31 October 2014, the Government released a discussion paper outlining the proposed design options for implementing the previously announced non-final withholding tax in relation to disposals by foreign residents of certain 'taxable Australian property' assets. The measure is proposed to commence from 1 July 2016.

The measure was originally contained in the former Government's 2013-14 Budget. The current Government announced on 6 November 2013 that it would proceed with the measure.

The release of the discussion paper will be of interest to those foreign investors who may be considering divesting their Australian real property or business assets over the next few years, as well as investors who are considering acquiring such assets from foreign investors over the same time period.

For full details, see King & Wood Mallesons publication

No capital growth for Brisbane property over last six years

Most recent property investors in Brisbane are likely to have lost money.

From a recent report from RP Data:

"The next time you hear someone talk of the booming national housing market remember these statistics.  Yes combined capital city home values are rising and this is due to the influence of the Sydney and Melbourne housing markets where values are rising.  Real home values in Brisbane, Adelaide, Perth and Hobart are still lower than they were before the financial crisis and have seen no real growth in more than six years."

When we abandon traditional underwriting standards

"The regulators believe that lower loan underwriting standards promote homeownership and make mortgages and homes more affordable. The facts, however, show that the opposite is true. ...

After the financial crisis, Representative Barney Frank — the Massachusetts Democrat who led the House Financial Services Committee during the crisis, and a champion of credit programs for low-income buyers — admitted, “It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” Policy makers who support homeownership would be wise to consider who is hurt and who is helped when we abandon traditional underwriting standards."

See:  Underwriting the Next Housing Crisis

My view is that government policy that encourages people to buy rather than rent often leads to poor results.

Brisbane rental market

From an REIQ press release that was issued today:

Rental markets remain tight in southeast Queensland and the state’s major tourism centres according to the latest REIQ Residential Rental Survey, conducted at the end of September.

REIQ CEO Antonia Mercorella said the survey showed vacancy rates remained relatively steady across most parts of the state, with improvements in some key regional markets.  Ms Mercorella said only four of the 16 major regions in Queensland recorded a significant change in vacancy rates, with something of a two-tier affect still evident in the State’s rental market.

Ms Mercorella said at the end of September, the Brisbane City local government area (LGA) recorded a vacancy rate of 2.3 per cent, relatively unchanged since the end of June.

“Brisbane’s middle to outer suburbs – those 5-to-20km from the CBD - recorded a slight easing in vacancy levels, up 0.2 percentage points to two per cent at the end of September.  The city’s inner suburbs, on the other hand, recorded a vacancy level of 2.9 per cent, down from 3.4 per cent at the end of June.  Median weekly rents from the Residential Tenancy Authority (RTA) for the September quarter show relatively steady rents across the Brisbane City LGA.”

Ms Mercorella said Queensland’s tourism centres continued to record tight rental conditions.

“On the Sunshine Coast, the vacancy rate is at one per cent, the lowest of any major region in the state,” she said.  “Population growth and a lack of investor activity are contributing to these tight conditions, particularly in hinterland areas where agents are struggling to find enough rental properties to meet demand.

Admiralty Towers 2 sales

Some recent sales in Admiralty Two, a tower on the Brisbane riverfront, at 501 Queen Street.  One of the better buildings in the city, which large apartments all with riverfront views that cannot be built out.  The building has two swimming pools, and direct access to the river boardwalk.

Reported sales since January 2014, with most recent sales listed first.

Apt 166, about level 29, 3 bedrooms, $979,900
Apt 58, 2 bedrooms, 2 bathrooms (116 sqm) - $785,000
Apt 19, 2 bedrooms, 2 bathrooms (116 sqm) - $770,000
Apt 115, 2 bedrooms, 2 bathrooms (116 sqm) - $755,000
Apt 127, 2 bedrooms, 2 bathrooms (116 sqm) - $750,000

The average price so far this year for the larger two bedroom apartment in this building is $765,000, or $6,594 a sqm.  If you are buying off the plan, you may wish to measure against this sqm price for comparison.

What does the future hold for Brisbane apartments?

My advice to those considering buying in a high-rise apartment block in Brisbane -- don't buy off the plan and don't buy for two years.  Why -- prices are likely to fall.  My reasoning:

• There are a very large number of new apartments being built, which will settle in about two years.
• Interest rates are likely to increase by then.
• Rental vacancies will increase and rents will decrease as these new apartments come on to the market.
• Banks will make it hard to get a loan.  My guess is that they will only fund 70% of the valuation.
• The valuations are likely to be less than contract price.
• Many people will be unable to settle.
• Prices will therefore decrease, at least from the prices that new off-the-plan apartments are currently being sold for.
• Second tier second hand apartments will be impacted as a result.  Why buy a old apartment in Charlotte Towers or Festival Towers, that have few redeeming features, when you can buy a similar sized apartment with a similar view in a new building for a similar price?
• Apartments in some locations, and in some buildings (e.g., direct riverfront, larger apartments),  will suffer less negative impact.

Brisbane Skytower

Pre-marketing has commenced for Brisbane Skytower, said to be the tallest residential tower in Brisbane when it is completed.

It is being developed by Billbergia on the old Vision tower site (now called 111 + 222).

It has four sections, a downtown section, an uptown section, a skycity section and a skyrise section.  The starting price for what I guess is a one bedroom apartment starts at $425,000 in the downtown section and increases to a minimum of $595,000 in the skyrise section.

In less than a city block, there are more than 2,000 apartments coming online.  There are three towers, Skytower (at 222 Margaret Street), Abian (on the corner of Alice and Albert) and Camelot (on the corner of Albert and Margaret).  Seems like a glut to me.

Win an apartment in Soleil

RSL Art Unions are giving away, in an art union, apartment 5304 in Soleil.  This is a 2 bedroom, 2 bath apartment, no balcony, at 83 sqm, located on level 53.

RSL Art Unions paid $570,000 for this apartment in June 2014.  They have included about $40,000 of furniture.  They estimate rental returns of $39,000 a year, which is $750 a week -- that is a little high in my view.

Ray White Market Update for Brisbane City apartments

From Ray White CBD:

"The third quarter has seen prices remain stable after the growth of the first two quarters on 2014. Falling rents across the inner city in the last two months have halted price growth as large developments in nearby suburbs such as South Brisbane, Bowen Hills and Fortitude Valley have been completed. This has resulted in an over supply of rental accommodation causing rents to plunge.  With over 8,000 apartments approved for the city's inner suburbs rents look certain to remain soft for the next few years.

Michael Matusik released an article on his Linkedin page this week on the rental situation that has seen the rents for 1 bedroom units drop by $60 a week in recent months and 2 bedroom units drop by over $100 a week. https://www.linkedin.com/today/post/article/20141019231540-170298265-brisbane-inner-city-apartments and following is a recent article in The Courier Mail http://www.couriermail.com.au/business/experts-say-outlook-is-not-pretty-as-fundamentals-in-inner-city-apartment-market-are-weakening/story-fnihsps3-1227024827411 

With the outlook for rents continuing to fall next year as more and more buildings are completed, it is doubtful prices will remain at their current levels.  Should you be considering selling, now is the time to do so."

Sounds like Ray White is saying now is not a good time to buy a Brisbane apartment.  Prices to fall!

Brisbane Still Behind

Chart from RP Data.  Brisbane market has under performed the combined capitals average since 2008.

Rental Report

RP Data has recently released its quarterly rental review.  It shows that Brisbane apartment rents are flat.  My sources tell me that rents are declining.

• Vacancy rates are longer.  My rough rule of thumb is that for every week a property is vacant, that is approximately $10 a week off the rent for a one year period.
• Rental periods (e.g. 1 year, 6 months) are tending to be shorter, with tenants turning over more often
• Actual rents are flat, or decreasing slightly.
• New apartment buildings that have many empty apartments are offering rent free periods, which in effect is a rent reduction.  For example, if the weekly rent is $500 a week, but the landlord offers four weeks for free, then the effective rent for the year is $461 a week.  But the RP Data report will show the rent as $500 a week.

Invest in Brisbane

This report suggests that Brisbane is the best place to invest in property at present.

"Overall, it’s a decent set of numbers with promising signs of strength in new home loans and construction – the desired “rebalancing” – but owner occupier activity has highlighted the possibility of softening almost everywhere except for Brisbane and Queensland."

Student Accommodation and Serviced Apartments - Good Investments?

"In summary, it’s difficult to recommend pursuing an investment in either a serviced apartment or student accommodation. While they both provide good cash flow, investors are likely to encounter resistance in obtaining finance, plenty of fees, a weak aftermarket and a need for ongoing in investment."

See AFR article - the type of property to be wary of

At present in Brisbane, there is an oversupply of apartments built for investors to rent to students.  Rents are decreasing, vacancy rates are increasing, and there are less students looking for such accommodation.   And non-students are not interested in living in or buying such apartments.  Take care!

Another South Brisbane Apartment Complex

Opera, another apartment complex is South Brisbane, is being marketed off the plan.

One bedrooms from $385,000 and two bedrooms from $580,000.

South City Square in Woolloongabba

A new apartment development in Woolloongabba has been launched, called South City Square.  It is located on Logan Road.

Over 1,000 apartments, across 7 towers, are planned.  Pellicano are involved in this development.

See article here.

Legal Claim Against Meriton

A Meriton construction company is being sued by a body corporate for building defects.

"BILLIONAIRE developer Harry Triguboff is at the centre of a legal battle with a body corporate over who should foot a $2 million repair bill for one of his Southport residential high rises."

Meriton is also the developer of the Infinity and Soleil towers in Brisbane.

See Gold Coast Business News

Index funds

There is often a debate whether it is best to buy shares or property.  My investment focus has been property.  When investing in shares, it seems that index funds (sometimes called exchange traded funds or EFTs) are the way to go.  See recent AFR article on this topic.

Brooklyn or Brisbane?

I can buy a two bedroom apartment in Brooklyn NYC for about the same price as a two bedroom apartment in Brisbane city.  See this listing for example.  Does that make sense?