John McGrath - Rent, Investments And What To Do Next
Most of the wealth in our investor client base has been created through the simplest of strategies – buy, hold, leverage and repeat.
As a likely recession approaches, my advice to investors is do everything you can to hold good quality assets.
Entry and exit costs in property are high, so selling should be a last resort.
At a Glance:
- Property market is down 5-10 per cent
- Possibility of another 5-10 per cent drop as employment drops and a second wave of COVID-19 occurs
- Tight supply is providing price stability
Thankfully, there are many levers investors can pull if they encounter financial difficulty, including government payments, repayment holidays and ultra-low mortgage rates.
On the flipside, some investors are seeing a window of opportunity.
Low interest rates and a 5-10 per cent price adjustment since March are making investment attractive.
But you will need good cash flow to offset reduced rental incomes for a while as we go through Covid-19’s economic fall-out.
As we’ve seen recently in Victoria, the health risk isn’t over and the economic impact is only just beginning.
Today, I’ll be answering the big questions that property investors have right now.
What’s happening with property prices?
We’re down 5-10 per cent in many markets, although official data shows less due to the lag effect.
We could see another 5-10 per cent drop if we have a protracted period of unemployment, a second wave or a lot of new listings in the final quarter of 2020 after the stimulus and repayment holiday ends.
Tight supply is providing price stability, with the lowest monthly sales volume since 1991 recorded in April across the combined capital cities.
Consumer confidence is coming back and buyer demand has been persistently high in desirable family areas, with strong prices achieved for the best quality homes.
What’s happening with weekly rents?
Renters are over-represented in hospitality and tourism where job losses have been highest; and the closure of the international border has heavily impacted migrant demand.
Many young renters have moved back home, others have formed shared households.
Hundreds of Airbnbs have come onto the long term market.
Supply is rising while demand is falling, so weekly rental values have gone down.
Sydney has been hit hardest.
SQM Research estimates weekly rents have fallen -8.6 per cent for houses and -5.1 per cent for apartments in just three months.
The vacancy rate has risen from 2.9 per cent in February to 4 per cent in May (3 per cent is a balanced market).
REINSW data puts the inner ring vacancy at 5 per cent – the highest in 18 years.
McGrath manages over 32,000 rentals along the East Coast and had a vacancy rate of 2.23 per cent last month.
About 5.5 per cent of our tenants are on reduced rents.
Tenants in Byron Bay – a town largely dependent on tourism and hospitality, have been doing it toughest with 1 in 3 clients on a reduced rent.
What should investors do now?
If you’re looking to buy, go for capital growth over yield and buy the best location, position and aspect you can (north aspect is best).
Take calculated risks in the big cities.
Look for scruffy gentrifying suburbs or those with new major infrastructure.
Consider regional satellite cities or desirable lifestyle areas. They should get a great boost from more people working from home, which will incentivise regional relocations in coming years.
Also, buy above the local median price to get a better quality property in a better part of the suburb.
If you’re already an investor and looking to simply hold, here’s what McGrath’s Head of Network Property Management, Michael Connolly recommends if your lease is expiring or your tenant asks for help.
“Definitely try to keep a good tenant," said Mr Connolly.
"If they can prove their income has fallen, negotiate the rent.
"If they vacate, you could take a 25 per cent reduction on your weekly rent plus the cost of vacancy, which is generally 2 per cent of your rental income for every week your property is unoccupied."
This article originally appeared in The Real Estate Conversation (June 29, 2020)