What property investors need to understand about rents and vacancy rates

We keep on reading about how low residential vacancies rates are across much of the country.  Ditto on how much rents have risen; and the expectation that they will continue rising, and at the same pace, well into the future.

But several sub-measures of the rental market suggest that rental growth is already slowing down.

Also, more renters are sharing accommodation in order to afford to live in preferred locations.

Plus, renters are leaving sub-par, even average digs, and relocating to better properties.  Renters are also staying longer in quality & well maintained homes & occupying lesser quality properties for increasingly shorter leases.

Some statistics

There are some 1,600 postcodes across Australia.

Last year, 40% of these experienced a decline in their rental vacancy rate, whilst just over half (52%) saw an increase in the number of dwellings available to rent.  Eight per cent saw no change in rental supply.

Nine out of ten postcodes across the ACT saw a lift in vacancy rates during 2012, as did seven out of ten in Tasmania & two out five postcodes across the NSW property markets also experienced an increase in rental supply.  Western Australia & Queensland had the highest proportion of postcodes (55% & 50% respectively) experiencing a decrease in rental supply.

When looking closer to home, median house rents across Brisbane have increased by $70 per week over the last five years (2007 to 2012 calendar years) but the rate of growth has slowed significantly in recent times.

Close to half of this rental growth occurred between 2007 & 2008, and whilst median house rents rose $15 between 2010 & 2011, they rose just $5 last year.

The same applies to Brisbane apartment rents, which rose $80 in total, on average, over the same time period.  Yet, $40 of this increase was in 2007-08, with median rents also just rising $5 last year.

When it comes to rental demographics, more people are sharing.  A consistent theme across Queensland rental agencies is the increase in the number of people per dwelling.  Many have told us that there are around 30% more people living in each rental property when compared to a few years ago.

I assume this is taking place elsewhere across the country.

Tenants are leading the ‘space for place’ charge, forgoing personal space in order to afford to live near the action.

The 2011 Census doesn’t supply us with the number of people renting, but some quick maths suggests that 2.5 people live, on average, in the nation’s 2.3 million rental dwellings.  Ten years ago, the average size of the rental occupancy across Australia, was closer to 2.

My comments

My experience – regardless of the stage in the property cycle – is that competition is fierce in rental markets.  Prospective tenants always compare your property to whatever else is on offer.  They just don’t blindly accept the asking rent without doing their homework.  And these days, lots of it.  Many parents wish they had studied that hard when at school or Uni!

Too much commentary is based around the total level of supply.

Poor product doesn’t rent well, regardless of the lack (or otherwise) of supply.

There can be, for example, 1,000 new apartments being developed in one postcode, much of which is likely to be pretty average in terms of liveability.  As a result of this quantum of pending supply, the mortgage insurers, valuers & investment sellers all blacklist such an area regardless of knowing what stock is actually being supplied.

The well-targeted & designed project(s) in the same area – which will most likely rent out well & resell for a premium – now get dragged down by this helicopter pigeonholing.  The devil is in the detail.  Sadly, detail takes time.  Time costs money.

Developers often seek attractive forward rental estimates to help sell their new product – but in light of the above (and the compromised nature of much of the new stock currently on offer) – the anticipated weekly rents seem, to me, to be quite high & highly improbable.

Investors should do their maths on a lower rental figure – something like 10% to 15% less – to be on the safe side.

Don’t expect rents to rise automatically every year.

There are many things an investor can do to maximise rents, but again, my experience suggests that rents don’t rise every time a lease is up & keeping a good tenant, even for a bit less rent, is far better than getting more money & having tenant problems.

Oh the tales I could tell!

A property investor’s aim always should be to sign the best tenant for the highest possible rent in the lowest possible vacancy time.

Never let your property sit – advertised for rent – vacant for too long.  Properties should be rented out in weeks, not months.

Waiting too long stuffs up your cash flow & often gets you less rent in the end.  If you want to take longer, do not list it for the full time.  It will look stale.

Target your lease periods around maximum take-up periods. 

They vary according to local drivers – i.e. universities, hospitals, new construction projects etc.  Ask the local rental agencies for their advice.

Finally, and we are starting to sound like a broken record, buy an investment property that can be shared.

One-bedroom stock in an inner city location is fine, just make sure the apartment design/proportions can accommodate a couple if needed.  Ditto when it comes to two-bedroom product – having separate bedrooms, with their own ensuites, allows two unrelated couples or singles to share.

In fact, the one ensuite per bedroom ratio is proving to be a good one, especially in regional markets, where resource workers often share accommodation once friendships are established.  Four middle-aged men in a four-bedroom/four-bathroom house might not smell too crash hot, but I bet my bottom dollar it would show a great rental return.

……..

Michael Matusik will be presenting at the National Property and Economic Update seminar in Brisbane on 13th April. Click here now for full details and to reserve your seat.

Michael is the director of independent property advisory Matusik Property Insights and writes the  Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.



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Michael Matusik

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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


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