We talk to one of the authors of a new research model built to increase the accuracy of rental yield predictions. Dr Andy Krause explains how this can be a brilliant tool for investors and we tell you how you can get your hands on the report.
Kevin: Some news: two lecturers from the Melbourne School of Design, University of Melbourne, have released a report that has been looking into predicting the accuracy of rental yields – predominately in the Melbourne area but it looks like it will be extended into other areas around Australia. Let’s get a bit of an insight into this. Joining me, one of the authors of the report, one of the researchers, Dr. Andy Krause.
Dr. Krause, thank you very much for joining us today on the show.
Dr. Krause: Thank you for having me, Kevin.
Kevin: Tell me about the research. How was it conducted and what did you find out?
Dr. Krause: My co-author, Gideon, and I started off with just trying to look at what areas spatially in Melbourne had better or worse rental yields. In getting into it, we realized that the question was perhaps a bit more complex than we had initially thought, and we realized that there are a number of different ways to measure rental yields. So we ended up backtracking a bit and working through those ways first.
Kevin: Could I ask you, firstly, why did you undertake the study? What was behind it?
Dr. Krause: My co-author, Gideon, had been doing a bit of work with some of the banks here in Melbourne, and there was understanding that they were going to start to look at limiting lending in some of the various postcodes. So we thought it was a fortuitous time to take a look at the issue of how yields vary over space or over the city.
Kevin: Okay, that’s given us the basis for the study. Tell me how it was conducted and what were some of the findings?
Dr. Krause: How it was conducted is we made a few calls, and luckily we had a relationship with APM and Domain.com.au, and we were able to work out some data access from them looking at all sales and rentals of houses and units in Melbourne over the 2011–2015 period.
The first step was really getting data access, which can be difficult. Once we had that, we then said, “Okay, let’s create a property-specific yield and let’s look at each property that sold and rented, and create an actual yield value for each of those properties, plot those on a map, and let’s see what shows up.”
Kevin: Right. What were the results?
Dr. Krause: I think we have two major findings at this point. The first is that… Often when you look at information that comes out of industry, you see yields shown at a suburb level: “In this suburb, yields are 4.6, and in this one, they’re 2.3, etc.” What we found is that yields vary quite a bit even within a suburb.
I think the first takeaway is that for investors, analysts, whoever it may be, lumping everything into one suburb can make you miss a lot of variation and in some ways leave a lot of money on the table perhaps if you’re an investor.
Kevin: Just looking at some of the heat maps that I have with your report here – I call them heat maps, they’re color coded – if you look at, say, the area of Fitzroy, there are some areas in there that are offering a 6% yield compared to some that are as low as 2%. These are almost within streets of each other.
Dr. Krause: Yes. Again, the big takeaway we had was did people realize how much yield can vary over 400 meters, for instance? That was really the first takeaway.
We then started to look at that a bit more closely and said, “What are some things that may influence yields?” At this point, we started with the idea of train stations – probably something very, very important to people. What our research has shown to date is that in the middle and inner suburbs in Melbourne, for units especially, being within 400 meters of a train station can up your yield up to 0.2%. So purely looking at the transit accessibility can increase yield.
Kevin: Did you find that in areas where there was a predominance of units as opposed to stand-alone homes, there was a difference in terms of the yield? In other words, did the units offer a higher yield?
Dr. Krause: Units do on average offer a higher yield – about 0.5% higher. That’s fairly common knowledge over the entire market, you get a little better yield on units. Of course, what generally happens with units is that you get a little less capital appreciation, so there’s some trade off there as an investor, obviously.
What we tried to do was when we looked at our maps and looked at our analysis, we separated houses and units out simply because some areas are predominately units – for instance, the area around the University of Melbourne and RMIT here in Melbourne – and then there are other areas such as the near Eastern suburbs that are almost entirely stand-alone houses. So we’ve conducted our analysis splitting those two apart since the markets in some ways really are different.
Kevin: Yes, getting back to what I call the heat map, if you look at the area around Melbourne, which I assume is the Melbourne CBD, very high levels of return – around 6%. Predominately, I would imagine, they would be units?
Dr. Krause: Correct. Those are predominately units. Although if you have a stand-alone or one of our terraced homes in the Fitzroy neighborhood, if you’re renting to students, you can still pull a pretty decent yield out of some homes in that area as well. But it’s predominately units, yes.
Kevin: Then, of course, if you jump across and look at the same map that looks at the housing yields, you can see that they’re mainly in the red, which would indicate anywhere from 2% to maybe even 3% yields that you’re getting. But as you’ve pointed out, the balance there is the capital gain is probably greater with the house as opposed to the unit.
Dr. Krause: Correct. That’s generally what has happened here. If you look at the last five to seven years, your capital gain has been higher on stand-alone homes than on units.
Kevin: How can an investor use what’s coming out of this study to help them either predict where they’re going to get the best capital gain or the best return in the years to come?
Dr. Krause: I think at this point in time, what we’ve really been focusing on is trying to say something about yield. Our follow-up study is both looking at Sydney and Brisbane as well as looking into the impact of busy streets, green space, access to water. Those are all things we’re working on at the moment. What we want to be able to do is to come out and say, “Look, as an investor, these are the things to look to for yields.”
Now, each investor has their own risk appetite they’re willing to look at, and that is what they need to look at when it comes to capital appreciation and what sort of time frame they’re trying to hold over.
We’re trying to attack the first question and say, “Let’s first understand yields,” because yields vary a lot over space, but we can expect that general differences over space probably won’t move all that much over time. The capital appreciation could move quite a bit, as both sides have been saying about this election, so we want to move into that in the future. But at the moment, we’re trying really just to focus on the yield.
Kevin: It will be really interesting to watch what happens in Sydney in particular where the market is pretty hot right now, and then you look at Brisbane. Of course, one of the big influences on yield is lower mortgage rates, and we’re certainly enjoying that. That does have an impact on yield, doesn’t it?
Dr. Krause: It does. A lower mortgage rate, generally speaking, will drive up the price, which does drive the yield down. So there is certainly a relationship between interest rates and yields. If you plotted them over time you would see that. Yes, you’re absolutely correct.
Kevin: Have you got a feel for what may happen when you extend the study into Sydney and Melbourne?
Dr. Krause: In terms of looking into a crystal ball, not necessarily. We suspect that a lot of the major trends will hold – mainly that there is variation within the suburb. We don’t see a case where the suburbs in Melbourne vary quite a bit in yields and then we go to Sydney and Brisbane and it’s completely flat across the suburb.
We don’t really see any reason for that since the drivers of yields, in some way, are looking at what are the things renters value and what are the things homeowners value? And where those two things differ is where you get yields on the very high and the very low end. We think that same set-up exists in some ways in all major cities in Australia.
Kevin: Great talking to you, Dr. Andy Krause, a lecturer at the Melbourne School of Design, University of Melbourne. Tell me how we can get hold of this report. Is it available through Domain?
Dr. Krause: If you go to Domain, there are a few new stories about it in Domain, and there’s a link, too. At the moment it’s being hosted on my personal website at http://www.AndyKrause.com. You can go to Current Research and two different reports are there. We also hope to have this forthcoming in an academic journal sometime in the near future. But I would check out my website for the time being.
Kevin: That website again is http://www.AndyKrause.com.au. Look for Current Research, you’ll find that button in there.
Dr. Krause, thank you once again for your time and I look forward to hearing from you when we get some results out of Sydney and I guess also Brisbane.
Dr. Krause: Absolutely. We will let you know. It was great to speak with you this morning, Kevin.
Kevin: Thank you. Thanks for your time.