Are vacancy rates the punk-rock property analytic shaking up mainstream median indicators? We drill down to see if an anarchic data revolution is under way.
Kieran Clair [@kieranclair]
The calculation seems reasonable enough – demand for accommodation rises, the number of available properties falls, increased rents follow and property values aren’t far behind… simple! Tightening vacancy rates are often touted as a great way to find suburbs undergoing a surge in eager tenants and all the potential upside, but it’s important to recognise the anomalies.
Setting the parameters is all-important. We’ve taken SQM Research’s figures for February 2015 and ranked suburbs by vacancy rate across each state. The results have then been filtered by postcode to identify metro locations with the list reduced to the top 10 place-getters.
Louis Christopher, analyst and owner of SQM Research, says vacancy rates are an important part of an investor’s data arsenal, but they must be used wisely.
“It gives an indicator in terms of the ease in which you’re finding tenants, from a property investor’s perspective, and whether conditions in the rental market are improving or deteriorating in terms of owning your property and finding that tenant.”
One oft-touted, broad rule of thumb is if vacancy rates are at two per cent, tenant demand is rising and rents will follow. At three per cent, rents and demand hold steady, while rates above four per cent indicate less demand and softening rents. Christopher says this is a reasonable overall view, but you really need to understand relative movement.
“I’ve seen instances where vacancy rates have lifted from half a per cent to two per cent. Now, two per cent on its own doesn’t sound bad, and it isn’t, but it’s a relative movement. If it’s gone from half a per cent to two per cent, it’s most likely that rents will actually fall.
“On the other hand, if you see a situation where vacancy rates have gone from four per cent down to two per cent, it’s likely rents will actually rise in such a scenario. It’s the relative movement, which is fairly critical.”
The analysis can be skewed by other factors as well. Sample size is an obvious one. If your pool of rental properties is small, it takes just a few listings to cause big changes in the vacancy rate calculation.
“The other thing about our index is that we don’t generally split it between housing and units, so it’s harder, from our data, to obtain a vacancy rate just for units.”
Christopher says the current low interest rate environment will play its part in the vacancy rate figure, because renters will move towards becoming homeowners when money is cheap to borrow. He says once the vacancy rate and its trends have been identified, it’s time to take a look at asking rents and market movements particular to your suburb of interest. By learning about the past, you can reduce future analysis errors. We’ve taken the top 10 lists to experts around the nation and asked them to identify the standout suburbs. Our team has also highlighted anomalies in the place-getters where they believe the figures fall short.
There’s been plenty written about Sydney’s runaway inner-city property market. We drew a 35-kilometre radius around the city and the results show the tightest numbers lie beyond the heart of the metropolis.
Amanda Segers, buyers’ agent at Amanda On My Side, says strong recent sales are probably counter-intuitive to what she’s seeing in the current rental market. Supply is on the rise and that means tenants are, or soon will be, spoiled for choice. Segers is surprised vacancies aren’t higher across the board, and says investors need to be cautious.
“There’s a lot of units going up. Right now, my rental friends tell me that they do open houses for rentals and maybe one or two turn up if they’re lucky, whereas 12 months ago, people would turn up and start outbidding each other because they were desperate!”
Segers says there have been fewer investors in the market in 2015 because gross yields are heading down.
“The reason investors have gone this year is because the rental market is flat and [property] prices have gone up 20 per cent. Rents are now nowhere near what they were. They started at five per cent two years ago, last year they went to four and a half, now they’re at about three.”
The city’s northern beaches dominate our Sydney top 10, with five addresses in the region. Who could blame tenants for seeking this idyllic setting an hour north of the country’s biggest CBD? Segers says unit construction is rife, however, so she expects vacancies to rise. The results are seasonal, too, with sunshine attracting tenants like moths to a flame.
“Bayview and Dee Why, they’re always going to be popular in the summer because they’re beach places but over the winter time they’re going to get a little bit soft.”
She believes Dee Why has gentrification potential, but investment should be viewed as a very long-term proposition. Those looking for quick profits will be disappointed.
“Dee Why is getting a big facelift. Over the next 10 years the government is going to put millions of dollars into making it more upmarket, but given the volume of units it will remain a cheaper rental option.”
Another surprise addition to the list is Hornsby, which lies 21 kilometres west-northwest of the CBD. Segers says Hornsby is experiencing a surge in unit construction, although there are great community facilities that will appeal to tenants.
“Hornsby has got a nice little centre and it’s got a train station. People have moved there for cheaper living and to still have access to the beaches and city.”
Ben Kingsley, founding director of Empower Wealth and chairman of Property Investment Professionals of Australia (PIPA) says Melbourne is experiencing city-led market growth.
“The inner-fringe areas of Melbourne have spawned the next lot of price growth. That’s coming out from the eastern suburbs and the inner-northern and now the inner-western areas.”
He says inner-city and city-fringe suburbs are showing good tenant demand due to their lifestyle drivers.
“They [tenants] want to be closer to the CBD to try and get that lifestyle element that brings all the convenience of them being close to work. They’re time-poor and they’re happy to pay a premium in rent to be in an area that gives them all of those things and makes their life enjoyable.”
Our top 10 list includes Thomastown, which is an affordable suburb about 16.5 kilometres north of the CBD. Kingsley says it borders the suburb of Bundoora, which is an interesting mix of established housing and new subdivisions. He believes Thomastown’s rental demand is feeding off Bundoora’s profile, but he doesn’t foresee stellar growth in the short-term.
“Certainly, if I was looking at Thomastown as an opportunity, I’d be focused on buying below the median price and an asset that could do with a lick of paint and a tidy up… I’d be buying sub-$400,000s.”
“If I was looking at Thomastown as an opportunity, I’d be focused on buying below the median price.”
Kingsley is more enamoured with Keilor, where town-planning changes are resulting in new development that’s set to benefit residents and property owners. Parcels of land are to be revitalised with medium-density, mixed-use buildings offering retail and entertainment facilities.
“When you get a reasonable concentration of that, you start to get critical mass to support the restaurants and give that ‘liveability score’ a lift.”
Kingsley’s only caution is to keep an eye on oversupply and absorption. Your best bets will be long-term, he says.
Jonathan Millar, founding director of JDMA Property Valuations, says recent market performance in Brisbane has been good.
“There’s more activity in the market and more competition for properties, particularly for houses.
“We’re seeing more requests for pre-purchase valuations from interstate, and the prestige market has started to come back as well, with an increase in the number of million-dollar-plus homes selling.”
Of those suburbs filling out the top 10, Keperra received the most kudos from our experts. Millar says investors should work the angles to boost their returns.
“Keperra is close to the 10-kilometre ring that I like to stick to and is on the train line. Purchasing a highset home, where you can build in under to create a second occupancy, is a good strategy for paying off a property quickly.”
He’s less keen on the affordable suburb of Inala.
“In Inala, you can buy for $300,000 and get a reasonable return on your investment as you can rent out for around $370 per week, however the long-term capital gains aren’t going to be as impressive as other areas.”
Zoran Solano, buyers’ agent with Hot Property Specialists, agrees Keperra is an interesting option, along with Murarrie in the city’s inner-east.
“Both are within good proximity of the Brisbane CBD, which is important, and both have bus and train infrastructure servicing the suburbs.
“Murarrie is close to the port of Brisbane, which is a big employment hub, and Keperra is close to Enoggera Army Barracks, which is another big employer. In Murarrie you’re looking at a three-bed, one-bath, 1960s to ’70s home suitable for value-adding. In Keperra, it’s a post-war, three-bed, one-bath typical house for the median price.”
Solano remains bullish about the capital.
“Lack of supply is still an issue in Brisbane as more interstate investors turn to Brisbane as a more affordable market with strong returns and growth prospects.”
Liz Sterzel, buyers’ agent and director at Property Wizards, explains that vacancy rates aren’t ever her first choice as an analytic.
“Four of the top criteria property investors need to consider when purchasing a property in Perth include the suburb’s proximity to the CBD, the ocean or Swan River, public transport and amenities that attract tenants, such as shops and schools.
“If you can find a property that ticks all four of these top criteria and isn’t in oversupply, vacancy rates become a secondary consideration.”
Despite this, Sterzel says there are interesting options among the top 10 list.
“Duncraig, for example, is especially promising, being only one suburb from the beach and Hillarys Marina as well as being on the train line and freeway to the CBD, with portions of the suburb included in City of Joondalup’s proposed rezoning area.
“Adding value through subdivision or renovation is a popular strategy in Perth, and can really accelerate an investor’s portfolio growth if done carefully.”
She says areas such as Maddington, Ballajura and Beechboro have also been singled out by their councils for future development, with Maddington already zoned to encourage higher density uses.
While these came up winners, other suburbs are seen as less than solid as it’s hard to overcome some traditional restraints.
“Kelmscott and Reservoir both have very low vacancy rates at the moment, however their long-term potential is hampered by their locations more than 30 kilometres from the Perth CBD.
“While it may be possible to find a Kelmscott property in good proximity to the train station, the commute to both the city and key business districts is off-putting to many potential tenants.
“Meanwhile, Reservoir’s draw-cards lie in its rural aspect, but with few amenities and no train line nearby, it appeals to a very narrow group of potential tenants.”
Margie Shean Coad, founder of Informed Property Buyer, thinks investors should include vacancy rates in their analysis.
“I very much have a mantra that without all of the information, you can only make a good decision by accident or luck.”
Shean Coad says Adelaide’s market is conservative by nature and hasn’t seen the vast swings and roundabouts that larger cities sometimes experience.
Among the list of 10, Shean Coad says Regency Park is an anomaly given it’s dominated by industrial uses with limited residential property options available.
“It’s not a market that an investor looking to purchase in a residential environment would probably consider.”
Banksia Park, on the other hand, is worthy of further research as it ticks a lot of investor boxes.
“Homes are typically three-bedroom, conventional-style brick homes built in the 1970s and often on large allotments of around 700 square metres. It’s approximately 20 kilometres from the CBD, set in a good eastern/north-eastern foothills location and offers good lifestyle options, with walking trails, parks, schools, major shopping and transport all nearby.
“If you’re looking for a lower entry point investment, the area has over the past 12 months shown to be a good high yield, low vacancy rate and high demand option.”
More data – Click here to see all our Top 10 suburbs mapped.
*Median house price and rents supplied by Australian Property Monitors.