Bright future for residential investors

Residential investors are waiting watchfully in the wings, poised to take up the slack from first-home buyers when the First Home Owner Grant Boost (FHOGB) begins to be phased out from September 1.

Since the onset of the global financial crisis investors in Australia’s residential property market have, by and large, been missing in action.

High interest rates at the beginning of 2008 fuelled an initial exodus of investors. Then, as the FHOGB kicked in and interest rates started to spiral downwards, the flurry of first-home buyers entering the market served to further undermine investor confidence.

However with superannuation funds and the share market in general taking a severe battering in the 2008/09 financial year, positive signs in the residential property market are starting to lure investors back into the sector.

The tables are certainly turning in favour of investors. We are seeing a marked improvement in investor confidence due to strong rental returns which are creating positive gearing and better capital growth.

We would expect investor interest to gather momentum as we move deeper into 2009. We’ve seen it in the past and this time, as first home buyer interest declines, investors are sure to fill the void. Given many property markets are experiencing very low vacancy levels, it will be difficult for savvy investors to ignore the healthy yields that a quality, well-located investment home can produce.

The latest Consumer Price Index (CPI) figures as reported by the Real Estate Institute of Australia (REIA), show why investor activity in the property market has increased over the last three months.

The figures show that rents increased by 1.4% for the weighted average of eight capital cities and increased 7.2% for the year. Rents rose in every capital city for the June quarter ranging from a high of 2.2% in Darwin to 0.9% in Canberra.

Add to these figures the fact that interest rates are lower than at any time in the last 45 years and vacancy rates are running at historical lows in most capital cities and you have a melting pot of positive fundamentals that investors would find hard to ignore.

The REIA data highlights “the emerging trend of increasing investor activity in the property market”.

“This is the third consecutive month showing continued increases in the number of finance commitments for investment purposes,” said REIA president David Airey.

Another major factor that is underpinning investor confidence is Australia’s growing population.

According to ANZ economist Alex Joiner, population growth is running at a four-decade high, which is putting unprecedented pressure on national dwelling stock. This is being reflected in very low rental vacancies right across the capital cities.

The National Housing Supply Council State of Supply Report found that housing demand in Australia was growing at a rate of about 150,000 homes per year and supply was falling short by only growing at a rate of 136,000 homes annually.

This disconnect between supply and demand can only spell more good news for investors as rents are pushed higher.

Raine & Horne Crows Nest proprietor David Hill, who looks after a large rent roll of more than 800 properties, said investors who have been waiting for the first-home buyer activity to cool off are now beginning to turn enquiries into offers.

“In a climate of uncertain share market returns investors are showing increased interest in bricks and mortar,” he said.

“The interesting thing is that most of the investors we are seeing are in the 50-plus age group who are nearing retirement and wanting the benefits of strong rental yields and low interest rates.”

According to the latest report from RP Data, rental rates have increased by 34% over the last three years to reach today’s peak. The report says investors who are prepared to buy into the market now will be securing a rental lease at peak rental rates which will provide excellent cash flow benefits.

Confidence that Australia has avoided a deep recession is also underpinning a revival of investor activity in South Australia, according to Raine & Horne South Australia proprietor Chris Weston.

Raine & Horne Queensland chief executive Stephen Sharry is also confident that as funds are more easily accessible, banks will ease their lending criteria to make it easier for investors to borrow and benefit from the positive market.

“As first home buyers exit the bottom end of the market it will be left open for investors to move in and take advantage of solid rental income and good capital growth prospects over the next five years,” Sharry said.

“There is currently a positive feeling out there and the only dark cloud in an otherwise blue sky is the possibility of higher unemployment.”

But the recent National Australia Bank’s Business Survey indicates business conditions and confidence improved sharply to pre-September 2007 levels and the data also suggests staff shedding has slowed, which could lead to lower unemployment levels than the 8.5% forecast for next year.