Plunging Rentals Exacerbated By Empty Shops Make Property Investors Worried
Rents are falling faster than the prices of Perth display homes and this situation is creating a draconian dilemma for investors of over-priced properties. Darwin and Perth were the superstars in the property market for the last 10 years of mining boom but is now reeling as the slowdown is worsened by the sharp increase in housing that has started 3 years ago.
Yield which is measured by dividing the property price over the rental income fall as the prices increases. However, if the landlord cannot find a tenant, rent has to be slashed if there is oversupply and falling prices. The end results are often long period of negative equity because the market value of the property is below the outstanding amount of mortgage that has been secured on it.
On the other hand, cities like Melbourne and Sydney where there are jobs, prosperity and confidence have contributed to a high single digit price increase and reasonable rents. Overseas investors as well as Australians believe in bidding up prices for assets that provide better returns instead of record low interest rates.
Investors need to think long term and must be flexible in buying quality property that will attract and possibly retain their tenants in both good and bad times. Apartments are getting more expensive in Melbourne and Sydney but it is returning less cash flow from rentals. Investors are paying too much and it is increasingly becoming risky. It is essential for investors to determine which property is the best for the investment profile as well as the rental returns and the projected capital gains.
In the commercial, retail and industrial property sector, investors need to be more selective to minimize risks. One of the problems confronting investors is whether they will diversify from residential to retail property investing. One example is Richmond’s Bridge Road that has a reputation as a fun, funky shopping strip. It faded when trendy tenants were forced to quit because of the high rent and lack of customers. The fall in property yields from approximately 5% to less than 3% has been exacerbated by the struggle to find new tenants to occupy the empty shops.