Rental yield is the new black

As a general rule there is a fixation with capital gains in real estate. It makes sense, the numbers are much sexier. Rental yield is always glossed over as just something that helps with holding costs until the future payday.

In an inflationary environment where borrowing costs are rising and capital gains less assured, I feel there may be a shift in focus to yield. This is already evident in the share-market, the rotation from growth to value is well underway. I wonder, will we see a similar shift in focus in the property market, with rental yield getting more attention?

There was a good article in AFR today about this trend. I raised rents on average around 10% in the last year or so. Some forecasts are saying this could be as high as another 20% in the next year or two. This is not small change, a 30% increase in rent for our portfolio is a beautiful thing to see, and something I can definately get excited about!

Property investment: The rental crisis is just beginning

The article is behind paywall, some excerpts:

The rental crisis is just beginning

As the real estate market cools, property investors will be looking to hike rents to ensure they continue to earn satisfactory returns.

“There’s a perception that rents are high now,” one of the country’s most highly regarded bankers tells me. “But rents are going to go through the roof once investors start to recognise that there won’t be significant capital gains from now on.”

Instead, it appears that we are at the beginning of a period of significant rental stress, as surging demand and a lack of rental stock have sent vacancy rates plummeting to a 16-year low.

Even worse, vacancy rates are expected to tighten further with the reopening of the international border and the resumption in migration and the return of foreign students.

The surge in rents is already sparking calls for increased controls that would limit annual rental increases. Of course, it’s highly unlikely that Australian politicians would even contemplate riling Mum-and-Dad property investors by introducing rental controls, but rising rents will undoubtedly fuel social discontent, and increase the pressure on lower-paid workers to secure larger wage rises.

 

Rents 'explode' across the country, as house prices fall in many Melbourne, Sydney suburbs

I think it should be good for the investor with no debt, but could be a double edged sword for the highly leveraged property investor.

Rents of course have a significant weighting in the CPI, so we can expect much higher interest rates now.

 

I doubt it. It never really has in residential property investing before now. Why would there be a sudden shift now?

 

There has always been significant portion of investors for whom yield and cash flow has been the primary focus for decades. Nothing will change for them.

 

Rents 'explode' across the country, as house prices fall in many Melbourne, Sydney suburbs

Ooh yeah!

 

Australia’s skewed tax code is heavily twisted towards capital gains through negative gearing and the cgt discount. Can’t see a shift in focus being sustained either. If capital gains seem unlikely, just means prices adjust until they are.