MELBOURNE LIKELY SET FOR LONGER TERM RESURGENCE
Falling vacancy rates are an indicator that Melbourne is set for long-term resurgence. Melbourne’s vacancy rates fell in the CBD to 8.0%. Melbourne as a whole went from 4% in April to 3.7% in May. It’s important to always question the underlying factors behind a significant statistical change.
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“Whilst the current surge in local demand and property values will no doubt plateau in the near future… international borders opening up will be the next catalyst for price growth.”
Falling Vacancy Rates A Good Sign For Melbourne's Property Market
Falling vacancy rates are an indicator that Melbourne is set for long-term resurgence. Melbourne’s vacancy rates fell in the CBD to 8.0%. Melbourne as a whole went from 4% in April to 3.7% in May.
Although Melbourne’s vacancy rates have been high the past 12 months – climbing from 1.9% in March 2020 to 3.1% in May the same year – this is primarily due to inner city high rise vacancy caused by the pandemic. Melbourne had a net outflow of 17,200 residents in the year to September 2020, 25 times larger than the outflow observed the previous year.
It’s not surprising that the two cities with the highest international migration rates – Sydney and Melbourne – are also the ones with the highest vacancy rates. In the 2011 Census, just under half of all migrants in Australia lived in either Sydney or Melbourne, with 1.4 million residents of Sydney and 1.2 million residents of Melbourne being born overseas. It makes sense, then, that since borders have closed, we’ve seen elevated vacancy rates in Melbourne and Sydney – 4.5% and 3.3% in February 2021, respectively.
At AllianceCorp, we aim to invest countercyclically – identifying hotspots before they are actually hotspots. Though some regional locations are performing extremely well, we look to places that are not at the top of their cycle as potential growth areas. Melbourne and Sydney have historically had strong performance. Post COVID, we’re expecting a massive insurgence of migration in these capital cities. 200-300,000 people will be arriving, and they will need accommodation. So it makes sense that we consider Melbourne in the longer term. In the meantime, with higher vacancy rates and low rent prices, it’s important that you find properties in areas that buck these trends.
What do vacancy rates matter
SQM Research today has revealed the national residential rental vacancy rate fell to 1.8% over the month of May 2021 from 1.9% in April. In Melbourne, this is “having the effect of boosting rents as tenants compete for rental homes”, according to SQM Research Managing Director, Louis Christopher. When vacancy rates decrease, it means there are less properties available. For investors, this should typically produce higher rental yield, as there are more tenants and less places to rent.
Lower vacancy but not higher rent
While there is a downward trend in Melbourne’s vacancy rate, asking prices for rent have also gone down across the year. This is bad news for investors who receive rental income from those properties.
Melbourne unit rents are down substantially by 11.0% while house rents have fallen 4.8% over the year in Melbourne. Melbourne is set to become the most affordable city in the country in which to rent a house and unit in 2021, if the current trends persist.
What’s behind vacancy rates and asking rents?
It’s important to always question the underlying factors behind a significant statistical change. This helps you determine if the benefits will still be there in the longer term. I spoke about this in my article on the impact of infrastructure. In that article, I discussed how projects, like mining, boost employment in the short-term. However, they don’t necessarily improve the overall quality of the area moving forward.
Similarly, the vacancy rate hit zero in many Australian coastal towns back in January 2021, as people flooded the regional locations. Now, the national vacancy rate is returning to pre-pandemic levels and we’re seeing metro vacancy rates trend downwards.
Factors which made locations like the Surf Coast desirable are abating: Many offices are re-opening. There are government initiatives to reinvigorate CBDs. Melbourne introduced FOMO Fridays while the NSW government is considering free public transport in the CBD in addition to its CBD reinvigoration strategy, worth $40 million. While Victoria just underwent a two week lockdown, it is also amidst a vaccine rollout, which is likely to see lockdowns become an event of the past.
What do the changes mean for property investors?
When it comes to evaluating locations, there are many factors that need to be considered. Most importantly, indicators of future growth or decline need to be analysed in the broader context of what is happening in a location.
At AllianceCorp, we plan for the longer term. At some point, international borders will re-open and bring with them an influx of migration, many of whom will be renters. This will push house prices up.
Adding further pressure to this demand will be a lack of supply. The pandemic saw the decline of apartment construction in capital cities.
UDIA Victorian chief executive Matthew Kandelaars said 800 new apartments in a 12-month period won’t keep up with housing demands, especially if Victoria’s population resumes growth. “Apartment completions are fast heading towards a cliff,” he said. Meanwhile Charter Keck Cramer predicts that in 2024 Victoria will build just 4% of the number of apartments completed in 2016.
However, the forecast population growth is unlikely to come in the next 12 months. Knight Frank’s head of residential research Michelle Ciesielski said, “we’re not likely to get a boost in population over the next 12 months.” Instead, Ms. Ciesielski sees a return to international migration in about 3 years.
There is also a significant trend towards lower density properties, especially in the wake of the pandemic. CoreLogic’s research director Tim Lawless said, “With a preference shift towards lower density housing options, many of these areas will be experiencing less demand for apartments.”
So, for investors who are focused on long-term growth and positive cash flow, Melbourne properties could still prove a wise investment – just not high rise apartments. This is where taking a realistic and longer term approach can really pay off for investors.
Minimise investment risk
Of course, when building a property portfolio, you should seek to minimise risk. One of the best ways to do this is by diversifying. While clients come to AllianceCorp wanting to purchase the house down the road, we encourage investors to firstly focus on properties and locations that look set for growth and secondly, to have an array of properties across various locations – so they don’t have all their eggs in one basket, so to speak. A Melbourne property could very much be one of those eggs, if you target the right properties within the city and know what questions to ask.
If you would like to understand how you can capitalise on future growth, minimise your risk and build a sustainable property portfolio, request a 1 on 1 strategy session.
At AllianceCorp, we have Property Wealth Planners who can evaluate your current financial position to help you determine a realistic plan for achieving long-term wealth.