Rents falling in outer-ring estates where investors own half the street

Investors buying new stock in outer-ring housing estates are running into falling rents and empty properties because too many homes in those suburbs are owned by other investors, according to comments made on the Property Buzz podcast.

Momentum Media director Alex Whitlock told host Phil Tarrant he had bought a new house on Melbourne's outer fringe through a buyer's agent and could not lease it.

"It was a great purchase and no one wants to live there. Couldn't rent it," he said. "I ended up flogging it and buying in Brunswick East."

Whitlock said the suburb was Greenvale, near the airport, and the home itself was sound. "It looked okay, a new looking house, nice and clean, but there's street after street after street of them," he said, describing blocks of around 200 square metres and an endless supply of near-identical stock.

He said distance from the city was part of the problem, but the bigger issue was choice. "More importantly, there's just so many to choose from there," he said.

The investor concentration problem

Tarrant said the imbalance was structural in some fringe suburbs. On a simple split of roughly a third of Australians renting and two thirds owning outright or with a mortgage, a suburb should need rental stock for about a third of its dwellings, he said.

"In some of these outer ring suburbs where investors are operating, you're getting 50 plus per cent of houses are owned by investors," he said.

Tarrant said he had spoken with a well-known buyer's agent this week who reported the same pattern. "Rents are actually dropping in these areas because there is so much investment stock," he said.

He questioned the policy logic of incentivising investors into new builds in those locations. "You can't build properties that people don't want to live in," he said, adding that such assets risked being worth the same or less in five or 10 years.

Whitlock said the missing element was community infrastructure, not just roads. "It's all well and good building ranks and ranks of cheapish accommodation out in the far flung reaches of Melbourne or wherever, but you're not building a sense of community," he said.

Where the yield is

Both pointed to inner-city apartments as the current standout for income. Whitlock said his daughter was looking at one-bedroom apartments in certain Melbourne suburbs and finding stock moving quickly.

"You're looking at sort of six, seven, in some instances, 8 per cent yields," he said. "Investors who now are not relying on negative gearing are going, oh, well, I'll go and buy a high yield property, and they're going fast."

Tarrant said inner Melbourne apartments were the most talked-up segment in the market right now, and that he believed the case had substance.

"Yield is a reflection of demand from renters. It's that simple," he said. "If lots of people want to rent them and there aren't many of them available, then guess what? The price then goes up from a rental perspective."

He drew a distinction between prospective and actual returns. "At the moment, they're delivering the yield. It's not they're going to deliver yield. They are delivering yield," he said.

Commercial shift hasn't happened

Tarrant also flagged that the widely predicted rotation of residential investors into commercial property had not materialised.

He cited reporting on sister title The Adviser from a Commonwealth Bank function this week, noting the bank had initially expected commercial real estate to be the major beneficiary as investors reconsidered established residential property, but that the anticipated reallocation had not emerged.

Whitlock said commercial was "not a panacea" and carried significant risk.

Tarrant said he would be doing more work on the commercial sector in coming months.

Listen to the full episode: The Property Dream is Rapidly Changing