17 July, 2023 / Category: Blog
The Melbourne rental market has been leading the way in quarterly rental growth, with a 3.9%* increase in the 30 June 2023 quarter. This is helping Melbourne catch up to other markets, with an annual rental growth rate of 12.6%* for all dwellings. Melbourne’s average yield stands at 3.47%*, and we expect this to grow steadily.
This month, we sat down with our resident investment expert Tristan Utting, to discuss what he looks for in an investment property and where are the best areas for investing right now.
Tristan discusses how to achieve the perfect balance between yield and capital growth, what attributes he looks for in an investment property, and the hottest locations on his radar right now.
The significance of yields has recently gained considerable attention, primarily driven by the surge in interest rates and land taxes. These factors have contributed to the challenges associated with maintaining capital growth properties. Consequently, the emphasis on acquiring investments with robust yields has become increasingly critical.
To ensure sustainable yields in the long run, it is crucial to purchase properties in the right areas that offer good access to Melbourne for working professionals and possess desirable lifestyle attributes, ultimately leading to an increase in property yield over time. That’s why we often focus on areas like deep Bayside and Geelong. Both of these areas have good access to Melbourne, so they are in demand from working professionals.
At Infolio, we adhere to a capital growth model that ensures the investments we procure for our clients align with a proven long-term strategy. Our approach is guided by the Infolio capital growth benchmark of 6%, which ensures reliable historical growth trends. We prioritise established areas over new and up-and-coming locations, as the latter may be more susceptible to potential value fluctuations during market downturns.
The calculation of the 6% benchmark involves analysing the property’s growth trajectory since its initial recorded sale, considering the average growth it has experienced over at least seven to ten years. If a property fails to achieve at least 6% growth, it does not meet our criteria for consideration.
It is important to note that the property’s growth may not reach 6% every year. Instead, our forecast considers the long-term perspective, where some years may yield higher growth rates while others may be comparatively lower. However, over the property’s lifespan (seven to ten years), the 6% benchmark is anticipated to be maintained.”
When searching for an investment property, several key factors come into consideration. First and foremost, we seek a property that includes its own designated land area, preferably without a body corporate. This ensures a sense of ownership and potential for future development.
A well-built home with sturdy foundations guarantees longevity and minimises the need for costly repairs. Furthermore, a modern and appealing floor plan is essential, one that caters to the preferences of most renters. While there may be room for cosmetic enhancements, a good floor plan provides a solid foundation for rental appeal.
The location plays a vital role, and we aim for areas that offer desirable amenities appealing to potential renters, such as access to shops and public transport. We also prefer areas with minimal ongoing development, as excessive construction can be disruptive to renters and alter the neighbourhood’s character in the long term.
When it comes to investment opportunities in Melbourne, two areas stand out to me as showing promising returns; Geelong and Deep Bayside. In Geelong, the suburb of Belmont has been particularly noteworthy, boasting a 7.7%** capital growth over the last five years and a current average yield of 3.4%** for houses. Belmont benefits from its proximity to highly sought-after suburbs like Herne Hill and Geelong West, which are becoming increasingly difficult to buy into. Belmont offers a wealth of solid brick homes built between the 1970s and 1990s, providing a strong foundation for immediate use and future capital improvements. With its consistent long-term growth rates, Belmont aligns well with our Capital Growth Model.
In Deep Bayside, Seaford presents an enticing investment opportunity. Situated on the southern side of premium suburbs like Chelsea, Bon Beach, and Edithvale, Seaford offers an attractive alternative for buyers and renters who may be priced out of those areas. It shares the impressive amenities of its neighbouring suburbs and has many solid properties constructed between the 1950s and 1980s. These properties have great potential for cosmetic renovations.
While Geelong and Deep Bayside stand out, it’s important to note that investment opportunities exist beyond these areas. Nonetheless, Geelong’s Belmont and Deep Bayside’s Seaford have recently proven to provide strong investor returns.
*CoreLogic Rental Review July 2023