Yield warning issued to SMSF property investors
SMSF trustees looking for lower volatility in the capital value of a property should consider that yields are compressing both in Sydney and Melbourne, says one property analyst.
Speaking to SMSF Adviser, CoreLogic RP Data's head of research, Tim Lawless, said the yield environment should be an important part of an SMSF trustee's assessment of their investment decisions.
“Of course you want to maximise your prospects for capital growth but you also want to ensure you have a decent rental market behind your investment to make sure you’re getting a high level of cash flow or rental income,” said Mr Lawless.
“For an SMSF investor looking for something a little less volatile in capital growth or loss, as well as higher, stable yields, they perhaps want to take into consideration the fact that yields are increasing in Sydney and Melbourne.”
Mr Lawless said yields in the major capital cities are currently experiencing a compressing trend.
“We’ve seen yields move lower in every capital city outside Hobart; it’s just a factor of rents and rental growth being lower than value growth,” he said.
“Yields are getting squashed smaller and smaller and in cities where we’ve seen the strongest value growth, Sydney and Melbourne, we’ve seen gross yields near 3 per cent [in] Melbourne and 3.1 per cent [in] Sydney and they’ll probably [go] lower yet.”
SMSF investors need to be conscious that the yield profile of cities which are performing best in terms of capital growth is unbalanced and that suggests that values relevant to rents are out of balance, he said.
“We either need to see rents rise or values fall to see that balance return to the market,” he said.
Low yield also implies that a marketplace is becoming more affordable in which to rent, according to Mr Lawless.
“That’s not the case in every capital city, but it’s definitely the case in Sydney and Melbourne,” he said.
Property markets such as Brisbane, Adelaide and Hobart, on the other hand, have not seen as much compression in their yield because they are still very early in the growth cycle he said.
“They’re probably looking a little better for an investment over a short to medium term,” Mr Lawless said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.