The Rise of Interstate Property Investment

Expensive property prices in Sydney have ushered in the return of interstate investing. A growing wave of ‘interstaters’ are seeking affordable investment opportunities outside of costlier markets.

One city benefitting from this trend is Adelaide. It has seen demand for inner city real estate shoot up in recent months. Most of this investment stems from Sydney and Melbourne. And considering the entry barriers facing investors in those markets, this trend isn’t surprising.

It’s not just expensive property prices that are a problem either. The higher cost of taking on investment loans is making things more difficult. Banks have jacked up interest rates on investor loans this past year. And the effects have become more apparent recently. In September alone investor lending fell by 8.5%. Not since 2007 has monthly lending declined by as much.

Then there’s the issue of higher deposit requirements. Investors are staring at down payments of 20% to qualify for loans. In cities with expensive prices, like Sydney, that’s a potent mix. When you put these factors together, it’s no wonder investors are seeking opportunities elsewhere.

Most people look for value where they can find it. Whether that’s through rental yields or capital growth is irrelevant. But there needs to be some upside.

Regardless of investment strategy, the options are limited in both Sydney and Melbourne right now. Capital growth is declining. Sure, those that purchased property a year ago would still see double digit growth selling up now. But the prospects for those buying today are much worse. By this time next year we could be talking in terms of losses.

And that’s where Adelaide comes in. Weaker housing markets are increasingly where investors can find this value. Which is why we’re seeing growth in interstate investing.

Not since 2010 have interstaters been this active. And all looking for more or less the same thing. Adelaide doesn’t offer investors much in the way of capital growth. But it does offer something Sydney and Melbourne don’t: cheaper property, with higher rental yields.

Rental yield behind the rise in interstate property investment

Rental yields in Adelaide are the real draw for investors. At present the market offers yields of 4.1% for housing dwellings. For units, yields are even higher at 4.7%. These rates compare favourably to both Sydney and Melbourne.

In Melbourne, rental yields are 3%. That’s down 0.3% from this time last year. Sydney’s rental yields aren’t much better, at 3.3%. Sydney is down 3.7% on last year. By comparison, yields of over 4% in Adelaide have remained unchanged from 12 months ago.

This advantage applies only to yields though, not changes in rents. Sydney and Melbourne still lead the pack on that front. Both markets have seen real rents rise by over 2% year on year. But between rental growth and yields, investors will opt for the latter. Adelaide’s are among the most attractive in the country. Meanwhile, Sydney and Melbourne have the lowest rental yields by comparison. Not a hard choice for investors, is it?

The interstater movement is a sign that relying on capital growth alone is a risky strategy. Why? Because if recent performance is any indicator, property prices may have already peaked.

Sydney’s market grew at just 0.3% in September. The national housing market rose just 0.2%. It’s been that sort of story for several months now. And there’s no sign we’ll see price trends reverse anytime soon.

Depending on who you believe, the market is set to fall further next year. Morgan Stanley recently suggested prices could plunge another 7% in 2016.

If we’ve reached peak housing, then investors have an easy choice to make. Many are likely to prioritise rental yields over capital growth. Otherwise there’s not much point in investing in the first place. Unless of course they’re willing to sit on their investment for decades, waiting for the next boom…

But for investors seeking shorter term gains, the equation is straight forward. Find markets with rental yield upside, and forget about capital growth. Or, at the very least, make capital growth a secondary objective.

From this perspective, Adelaide has a lot of upside to it. You’re not only getting attractive rental yields. But the cost of entry remains affordable.

A house in Adelaide would set you back $430,000, by median prices. Which is roughly half what you’d pay in Sydney. A 20% deposit on a $450,000 house is expensive. But $90,000 is a lot cheaper than an $180,000 deposit on a $900,000 home in Sydney.

Of course not every property in Adelaide comes that cheap. In Adelaide’s inner core you’ll still find properties nudging north of $800,000. But relatively speaking Adelaide is still cheaper than Sydney. Which reduces your upfront capital from the outset.

The added bonus for Adelaide is that this interstate investment is lifting demand. In the long run that should force up prices too. Already dwelling prices have risen 4.3% in Adelaide in the past year. If nothing else, it’s an added incentive for investors. Even those focusing their strategy on rental yields.

Either way, as the housing market cools we can expect a rise in the number of interstaters. In all likelihood we’re only just scratching the surface.

Property market performance by city

Market performance by city for the year to September (monthly, yearly, median dwelling price):

Sydney: +0.3%, +15.6%, $800,000

Melbourne: 0.6%, +12.8%, $600,000

Brisbane: -0.2%, +3.8%, $460,000

Perth: -2.8%, -1.8%, $500,000

Adelaide: +1.5, +2.3%, 402,200

Hobart: +1.4%, +3.8%, $325,000

Darwin: -0.1%, -3.7%, $540,000

Canberra: +1.5%, 4.5%, $562,000

Combined capitals: +0.2%, +10.1%, $590,000

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