Rental property vacancies could signal a price shakeout

15 September 2001
Robert Harley

Where real estate prices have scaled dizzying heights falling returns on investment properties might indicate a peak is close.

Investors beware. In Sydney and Melbourne the rental market has softened. Rents have weakened, letting costs have increased and returns to investors are on the slide. Vacancy rates for Sydney flats have doubled in a year.

Other markets are going in the opposite direction. Hobart and Brisbane are tight and Adelaide is becoming even tighter.

But for investors in Sydney and Melbourne it is a double warning.

Buyers need to be confident that estimates of rent are accurate and that they are not basing their funding on rental figures that cannot be achieved.

And they need to understand that movements in vacancy rates have in the past proved an indicator of price movement, both in the late 1980s when the weakening vacancy rate foreshadowed the shakeout to come, and again in the 1997 when the tightening rate pointed to the latest price surge.

In Sydney, according to the Real Estate Institute of NSW, the vacancy rate in the city's rental apartments and houses reached 3.8 per cent in July double the level of last year and close to the record peak of 1989.

Hardest hit have been particular localities, like Bondi Junction, where just-completed towers have large numbers of new apartments.

Some owners are offering tenants two weeks rent-free and other properties have suffered 10 per cent to 15 per cent declines in rent on reletting.

Top-end executive lettings have also been hard hit, with some estimating that rents have come back about 50 per cent.

However, some experts believe the weakness might be short-lived and not develop into the oversupply that characterised the early 1990s.

REINSW president Chris Fitzpatrick believes the new round of tenants entering the market in the new year will soak up much of the stock and BIS Shrapnel director Robert Mellor says that from a broader point of view, the city is not fundamentally oversupplied.

In Melbourne, the chairman of the Real Estate Institute of Victoria's residential property management interest group, Mark McDonald, said that the suburban market was softer than the city. His office, Hocking Stuart, Melbourne, only has eight properties to lease in a portfolio of 300. He adds that the top-priced properties in each range are the most affected.

Owners need to remain patient. The chairman of the REINSW's property management chapter, Lyn Tamsett, says many will have to upgrade properties, not to gain more rent but simply to remain competitive.

Or they can adopt strategies, like Hocking Stuart's Melbourne office, which is seeking shorter-term leases, so the rent can be negotiated as the market strengthens.

The news from other cities, apart from Darwin, is more positive.

One Brisbane near-city property manager, PRD Toowong, has a 1 per cent vacancy rate although September is traditionally the quietest letting month in the year.

In Adelaide, rents are on the rise and new properties are being let within the first weeks of listing.

But surprisingly, the tightest rental market in the country is in Hobart where the strong take-up of first-home owner grants Tasmania was awarded some 4,500 last financial year - has converted many rental properties into owner occupation.

The city's vacancy rate hit a 10-year low of 1.5 per cent in April and while the figure has risen a tad in recent months, L J Hooker Hobart's property investment manager, Denise Phillips says the market is still very tight, with a "drastic" shortage of properties available for rent in the $80 - $250 a week range.