You can't have your cake and eat it. While this truism was first coined around 500 years ago, nowhere do these immortal lines resonate

louder than within the residential property market.

The two key strategies that dominate property investment the world over are cash flow and capital growth.

The trouble is, there's mostly an inverse relationship between yield and capital growth. This means it's rare to find properties that offer up a "perfect storm'' combining equally high levels of both, with investors typically having to trade off one for the. other.

Nevertheless, it's understandable why Perth investors - especially those

·needing income within a low interest rate environment - are turning their attention to the reasonable yields residential property can still offer. However, that yield comes at a price, with the continued softening of Perth's property market - with house prices for the year to March 31 down 2.1 per cent - making capital growth look less bankable any time soon.

QQ • APIMAGAZINE.COM.AU • AUGUST 2016

f.!j ALL ABOUT SCARBOROUGH'

Median price Mar 16 $675,250 $482,500

12-month growth -1.4% 3.9%

Median rent Mar 16 $480 $350

Rent growth -4.0% - 6.7%

Mar16 (YoY)

Gross rental yield 3.7% 3.8%

Mar16

Properties sold Mar 16 336 74

Properties sold Mar 15 430 106

Average vendor 5.4% 3.8%

discount Apr 16

Average vendor 2.4% 2.1%

discount Apr 15

iii SCARBOROUGH MEDIAN SALE PRICES'

$,000

600

400

200

0 07 OB 09 10 11 12 13 14 15

At 3.8 per cent, based on CoreLogic data to March 31, 2016, average rental yields in Perth are significantly down on an historical average closer to five per cent. But in fairness, they remain considerably higher than 3.4 per cent in Sydney and three per cent in Melbourne, which have delivered capital growth of 8.9 per cent and 10.1 per cent respectively in the year to March 31 .

What's contributing to Perth's property yield compression is vacancy rates that are currently over double the historical average of around three per cent, with a whopping 10,000-plus rental properties available across metropolitan Perth, adding to a rental crisis.

Nevertheless, while they're the closest they've been to interest rates in 30 years, Gavin Hegney of Hegney Property Group says gross rental yields by default remain relatively attractive. While investors are able to command rental yields on houses and units of four per cent and 4.5 per cent respectively, a cash rate of 1.75 per cent will put further pressure on fixed income. ~

r'~, INVESTOR SNAPSHOT ~---

Future tail winds While seasoned investor Brad Booth plans to buy more residentia l property, his latest investment is a syndicated, near-city development offering a "multiplier" effect derived from converting a single residence on a corner block into a multi­apartment complex.

Instead of participating in "crowded trades" - where upward pressure on price from those chasing an income stream only ends up diluting the yield - Booth expects the sale of the final development to deliver a total return of more than 15 per cent.

"Perth property investors are chasing higher yield because they can't extract a portion of underlying capital gains easily, and the latest rate cut makes it more difficult to extract a reasonable return from cash or fi xed interest," Booth says, adding that

Hegney also reminds investors that the further the investment horizon, the greater the opportunity for both good cash flow and capital growth.

"Be careful employing a strategy that fits nicely into where we are in the cycle today but ignores the other parts to the cycle;' Hegney warns.

"When markets are booming - and they tend to do so every 10 years -capital growth potential is paramount.

"This differs when we're in early- or mid-cycle, when yield is proportionally just as important:'

• RED FLAG With property investors perpetually juggling the trade-off between short­tet m yield and long-term capital growth, Hegney says the best "perfect storm" they can hope for is the prospect of capital growth plus sufficient yield to make their investment serviceable.

Given that it's long-term capital growth and not yield on property investment that will generate their wealth, he warns investors not to chase yield for yield's sake.

the days of Austra lian investors relying on a rising tide to lift all properties sufficiently to provide a decent return are gone.

As a result, the smarter approach, he says, is to benefit from future tail winds on either land va lue or other drivers of growth such as rezoning, renovation or infrastructure developments.

Admittedly, buying a positively geared property offering a reasonable yield, on the assumption the underlying investment won't fall, is a personal choice.

But Booth warns investors that buying any asset solely for the income isn't the way to generate above-average returns.

"Instead of being fixated on milking property for yield like a 'cash cow', investors need to understand that it's the total return, compounded over time, that matters."

As a case in point, while the Perth CBD apartment market currently has strong yields above five per cent, oversupply within this market is likely to restrain future capital growth.

In the meantime, Richard Wakelin of Wakelin Property Advisory reminds investors there's no such thing as a high growth property delivering high yield. He says high yield properties should be a red flag to investors.

"A good capital growth property will invariably give a better cash flow than its high-yielding counterpart in the long run;' Wakelin advises.

However, it's impossible to get the yield/capital gains balance right, Damian Collins of Momentum Wealth argues, until investors assess their property investment goals, financial capacity, risk profile, age and a myriad other personal factors.

"Typically, capital growth is best for younger investors who are accumulating personal wealth, whereas positively geared property is generally better for retirees who rely on the rental yields for income;' Collins says.

I

Western Austra lia • THE STATES mma•

~j SCARBOROUGH FACT SHEET

Scarborough has an oversupply to demand situation. There are many rental properties available to tenants and there's an oversupply of for-sale listings. Incomes in Scarborough are growing significantly slower than the Western Australia average. The proportion of renters to owner­occupiers is above average for WA. Stock for sale levels are up by 2.9 per cent year on year. 'Source; SQM Research. www.sqmresearch.com.au (accurate to May, 2016)

• Owner-occupiers • Mortgage holders •Renters

VACANCY RATES'

4.4°/o SCARBOROUGH

KEY DRIVERS

•Coastal location

•Infrastructure.

WALK SCORE6: 65

• Separate house (2,200) • Semi-detached

row or terrace house, townhouse etc (2 ,113)

• Flat, unit or apartment (1.788)

4.6°/o PERTH

POPULATION4

14.271

Scarborough has a Walk Score of 65 - some errands can be accomplished on foot in the suburb. There are about 65 restaurants, bars and coffee shops and people in Scarborough can walk to an average of two in five minutes.

j 1

AUGUST201 6 • APIMAGAZINE.COM.AU • Ql

10 ways to balance yield/capital growth 1. Look for total returns and not

just yield.

2. Newer houses command better yield but lower capital growth.

3. Apartments command higher yield than houses, but lower capital growth.

4. Properties with land have greater capital growth upside.

5. Areas with higher-than-average renters are likely to deliver lower yield.

6. Yield contributes considerably less than half total return over time.

7. To maximise total returns, hold property for seven-plus years.

8. If you forfeit capital growth for yie ld of five per cent, you're better investing in A-REITs (Australian Real Estate Investment Trusts).

9. Anything resembling a "cash cow" offers scant c.apital growth.

10. Land and other "multipliers" like renovation or changing dynamics drive future capital growth.

92 • APIMAGAZINE.COM.AU • AUGUST 2016

With the Perth property market becoming fixated with the "land-factor'; buyers' agent Zana Van de Graaf of Property Buyer Services says fewer investors are chasing units due to limited capital growth potential.

Instead of settling for just a higher yield, Van de Graaf is watching investors' refocus on rental properties that allow them to maximise the best total returns through a "reasonable" yield together with capital growth that's embedded in the future land value.

"While units offer a low-cost entry into the property market and a reasonably higher yield, they tend to be a losing formula, as investors are penalised when it comes to exiting;' Van de Graaf says.

"Having a land component protects investors from negative equity, and they can still find good total return opportunities, with anything over $500,000 typically offering good yield and future capital growth, and often subdivision potential:'

Jon Williams, of Altitude Real Estate, is also witnessing Perth's apartment market, as a result of inexperience and limited affordability, become the domain of younger investors, who need higher yields to service their debt. What they often overlook, he adds, is that by chasing that extra one per cent yield, they could be giving up a lot of capital growth.

Unsurprisingly, given the dearth of

positively-geared cash cows within Perth's property market, he's also witnessing the migration of seasoned investors away from higher yielding apartments back into properties with land upside.

• YIELD/CAPITAL GROWTH PLAYS It's the high-density areas, Williams adds - especially villas and townhouses offering a land component - around transport hubs, like Maylands and coastal areas like Scarborough Beach or Double View, where there's a high turnover of tenants - offering both higher yield and some long-term capital growth.

"Admittedly, there's always risk of negative equity, but based on the infrastructure, and high-density demand, this is less likely;' he says.

Included among pockets worth looking at for good yield and renovation upside, Williams points out, are Mount Lawley, Highgate, Morley, Duncraig, Hammersley and Greenwood.

These localities are close to trains and amenities, where the development of bigger blocks could be adapted for better tenant outcomes.

For a reasonably modest capital outlay, Hegney also reminds investors that in addition to greater capital value and depreciation benefits, good renovations can also increase yield by around two to three per cent.

Western Austra lia • THE STATES---·

''Be careful employing a strategy that fits nicely into where we are in the cycle today but ignores the other parts to the cycle.'' GAVIN HEGNEY

"Investors who renovate need to get a lot smarter at adapting areas to accommodate multi-tenant scenarios;' he says.

Hegney encourages investors to hunt for older homes on bigger blocks, where there's the opportunity to create multiple living areas that allow different tenants to cohabit, plus future upside from rezoning.

• NURTURE CAPITAL GROWTH Given where the Perth market is right now, Williams admits any property investment decision should be heavily weighted around yield.

But he also recommends protecting future capital growth by purchasing property with a larger land component, especially in areas in which land represents at least 70 per cent of the total property value.

"There are also a lot of promising high-density villas or townhouses with

some land and a single garage around inner cafe suburbs like Leederville, and newer stuff in Mount Hawthorn and North Perth on 250-square­metre to 300-square-metre blocks;' Williams says.

Other areas currently offering a good combination of yield and capital · growth are those at the more affordable and unappreciated end of the market which still offer good facilities.

They're often close to good infrastructure, schools and amenities, Van de Graff says.

These include 1970s or '80s houses on bigger blocks within outer suburbs on Perth's northern corridor, like Craigie or Beldon; Lockridge in the Swan Valley, where 90 per cent of the value is in the land; or Kenwick and Forrestfield to the southeast, where there's a lot of future subdivision potential.

The opportunity for rental growth is significantly limited in areas where

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renters already comprise well above the Perth average of around 28 per cent - examples include Northbridge (70.4 per cent), Highgate (63.6 per cent), Bentley (60.4 per cent), West Perth (64.1 per cent), Victoria Park (54.4 per cent), Burswood (53 per cent), Subiaco (48.l per cent) and South Perth (46.9 per cent).

As such, Hegney recommends investors chasing better yield stick to suburbs in which the percentage of rentals is considerably lower, ideally between five and 20 per cent.

"Changing vacancy rates means properties that were commanding $620 a week rent may now only rent for $500 a week, which puts downward pressure on yields;' he says.

"Around 70 per cent of Australian property investors have only one investment, so make sure it's a good one by getting the best balance of yield and capital growth you can:' rm

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