Miranda Brownless writes a piece for the website SMSF Adviser wherein she warns investors seeking low volatility of the SMSF property sector about the poor yield that they might come to expect in markets of Sydney and Melbourne. Yield environment must be factored in before SMSF trustees make their investment strategy.
Yield gives positive cash flow
Asking for capital growth is the traditional thing to do but investors buying SMSF-enabled properties will do well to take a look at the rental yield because that alone can ensure a positive cash flow. A must then, because every investor does not have an appetite for negative gearing.
Yields compressing across capital cities
Yields are compressing across the capital cities. It is not that rental returns have plateaued; it is just that the value growth has been phenomenal and you can make out through a relative assessment that yields are only bound to compress when value growth shoots way upward.
Sydney and Melbourne are classic examples of high value growth/low yields
For cities like Sydney and Melbourne that have exhibited terrific value growth, the yields have come down sizably. For Sydney, it stands at 3% and for Melbourne it stands at 3.1%. The upside is that the rental market has become a little more affordable but this is not how economy would like to pan out. For any semblance of sanity to return to the yield market, the value growth will have come to down in the capital cities or else things may really get out of balance.
You can read the original article here.
Investors should be wary
Low rental yield may be one more reason why the vacancy rate is tightening. The rental market may well be looking affordable to prospective tenants. How else can the status quo be explained. Brownlee has come up with the article in time because it is really the ripe moment for property investors in the SMSF sector to take a long, hard look on how much of a positive cash flow they require.
If gearing their properties negatively is part of their investment strategy, then they can keep hunting for value growth but if they do not want to honour mortgage commitments through their own pocket, yield definitely becomes a factor.