If you are a landlord with a residential investment property, or are thinking of investing in this sector, you will want to know what the impact of Covid-19 is on the rental market.
The reality is that a combination of factors, including a deteriorating Australian economy, spiking unemployment and travel restrictions means the landscape is looking very different for the rental market – with vacancy rates up, and average rents dropping in many urban markets. Rent.com.au believes that overall, “…a fall in median rents is likely across Australia”, and indicates that government assistance will be crucial in determining the medium term economic impact on the sector.
This article will help you understand the problem – specifically in Sydney, Melbourne and Brisbane – and give you an idea how you minimise the impact on your investment, so you can negotiate this uncertain time and keep your property tenanted. Let’s start by looking at the primary drivers impacting rental markets generally, followed by a city-by-city analysis of the three metro markets.
Drivers impacting the rental market
Initial job losses in the first phase of the pandemic impacted a younger demographic, who are more likely to rent – so they either looked for cheaper accommodation or moved back in with family. The flow of international students and migrants has also dried up, while domestic students are increasingly limited to studying remotely – further weakening demand. The long-term rental market has also been flooded with Airbnb properties transitioning away from short term rentals as local and international travel restrictions have virtually eliminated demand for their properties overnight. New South Wales has gone as far as banning short-term holiday accommodation due to movement restrictions.
All this equates to oversupply in the rental market, which puts tenants in the driver’s seat. This means you should be prepared to:
- List for less than you have historically been receiving in terms of rent.
- Accept an offer lower than advertised.
- Negotiate with existing tenants to keep your property tenanted.
Now let’s look at the major rental markets and how they have been impacted, bearing in mind local conditions do vary sometimes quite significantly.
The effect coronavirus has had on Sydney’s rental market
Regions where a high portion of renters are obviously more susceptible to the broader impacts of the pandemic – as some postcodes in Sydney clearly illustrate. If there is an overriding theme it is that units are more susceptible to current market forces. CoreLogic reports that overall capital city house rents have dropped -0.3% since March, but units have recorded a more substantial drop of -2.6% over the same period.
At the city level – between 22nd of March and the week ending 26th of April – the period when restrictions impacted international travel and business activity, the number of properties for rent in inner city Sydney more than doubled to 34.1%. Other parts of the city to record significant rises in rental listings over this timeframe include the Eastern suburbs (22.8%), Sutherland Shire (10.4%) and Inner West (8.7%). Contrast this with an increase of 0.8% nationwide over this timeframe.
Corelogic’s Hedonic Home Value Index for July 2020, which also tracks rental activity, indicates that Sydney house rents have dropped -1.1% over the July quarter, while units are down -3.2% for this timeframe. Rental yields over the month of July in Sydney were 2.7% for houses and 3.4% for units. SQM Research reports that residential vacancy rates in Sydney are at 4% in May of this year.
The effect coronavirus has had on Melbourne’s rental market
The rental market in Melbourne mirrors Sydney’s, with inner city postcodes posting a record rise of 36.2% for the number of properties for rent (22nd of March and the week ending 26th of April). Other areas with rising rental supply over this period include Warrnambool (+13%), the Inner South (+10%) and Inner East (+7.2%).
The real concern is however the fall in international migrant arrivals, which has largely fuelled the rental boom across metro Melbourne – with no end in sight to the current restrictions on our borders.
In terms of rental activity, CoreLogic data indicates Melbourne house rents have dropped -0.7% over the July quarter, while units are down -3.1%. Rental yields over the month of July in Melbourne were 2.9% for houses and 3.9% for units. SQM Research reports that residential vacancy rates in Melbourne reached a peak of 3.1% in May of this year.
The effect coronavirus has had on Brisbane’s rental market
Brisbane’s property is historically not as volatile as its larger metro cousins, and this is true for rental data. This shows that rental listings rose in single figures, +2.7% for Brisbane’s Inner City. The Gold Coast is the most concerning area in the state with a rise of +12.5% over this timeframe, but this area has a high proportion of short term holiday rentals which explains this figure. Asking rents in Brisbane also showed a less dramatic drop over July, down -0.3% (houses) with units down -1.0% over the July quarter.
Long term vacancy rate data from SQM Research also show that Brisbane has weathered worse periods – in December 2016 for example, when it was 4.1% – where June 2020 finds it at 2.4% (June, 2020).
Now let’s look at some strategies you can use to ensure your investment property is tenanted during this challenging period.
Tips for re-letting a property during the pandemic
Be aware that the market is in a different place – it is essentially a tenants market, so you should look to:
- Reevaluate your properties current market value. What you ‘used to achieve’ in terms of weekly rental has very little relevance. It’s also not forever – and is hopefully a short term measure.
- Be prepared to list for less than you have been historically receiving in terms of rent. Don’t waste time chasing an unrealistic figure. This could cost you more if you have an extended vacancy period.
- Focus on the quality of the tenant, rather than achieving the highest possible rental price.
- Be prepared for extended vacancy, and look to protect your cash flow – such as applying for a loan holiday or pause with your bank.
- Pay close attention to the quality of marketing your property manager uses. Your property needs to stand out now more than ever to avoid an extended vacancy. They need to prioritise your listing with professional photography, and tools like 3D virtual tours, which are crucial in an environment where social distancing is the norm. Also be aware that prospective tenants are depending more on online tools to help find their next rental.
If you are unsure how to market your property in this market, an experienced property manager like us with local market knowledge can help protect your investment.