Tuesday, August 21, 2012

Gross yields not so grand

Property Observor has placed Westcourt at the top of high yielding rental suburbs in Australia: Suburban Cairns unit investors reaping the highest yields amid Australia's most active 50 rental suburbs. This is based on research from RP Data which placed two Cairns suburbs in the top 50 rental suburbs list, the other being North Cairns at #10 with 66.8% of homes rented. Westcourt is at #27 with 62.4% of homes rented. 
In Westcourt, an inner suburb of Cairns, 62.4% of homes are rented, and the median price for units is $145,000 – the lowest median price in the list.

However, LJ Hooker Cairns Edge agent Jason Edwards says in real practice he hasn't seen yields like this in Westcourt."The figures [for] the rental yields sound high. If we were getting yields that high property would be selling like hot cakes."
Edwards is currently selling unit four at 8 Ascot Avenue for $139,000 with a current rental income of $200 per week. Without taking any outgoings into account this is technically a yield of 7.5, though Edwards says outgoings quickly eat away at this.
"[The apartment earns] $10,400 for 52 weeks. With body corp fees of $3,200 and council rates of $2,200 that leaves you with $5,000. That doesn't add up to 7.48% to any investors I talk to relative to $149,000 purchase price."
Body corporate (including insurance) and Council rates quickly slash that gross yield in half. That would still not include other costs such as management, maintenance, depreciation or acquisition expenses. The resultant net yield would be quite skinny in comparison with the big banks currently selling on yields of 6% fully franked. Perhaps intending investors should also consider the previous post differentiating the risk of an individual property with the overall market.

It also provides an interesting comparison between that modest Westcourt unit and more salubrious CBD apartments. There is currently a three bedroom sub-penthouse for sale in the Centrepoint building, next to the library, asking above $800,000. There is also a three bedroom unit on level 5 at $600,000.

The Centrepoint land is valued at $1.2 million for 1,437 M2 with 35 units in the building. That works out an average $34,286 land value for each unit. The land valuation for which the minimum rate cuts in for strata units is $62,845 so Centrepoint is way below that.

The way the land value is distributed between units is determined by the interest schedule in the strata plan which I don't have for Centrepoint. There are also commercial premises at ground level so how that has been factored into the schedule is also unknown.

That expensive sub-penthouse may have a higher interest (another issue), however on these numbers would likely be paying the minimum rate. Certainly the apartment on level 5 would be. So they would likely be paying the same Council rates as that modest Westcourt unit? Also consider that the unit is paying the same garbage and sewage charges as a five bedroom house!

Related posts:
Triinity Beach: Rates ranting revisited
Which unit will pay the highest council rates?

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    Valuation of Apartment