Changing legal obligations and more complex challenges are confronting property investors, despite residential rental markets across Australia rapidly returning to health.
In Victoria, additional layers of management complexity and legal obligations now affect anyone who owns a residential property that is leased. Victoria’s revised Residential Tenancies Act, which comes into full effect at the end of March 2023, will change the rental landscape for many owners.
The legal changes include a provision ensuring rentals meet basic “minimum standards” by having functioning stoves, heating, deadlocks and safety measures. Under the changes, no-reason evictions will be scrapped, bonds will be capped at four weeks’ rent and rent increases are limited to once a year rather than six months previously. Other changes give Renters the right to have pets and make minor modifications to a building.
Nelson Alexander’s Head of Property Management, Martin Sizer, says property owners face the prospect of earning higher rents in the coming years. However, they will also need to be more diligent about managing properties because of the added obligations.
“We are going to kick off 2023 with high rental demand, especially as we are about to welcome international tertiary students back to Australia,” Mr Sizer says.
“Vacancy rates are back to pre-Covid levels, but Rental Providers are now required to undertake safety checks of their properties as part of the Act. This will involve paying licensed electricians and plumbers to check the safety of appliances. This will need to happen as they are leased to new Renters or a new lease is negotiated with an existing Renter.”
Mr Sizer says going forward more will be required of rental providers. “Rental providers will want to improve their revenue, which is why they will be looking for higher rents,” he notes.
“The vast majority of owners will also want someone to manage their rental property. It is almost too much these days for them to manage their property asset themselves because of the stepped-up legal obligations and attention to detail that’s required.”
Nelson Alexander manages more than 16,500 rental properties on behalf of investors. The company is seeing a trend of investors – especially those who have owned a rental property for 20 years or more – opting to sell units and houses. As opposed to fulfilling the minimum standards requirements. This includes safety upgrades that will be widely required from March. However, retaining a rental property or buying rental properties in Melbourne can be a lucrative investment.
According to research by Domain Group, unit rents are close to a new record high in Melbourne. Domain research shows that house rents increased 2.2 per cent over the September 2022 quarter to a new record high of $470 a week. Unit rents jumped 3.7 per cent over the quarter to $425 a week. This is the third steepest annual rise on record and the sharpest annual increase since 2008, at 14.9 per cent. “Unit rents are maintaining a faster pace of growth than house rents over the quarter and year as affordability makes units an attractive option," the Domain September Quarter Rental Market Report notes.
“Tightening rental conditions have pushed house rents to another new record high, an achievement smashed each quarter for the past year. The last time house rents rose for four consecutive quarters was in 2007. Despite this, Melbourne remains the most affordable city to rent a house as rents have seen stronger growth in other capital cities.
“While it has been the norm for house rents to smash new record highs, it is a stark change for units. Unit rents have recouped almost all that was lost during the pandemic price dip and are now sitting only $5 lower than the March 2020 record high. In fact, unit rents have risen faster than houses for the third successive quarter. They are also increasing at the steepest annual pace since 2008, an annual growth rate that has also surpassed houses. If Melbourne units continue to rise at the current pace, they are on track to set a new record high next quarter.”
Mr Sizer says rent values are trending up across the board, even though many Renters are now bolder in their approach to dealing with Property Managers and Rental Providers.
“Because rent rises are consistent throughout the market, Renters might contest a rent increase, but as long as the Property Manager has done their due diligence and can show rises at comparable properties, it is now more likely that the increase will go ahead,” he says. “From a Rental Provider perspective, rents have not simply returned to pre-Covid levels; they are now heading back above that. Vacancy rates have come down to pre-Covid levels.”
Leasing activity in Victoria peaks in January and March. Consequently, appointing a well-qualified professional Property Manager is a wise move in the New Year. The letting agent should be fully versed in the legal issues in the market, and able to maximise and properly time rent increases.
It is critical to note, too, that outsourcing the management of a property keeps an “arm’s length” between the Renter and the owner, a favoured situation for most investors. Mr Sizer is upbeat about the likelihood of improved yields and returns on investment properties. “Overseas students will be back this summer for the first time since early 2020,” he says.
“The impact of large numbers of overseas students coming back to Australia bodes well for the Melbourne inner city. This is especially true for smaller studio apartments. Some of those apartments on the Carlton fringe and in the CBD have been sitting vacant for a very long time. So it is good news for investors who own many of these apartments that they are going to get a surge in demand in 2023.”
According to real estate analysts CoreLogic, gross rental yields continue to expand, with rental values rising while housing values depreciate. Research by the analyst group shows that national dwelling values fell by -4.1 per cent in the September quarter while national dwelling rental values rose 2.3 per cent in the quarter.
“The strong yield recovery has been led by an increase in unit yields, with national unit yields rising 49 basis points over the year to date to 4.15 per cent, while national house yields (3.39 per cent) rose 32 basis points over the same period,” CoreLogic’s latest rental report says. “Dwelling yields across the combined capitals rose 25 basis points over the past quarter, the largest quarterly rise in yields on record.”
Meanwhile, Domain analysts say Melbourne’s impressive rental market turnaround has almost fully recovered from the pandemic-induced supply bounce and lowered asking rents: “The vacancy rate and rental supply are currently lower than pre-pandemic while house rents are at a record high; the recovery remains for unit rents that have only $5 left to recoup. “Overall, Melbourne remains a landlords’ market with available properties to rent declining for a consecutive nine months, dropping by 61 per cent annually,” the Domain report says.
“This leaves fewer options and has created a more difficult environment for tenants. The vacancy rate has now dropped to its lowest point since early 2019 and is edging closer to a record low, currently sitting at 1.3 per cent. This is a sharp recovery from the 5.2 per cent vacancy rate peak in 2020. The improvement in the rental market is also supported by the return of international students and overseas migration, the affordability constraints of purchasing, weaker investment activity throughout the pandemic, changing household formation, and some investors selling.”
If you are keen to discuss your Property Management needs in greater detail, please contact any Nelson Alexander office.
