Down-under investment
 When thinking of buying property in Australia, Sydney might seem to be the obvious choice. However, more and more people are attracted to Melbourne as a viable investment alternative.
By Michael Bentley *
Published in Square Foot Magazine on May 15 2007
Melbourne is Australia's second most populous city, and a strong rival to Sydney. This southern metropolis serves also as the financial and business capital of Australia. Eight out of 10 of Australia's largest corporations have their head office in Melbourne.
Last year, Melbourne outstripped Sydney in the living standard stakes, buoyed by the stronger Victorian economy and a stronger property market, according to the latest "Sydney Prosperity Index", the Sydney Morning Herald's comprehensive measure of wealth and economic wellbeing.
Prosperity in Australia's two major cities, Sydney and Melbourne has risen virtually in tandem since the turn of the decade, by just over 26 percent, although Sydney was slightly ahead over the past five years, reflecting its relatively bigger property price boom in the period to mid-2004.
However, Melbourne house prices did not fall so far from their peak and have come back more strongly in the past year, helping to narrow the prosperity gap.
Melbournians have been doing better than their Sydney counterparts, with the equivalent index rising 1.5 percent in 2006 and 4.4 percent since 2001.
Lower entry point
 Since the early 1990's, perhaps more so in Melbourne than in any other city in Australia, the focus for investors has been on inner-city apartment investments. However, many analysts are now forecasting a strong upswing in Melbourne houses this year.
Melbourne has lagged in house-price growth over the past five years in comparison with other Australian cities (see figures below), creating an excellent opportunity for investors to buy in now. The long-term, 10 and 20-year trend line, has shown Melbourne to be similar to Sydney and higher than Brisbane and Perth.
Compared with other major cities in Australia, Melbourne offers investors a lower entry price and attractive returns on property.
New apartments in Melbourne can be purchased off-plan in prime locations like Bourke Street in the City, and on Melbourne's famous St Kilda Road, near the South Bank, the botanical gardens and Yarra River. Prices start from around A$360,000 ($2.3 million) for one-bedroom, 650 sq-ft apartments, and from around A$500,000 ($3.2 million) for two-bedroom luxury apartments.
Attractive returns
For overseas investors, apart from the lower entry point factor, the strongest factors in favour of Melbourne are its strong rental market and excellent prospects for capital growth.
Rental returns for middle Melbourne houses range from 4.5 percent to 5.5 percent with prices starting in the mid A$300,000's ($1.9 million). A A$550,000 ($3.6 million) 2-bedroom city apartment purchased in Melbourne (which would be over A$650,000 ($4.2 million) for the equivalent apartment in Sydney) is expected to yield around 4 percent to 5 percent in the first year - that is up to A$27,500 ($1.8 million) per year in rental. And Melbourne rental properties currently boast a staggering 98.3 occupancy rate, the highest in Australia. The chance therefore of having an empty property is slight. What's more, Australia's population is continuing to grow creating ever increasing demand for rental property.
Growing population
The Australian Bureau of Statistics recently revealed that Victoria had attracted almost 70,000 new residents during 2006, the biggest influx since 1960. With population growth comes demand for housing, and research shows that areas recording the highest rates of population growth generally have healthy real-estate markets. Overseas migration is running even higher in Victoria than nationally. In the year to September 2006 it was just under 40,000, almost overtaking New South Wales (43,100) and well ahead of Western Australia (22,200) or Queensland (21,600).
Also, in March, the bureau reported that Melbourne recorded the biggest population growth of any city in Australia in the year to June, adding 49,000 people to increase its population to 3.68 million. The bureau estimates that Victoria is now adding about 30,000 households a year, a trend that would allow it to pass 2 million households soon.
Melbourne's population is also ageing. By 2030, it is estimated that the proportion of persons aged 60 years of age and over will increase from 17 percent to 27 percent of the total population. Household sizes will also fall during this period from the present 2.6 persons per household to 2.25 by 2030. Therefore, one-person and two-person households will become more numerous and account for an estimated 90 percent of all additional households between now and 2030.
Investors should note that the demand for small one- and two-bedroom apartments should greatly increase in future years. Melbourne will also need thousands of new houses
Time to buy
Over the next 30 years, Melbourne will grow by some 620,000 households and by 925,000 people. Investors should be aware of the government's "greenbelt programme" and its intention "to limit further urban sprawl".
Melbourne's median house price is expected to increase by around 45-50 percent during the next upswing, according to Blair Warman, senior urban economist at Charter Keck Cramer.
Other analysts, such as Residex, believe Melbourne house and land properties will remain quarantined from the large number of apartments and medium-density property coming on to the market, with "price growth for the next three years averaging around 8-10 percent per annum".
With the next major upswing expected to start in Melbourne this year, it makes sense to consider buying into this segment as soon as you can.
* Michael Bentley is Managing Director of Citylife Property Group - Low Risk Australian Property
RESIDENTIAL INVESTMENT RETURNS
2-bedroom apartments*
- Sydney past five years to December 2005: 39 percent
- Melbourne past five years to December 2005: 56 percent
- Brisbane past five years to December 2005: 59 percent
- Perth past five years to December 2005: 114 percent
3-bedroom houses*
- Sydney past five years to December 2005: 63 percent
- Melbourne past five years to December 2005: 43 percent
- Brisbane past five years to December 2005: 109 percent
- Perth past five years to December 2005: 95 percent
* Source: REIA market facts. |
