Melbourne beats Sydney on long-term property returns

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Larry Schlesinger| Australian Financial Review| 3 November 2015

Investing in housing at below replacement cost in suburbs close to major infrastructure and where demand for rental accommodation is growing can deliver double digit annual returns over the long-term, analysis of a major investment portfolio shows.

This was the investment rationale utilised by Portfolio Management Services, which has accumulated a $425 million portfolio of 562 east coast residential properties spread across Sydney, Melbourne, Brisbane and Geelong.

Across the portfolio, the average return was 10 per cent per annum, according to an audit by Atchison Consultants which analysed returns dating back to 2002.

This beat returns generated over the same period by Australian shares, listed property and fixed interest products with only commercial property (out of the price range of many investors) generating a slightly stronger return.

PMS, founded in 1971 by Jock Bing, acquires property using an investment formula based around identifying properties close to major infrastructure that can be bought at below replacement cost in areas where changing demographics support future price and rental growth.

“Our investments are driven by the dynamics of demographics and where people wish to live,” Mr Bing said.

Melbourne’s eastern suburbs, which include the likes of Glen Waverley and Box Hill, which have benefited from an influx of Chinese migrants as well as from investment in transport infrastructure, hospital and education facilities, outperformed all other metropolitan regions, averaging capital growth of 7.8 per annum and rental yields of 6.1 per cent for a total average annual return of 13.9 per cent.

Melbourne’s northern, south eastern and central inner city suburbs rank second, third and fourth on the list, generating total returns between 11.1 and 12 per cent.

The best performing Sydney market was its northern suburbs (including the likes of St Leonards, Ryde, Epping, Hunters Hill, Lane Cove and Macquarie Park) where annual capital gains averaged 6.9 per cent and rental returns four per cent for a total return of 10.9 per cent.

The audit of the $425 million portfolio comes as November figures from CoreLogic RP Data show a 1.5 per cent fall in dwelling values over November, with Melbourne values falling 3.5 per cent and Sydney down 1.4 per cent.

PMS founder Jock Bing said it was getting harder to find investments that meet its criteria: “We would like to keep buying in Sydney, but we now have to look at 15 properties to by one. In Melbourne we would have to look at 12 properties to buy one and in Brisbane six to buy one,” he said.

Mr Bing said it was likely that Sydney house prices had most likely peaked and would – if anything – start to soften, but discounted any “major correction in either market”.

“The major movement could be in the house and land markets in the outer suburbs.” In the inner city metro markets, Mr Bing said any correction would be no higher than four per cent in 2016.

Giving hints as to where PMS sees future growth potential, Mr Bing said recent acquisitions had been made in Frankston, an outlying suburb of Melbourne near the Mornington Peninsula, Brisbane and Geelong (which has historically underperformed its big city rivals).


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