After four years of poor yields, the fundamentals now stack up for residential property, Karin Derkley writes. AFR Smart Investor identifies a dozen in-demand suburbs with the necessary ingredients to offer not only strong income but also potential capital growth.

It’s time to get back into the property market. In a simple case of demand exceeding supply, rental yields have turned upwards to reach their highest in years.

On much of the east coast, overstretched property owners have pulled out of the market, causing static – even falling – prices. At the same time, potential first-home buyers have given up the hunt and returned to the rental market. The result is more renters on the market combined with a shortage of properties, equalling a push higher in rents.

In Sydney, for instance, rents have risen by as much as 10 per cent in the past year, taking yields above 4 per cent and as high as 6 per cent in some suburbs. Brisbane is similarly strong, with rents up 14.3 per cent for houses in the year to March.

The only city that has recorded falling rents is Darwin, and that’s after unprecedented growth in preceding years.

Meanwhile, property prices are starting to move again in what may be the start of a slow build-up to the next boom. For property investors, now’s the time to move in to secure properties at yields that for the first time in years come close to defraying the costs of ownership, at prices that may prove to be absolute bargains down the track.

On these pages we list the best-value suburbs and towns around Australia that we think also have the necessary ingredients for future capital growth. The data has been supplied by Australian Property Monitors and filtered on a number of levels.

First, we’ve taken the highest-yielding suburbs, screened out those where yield has fallen, and screened in those that have shown positive capital growth over the past year (even if just a couple of percentage points) and over the longer term.

Then we’ve looked at suburbs that have a reasonably high proportion of renters. Inevitably these are close to centres of employment, whether the CBD of a capital city or industrial areas with long-term futures.

It’s an interesting collection. Units figure highly – as much because they offer a reasonably priced entry point as because they’re a stronger yield story.

The capital growth on a unit may not be as impressive as for a house on its own land, but the areas we’ve chosen have the potential for suburb-wide growth that should lift all boats.

Apart from South Australia’s Port Lincoln, it’s a capital city story. The country and coastal boom has had its run for now, limiting further capital growth for the next couple of years. And it’s mostly about suburbs, where there’ll always be a high proportion of renters wanting to live close to work and in proximity to the life and action of our rejuvenated inner cities.

QLD

Balmoral

Median unit price: $353,500

12-month price change: 13%

Long-term price change: 8.1%

Current rental yield: 5.44%

12-month yield change: 13%

In among the beautiful old Queenslanders and contemporary homes with city and bushland views, it is still possible to find an affordable apartment in Balmoral in Brisbane’s inner east.

Unit prices have firmed in the riverside suburb, but so too have rents – with two-bedroom apartments now fetching $350 a week.

Frank Lombardi, of Ray White Bulimba, says Balmoral’s proximity to the city and to Oxford St, with its groovy shops, cafés and bars, puts it

in high demand.

Balmoral is only five kilometres to the CBD, with excellent public transport on buses and the City Cat only minutes away.

Si verdict: If you can find an apartment in this suburb, you’ll be assured of strong demand from professional tenants who appreciate the great views and proximity to the CBD.

VIC

Dandenong

Median unit price: $170,000

12-month price change: 7%

Long-term price change: 11%

Current rental yield: 5.24%

12-month yield change: 0%

The Victorian state government has been pumping money into this traditionally working-class south-eastern Melbourne suburb. Dandenong is already one of the biggest employment areas in the state, and the extra infrastructure will firmly establish it as Melbourne’s “second city”, says Peter Curtis of Greater City Professionals.

Dandenong experienced a huge rise in property prices in the early 2000s. Price growth has slowed somewhat since then, but the rental market continues to be very strong.

“There’s just not enough to meet the demand,” Curtis says. Near-new townhouses are selling for about $220,000 and renting for $200 a week, while houses go for a median price of $245,000.

Si verdict: A steady stream of workers and new arrivals will ensure solid rental demand, while government-funded infrastructure will boost future capital growth.

ACT

Griffith

Median unit price: $310,000

12-month price change: 3%

Long-term price change: 8.1%

Current rental yield: 6.04%

12-month yield change: 7%

Located near the parliamentary triangle, Griffith is a suburb of choice for high-end tenants of all political hues, says Stephen Thompson, managing director, LJ Hooker Manuka. “It’s close to the lake (Burley Griffin) and parkland – there’s lots of open space and established trees. There’s the Manuka shopping centre and Kingston next door. It’s what they call a lifestyle suburb,” Thompson says.

For rental yield, look to the classy newer units that have been built in the past 10 years. These are selling in the low- to mid-$300,000s and renting for about $320.

Canberra house prices are tipped to rise again this year but Thompson says whatever the market, Griffith has the ingredients to hold its own.

Si verdict: In the sought-after inner south, Griffith has perennial attraction to high-end renters and will perform strongly when Canberra goes back on the boil.

NSW

Homebush West

Median unit price: $340,000

12-month price change: 5%

Long-term price change: 5.5%

Current rental yield: 5.10%

12-month yield change: 7%

In the euphoria towards the end of the Sydney property boom, this inner west suburb underwent massive urban development. But the subsequent slump brought new developments to a halt and apartments that sold a couple of years ago for $400,000 are now changing hands at $350,000.

As local agent Robert Pignataro, of Strathfield Partners, puts it: “We’re back to the Stone Age.”

For a counter-cyclical investor, it’s an ideal time to buy. Renters are back in droves, attracted by the suburb’s transport links to the CBD and Parramatta. But, as with the rest of Sydney, agents have little to offer them, which means you can buy a two-bedroom unit for $350,000 and rent it out for $400 a week, Pignataro says.

Si verdict: Rental yields above 5 per cent and a reasonable entry price indicate this is a suburb for investors to watch.

NT

Jingili

Median house price: $350,000

12-month price change: 14%

Long-term price change: 12.7%

Current rental yield: 5.62%

12-month yield change: 1%

Darwin has had an extraordinary couple of years, rivalling only Perth for the strength of its median price growth. That growth spurt has pushed median prices past the value level, but Darwin’s always had a strong rental market, and recent jobs growth will continue to underpin demand.

One suburb benefiting strongly is Jingili. Traditionally a suburb with a high proportion of home owners, it’s now taking the overflow of renters priced out of suburbs such as Fannie Bay and Parap. “There’s a real shortage of average-priced homes that you can rent for around $350 a week,” says Inge Beller of Inge Beller Real Estate. “Any that come up are snapped up almost immediately.”

Si verdict: Darwin has shown strong growth over the past couple of years, but this suburb looks to have further to run, with strong rental demand assured in the meantime.

QLD

Kangaroo Point

Median unit price: $417,125

12-month price change: 10%

Long-term price change: 9.6%

Current rental yield: 5.46%

12-month yield change: 17%

Once a predominantly industrial suburb, Kangaroo Point’s transformation got its kick-start from the reworking of the old Evans Deakin Shipyards into the Dockside development in the late 1980s. Since then the residential population has grown more than 20 per cent.

Richard Willert of Kangaroo Point Real Estate says the attraction of the suburb is the five-minute ferry ride or drive across the Story Bridge into the CBD, coupled with the suburb’s superb natural surroundings. “You step out of your door and into greenery,” he says. “You’re living in the inner city but without any of the hustle and bustle.” Renters vie with a mixture of empty-nesters and young professionals for units ranging from studios to spacious three-bedroom apartments.

Si verdict: Apartment-living among the greenery in the CBD means this suburb is always sought after by renters.

VIC

North Melbourne

Median unit price: $315,000

12-month price change: 11%

Long-term price change: 8.2%

Current rental yield: 5.19%

12-month yield change: 3%

Tucked away on the north-west corner of the CBD, North Melbourne has a mix of grand old Victorians, flats and townhouses, many of which are run-down and ripe for a makeover. It’s a stone’s throw from the CBD on foot through Flagstaff Gardens or a tram ride up William Street.

Local agent Tammy Evans, of Evans Real Estate, says the suburb has long been undervalued, but the influx of professionals working in the CBD is fast transforming the area into a dynamic suburb.

“Not long ago you could park anywhere down [main street] Errol Street and you’d find it hard to get a good coffee.” These days the parking is harder to find, but the coffee is topnotch.

Si verdict: North Melbourne is high on the radar for renters, particularly professionals working in the CBD. Long undervalued, its fantastic location warrants strong capital growth in future years.

NSW

North Sydney

Median unit price: $505,000

12-month price change: 9%

Long-term price change: 6.1%

Current rental yield: 5.17%

12-month yield change: 9%

Few records are being set right now in property prices in North Sydney, but with the rental market as strong as ever this is the ultimate buyers’ market, says J.P. Austen, of JP Austen Real Estate.

“We’ve seen some rental increases of up to $50 (a week) over the past year,” he says.

The suburb, which is primarily made up of apartments and townhouses, is two train stops from Circular Quay, making it highly sought after by young professionals working in the CBD.

Austen says there’s also an influx of people renting three-bedroom apartments with room for a home office. “It’s out of the main hubbub of the city but still very central,” he says.

Si verdict: When the lull in Sydney property finally comes to an end, this suburb is set to rocket back into life, making current rental yields a bargain to lock in.

TAX TALK

* If you own an investment property with someone else, you need to decide whether to own it as joint tenants or as tenants in common.

* Joint tenants own equal shares of the property and must apportion the income and expenses equally – even if one of the partners incurs higher expenses or would benefit more from the tax deductions.

* Co-owners who are tenants-in-common can be more specific about who gets the income and who gets the tax deductions. If one partner owns 75 per cent of the property, they include 75 per cent of the rental income and expenses on their tax return, receiving 75 per cent of the tax deductions, while the other partner gets 25 per cent.

* If you don’t know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the property.

SA

Port Lincoln

Median unit price: $185,000

12-month price change: 10%

Long-term price change: 13%

Current rental yield: 6.09%

12-month yield change: 8%

Real estate agent Larry Hartigan, of Elders Port Lincoln, says Port Lincoln’s days as a sleepy fishing village are numbered.

The new ferry that crosses between the Yorke and Eyre peninsulas has reduced the town’s isolation, bringing baby boomers from Adelaide, who see the natural beauty of the seaside town as the perfect setting for their retirement. With the extension of the local airstrip, visitors will soon be able to arrive direct from Sydney and Melbourne.

Apartments overlooking Boston Bay command a premium, but houses are also well-priced and renting strongly, Hartigan says.

“The real estate here is ridiculously cheap,” he says.

Si verdict: This town is set to ride the incoming tide of the sea-change phenomenon, helped along by a ferry which has cut the tyranny of distance – that previously kept a cap on its growth.

WA

Rivervale

Median unit price: $255,000

12-month price change: 51%

Long-term price change: 14.5%

Current rental yield: 4.68%

12-month yield change: 4%

This riverside suburb is a classic case of a once rundown area in a great location now booming as a result of regeneration efforts. Local agent Paul Blackburne, of Blackburne Property Group, says the area has benefited from various redevelopment projects, which are re-greening the area and drawing focus to its riverside attractions.

“It’s always been a great location,” Blackburne says. “It’s only 10 minutes from the city across the Graham Farmer Bridge, and it’s got the riverside setting.” Older apartment blocks are being upgraded and larger luxury developments are being built. It’s still possible to find a two-bedroom apartment for $250,000 that can be rented out for $200 a week.

Si verdict: Even if Perth experiences a lull after an extraordinary few years, this regenerated riverside suburb has the necessary ingredients to support capital growth and draw in renters.

SA

South Plympton

Median unit price: $207,500

12-month price change: 5%

Long-term price change: 10.2%

Current rental yield: 5.79%

12-month yield change: 13%

Halfway between the CBD and the beach, South Plympton is a modest middle-distance suburb that has been discovered by first-home buyers priced out of more upmarket suburbs.

Valentine Izdebski, of Gary J Smith First National Real Estate, says that older owners are gradually moving out and first-home buyers are snapping up and updating the mid-century homes.

“It’s always been an affordable working-class suburb,” Izdebski says, “but it’s very convenient, just 10 minutes in to the CBD, and not too far from the sea.”

Finding a property is the challenge. This is a tightly held suburb, and there’s a swelling pool of buyers, Izdebski says. Rental properties are snapped up as soon as they come onto the market.

Si verdict: An ideally located older suburb whose attractions are rapidly being uncovered by first-home buyers.

TAS

West Moonah

Median house price: $242,000

12-month price change: 24%

Long-term price change: 13.3%

Current rental yield: 5.16%

12-month yield change: 5%

Up on the hill overlooking the Derwent River towards the eastern shore, West Moonah would command a premium for its views in any other city. But Michael Drinkell, of LJ Hooker Glenorchy, says the northern suburb, just 15 minutes from the Hobart CBD, has only recently been discovered.

Prices are now rising fast. “Younger people are coming in and renovating the properties and selling them on at a good profit,” Drinkell says. A new shopping centre has also made the suburb more attractive.

With a 1.2 per cent vacancy rate, rental properties are highly sought after, he says.

“It’s close to the CBD and it’s close to the industrial areas further north,” he says. “You can buy a house for $200,000 and rent it out for $200.”

Si verdict: Views and family homes make this undervalued suburb worth looking at for the investor seeking yield and capital growth.

Note: All data in profiles supplied by Australian Property Monitors. Figures are to March 2007. Long-term price changes are based on the past 10 years of median house or unit prices.