Investors focusing on high-yield properties

High rental yields are replacing capital gains as the goal for property investors and new figures from CoreLogic show where to find them.

The housing market has turned, with house prices down 5% to 6% so far and forecast to drop up to 20% once adjusted for inflation.

Once prices have finished their fall, they are expected to flatline for several years.

CoreLogic chief property economist Kelvin Davidson said that limited the potential for capital gains for the foreseeable future and meant investors would switch focus to buying high-yield properties for the lowest risk. Rental yield is the measure of rental income a property generates against its purchase price.

But the national average yield was currently 2.6% and investors would want a higher yield to make sure the property was worthwhile, Davidson said.

Analysis by the property research company drilled into property type and location to identify where yields above 4% could be found. It showed that three-bedroom houses in Gisborne and twobedroom apartments in Newton/ Grafton in Auckland had some of the best yields.

In Gisborne, the median price for a three-bedroom house is $601,150 and the median rent is $575. That returns a gross rental yield of 5%.

Two-bedroom apartments in Newton/Grafton have a median price of $598,550 and a median rent of $570, which also makes for a 5% yield.

Three-bedroom houses in Whanganui, and two-bedroom apartments in Auckland central west and Wadestown/Thorndon in Wellington offer yields of 4.5%.

In Christchurch, three-bedroom houses in Addington and Woolston/ Opawa have yields of 4.4% and 4.2% respectively, while two-bedroom flats in Linwood/Phillipstown and St Albans East/Edgeware offer 4.3% and 4.1%.

And in Dunedin, three-bedroom houses in Kenmure/Mornington and Glenleith/Roslyn/Belleknowles have yields of 4.1% and 4.0%.

In contrast, there are sub-2% yields in some expensive areas.

An example is three-bedroom houses in Remuera, Westmere/Surrey Crescent, St Heliers/Glendowie, and Grey Lynn/Arch Hill in Auckland, all at 1.7%.

Davidson said higher yields tended to be found in areas with lower house prices and there was always an element of risk involved which was worth considering.

The West Coast generally had the highest yields in the country but rental property risks, such as long vacancies, were greater, so high yields would be essential, he said.

Recent Real Estate Institute figures put the region’s yield at 5.2%.

‘‘Strong rent increases have helped yields but rents have been rising at 6% to 7% annually, which is double the long-term pace of 3%,’’ Davidson said.

‘‘Given tenants’ wages ultimately cap how much they can afford to pay, there is a limit to how long such rapid rates of rental growth can last.’’

But even if rent growth slowed back to 3%, rents were not likely to fall and if house prices kept falling, that would push up yields at a faster rate, Davidson said.

While experts consider the current environment challenging for investors, due to tighter credit conditions and regulatory changes such as new interest deductibility rules, there were still investors in the market. Buyer classification figures showed the mortgaged investors’ share of purchases had fallen over the past year but they retained a 23% to 24% share.