Ridiculous regional yields (in the bad way)

[Jamie]

Is it just me, or are people still paying ridiculous prices for regional places because they are chasing cash flow properties?

NSW is well and truly at the ar$e end of the biggest boom in history, and people are still buying in places like Coonabarabran, Forbes and Temora on yields of under 5% thinking there is CG on the horizon..

Apparently there is an offer in on a duplex (both sides) in Cootamundra that is based on a 7% yield. Does this scare anyone else? A town of about 17 people, no facilities, but some mug is going to fork out because the yield is near his/her bank rate.

I chatted to an agent in one of these towns in the last few weeks, and he reckons he has someone about to buy a block of 8 units on a 7.5% yield (yield would have been around 18% in 2002-2003).

7.5% yield on a block of units, in a one horse town, and there are still takers. I can't believe it.

Hope whoever buys it plans to hold it for a while (like 37 years)

I hope anyone who is negative geared in regional NSW at the moment can hold on for a while...

Jamie.

 

[GIDDO]

These investments surprise me too.
I would prefer to get 6% in a regional city of 90,000 people (which I am currently doing) than go to a small town and get 7%.
Are you sure the agent is not just doing what agents sometimes do?

 

[topcropper]

Yep, things truely are crazy. I've been saying this for a long time. Yields of 4% and 5% are the norm around the towns near me. Why wouldn't someone pay twice as much, get the same yield in a capital city and get a couple of hundred grand worth of land chucked in for nix.

Got me confused.

See ya's.

 

[Rolf Latham]

Hiya

Getting stuff like that ALL the time........................woeful yields with little upside .................but then you cant expect much else when people promote positive cashflow as the be all and end all, rather than a part of a sensible, balaned overall strategy

ta
rolf

 

[Brenda Irwin]

As you say Jamie, the only winners will be those who can hang onto rural properties for many years. They will eventually get their cashflow positive, maybe. I have found the maintenance can be quite expensive as there is a shortage of people to service it in rural areas.

I think the only attraction is that those areas have a cheaper entry level, maybe. In my area, prices are once again overpriced. They did it last boom and didn't seem to learn their lesson then. In the bust, properties were being sold 30% cheaper, but when you take into account, they were 20% too high in the first place, it only represents a true fall of 10%.

You know I have rural properties myself and where the yields were once 9% to 16%, they are now down to 4% to 5%. Come July, I will have at least 5 listed for sale. They have achieved their capital growth now, and there won't be any more for quite some time. The capital proceeds will be used to reduce debt, and for deposits on investments in the city. They may start out there as negative, but I think they will become positive a lot faster than something in rural areas.

 

[MarkB]

Good thread.

Imho real estate is essentially a "bums on seats" investment medium.

A recently published NZ Report - Regional Housing Markets in New Zealand: House Prices, Sales and Supply Responses (Centre for Housing Research (NZ), 2006) available online at: http://www.hnzc.co.nz/chr/index.html - summarised the results of 23 years (1981 - 2004) in the NZ residential property market by looking at each of the 73 local government areas.

And then it ranked each area by Real % Change in Median House Prices.

Queenstown, a regional town that is now a city, was:

#1 - for median price - up 244% in real terms over the 23 years,

#1 for the increase in the size of the dwelling stock - up 195% over the period, and

#1 for population growth - up 257% over the period


Compare this to somewhere like Gore (rural regional NZ)

#71 (out of 73) for House Sale Prices - down 31% in real terms over the 23 years,

#62 for dwelling stock - up 7% in 23 years, and

#64 for population growth - down 14% in the 23 years


What a difference it makes when people actually want to move somewhere and the population grows.


Mark

btw. Queenstown's population in 1981 was 6,200, in 2004 it was 22,200.

Gore's population in 1981 was 14,600, in 2004 it was 12,500

Just so you know I was not using the eg. of a 1 horse town (as Jacque correctly pointed out).

 

[see_change]

Brenda

as you know ,the real winners are those who bought 3-4 years ago for the reasonable yields and are now selling ....

See Change

 

[Jacque]

...Apparently there is an offer in on a duplex (both sides) in Cootamundra that is based on a 7% yield. Does this scare anyone else? A town of about 17 people, no facilities, but some mug is going to fork out because the yield is near his/her bank rate...

Jamie.

Actually Coota is a little larger than a one horse town, Jamie
Real pop is closer to around 7500 with a further 2000 in the surrounding shire. Birthplace of Don Bradman, its in an area of NSW with a long agricultural history and is only 2hrs from Canberra.
Admittedly, its not somewhere I would invest (positive cashflow props have had their run) but its not a bad little town to visit. Especially if you're after some peace and quiet and enjoy looking at historical Aussie towns.

 

[topcropper]

Here's a bargain,...

http://www.realestate.com.au/cgi-bi...&t=res&ty=&snf=rbs&ag=&cu=fn-rea&fmt=&header=

Just guessing, but I would say a 3.5% gross yield.

See ya's.

 

[MarkR]

Pitt St,

Not quite sure the point you'r trying to make.....perhaps you're drawing a long bow there. Comparing Queenstown to Gore is the equivalent in Oz of comparing Byron Bay with one of those small Tassie towns with negative population growth. Queenstown is in a very unique situation in NZ & one that probably won't be repeated i.e. it's become a haven for the extremely wealthy (local & international), most locals can't even afford to shop there now. Last I heard hammer jockeys were getting $40/hr !

Perhaps you can elaborate on the point, or maybe this flu is just making me a bit slow

Cheers
Another Mark

 

[MarkB]

Mark

A simple point.

If you invest in a dying town, then chance are your investment will die with it.

If you invest in a town with good prospects, then your investment has alot better shot.

The last 20 years have been very kind to Queenstown and not so kind to Gore.

Since you mentioned Byron....

I lived for 25 in Ballina and used to work in Byron. While Byron has been the stellar peformer in that market (in no small part due to the people that go there), the northern rivers region of NSW has gone from strength to strength over the past 20 years. And guess what? The population has increased considerably over that time and is expected to continue to do so.

The thread is called "ridiculous regional yields" and what is it that makes a yield of 7.5% ridiculous in one location (Cootamundra) and not another (eg. Inner City Sydney)?

It is the realistic expectation of capital growth.

And what drives capital growth? Demand (relative to supply)

And when you take away the investors, what drives demand? People wanting to live there.

It isn't that investing in a town of 7,500 people makes it a poor investment (at 7.5% yield). I can think of plenty of places that I would invest in that have a smaller population. But what seperates them from Coota is that they have good prospects for the future and people are moving to those areas.

In Coota's case there is not much chance that the town will grow and become a town of 10,000 people, then of 15,000 and so on.

In fact, over the period 1996-2001 the town's population fell by 3.4% (from 7,600 to 7,350).

Bums on seats.

Does that clarify things?

Mark

 

[FrankGrimes]

I've personally never understood the whole rural thing, even when you do get 10% + returns, the longerm growth is going to average at best and if you have to make some repairs or it is vacant, your 10% becomes 4% very quickly.

It just doesn't make sense to me when you can buy fewer properties that are in a good location that have good capital growth prospects over the next 10-20 years.

If people are so mad about yields, why not look at alternatives like listed property trusts? These return 10% + and get 2-3% growth to boot.

Crazy people out there... I remember reading Steve McKnight's book and forum and thinking "lunacy"

 

[MarkR]

Pitt St,
Yep clarifies nicely thank you. So if you find a region where the regional prospects are good, then cherry pick the best spot in that region you can do very well. Me, I'll stick to the cities, seems simpler to me.

Cheers
Mark

 

[GIDDO]

To brenda Irwin,

Hello Brenda,


I was quite interested to hear you will be selling 4 or 5 props soon.
Do you believe Brisbane is certain to be better CG prospects and sooner than the lower Lockyer?
Would it be worth It (i.e. selling and re purchasing) due to this? Considering CG tax, etc etc.
Perhaps you feel the outlook is ordinary for quite a while - say 3-5 years?

Maybe you are like me and always looking to be in a better position earlier?

After all, It is fine to sit and wait if you have plenty of spare time.
I for one want to see results a little sooner if possible.

By the way you may be interested to know that a property next door to my brother's place at Clarendon near Lowood, just went for $115k.

It is 4 acres with a knockdown style cottage and similar sheds on it. The house would rent to seasonal workers for maybe $100 per week while the new owner built their dream log cabin or whatever.

This means the gross yield is about 4.5%. I guess the land is worth it anyway.
It is only 4 miles from Lowood and has power, phone and wheelie bins.

My brother reckons he may have wished to purchase it (next door)if he could have nabbed it for about $80k. BTWt went quickly. He missed out. Right price bracket for market entry people I suppose.

Sorry this is a little off the track

 

[Jamie]

Actually Coota is a little larger than a one horse town, Jamie

Hey Jax

Yeah, I know, it was more to illustrate a point than anything else

What Brenda mentioned above is the exact point I was making. Theres no reason the properties I mentioned couldn't make you money - at some other point in the cycle. When Brenda bought places in small country towns with yields in the mid teens, there was only upside - even if there was no growth, they would pay themselves off on P & I loans.

My point is the there are people buying in rural areas now with yields of 5% and 6%, only because its a better yield than they can get in the city. I just can't understand the rationale.

What these people don't understand is that, over time, yields regress to a mean. Which means that if the long term yield for a city is 10%, and you buy in at 6%, you've got a long time of waiting for rents to catch up to prices before the next boom hits.

Take Dysart in QLD for example. I remember looking at places there when yields were 12%, and wouldnt have touched them with a pole - because the 10 year average yield was 18% at the time. But people chasing cash flow were jumping in, with no real strategy other than that the rent cover outgoings.

Seems to still be happening in rural areas at the moment.

Jamie.

 

[Kingbrown]

I have just made my first regional IP purchase - North Island NZ.

Growing regional centre, low vacanacy rate, 140,000+ population, over 9% yield currently, realistically could move to 10%+ when I put the rent up to the "market" rate.

Time will tell if I have made the right move, but CG's are just a bonus when they arrive.

Long term, the area has had real CG's.

 

[Brenda Irwin]

Giddo, the houses are not in the lockyer, they are in the South Burnett. Murgon's main industry is the meatworks. It employs people from Murgon, Kilkivan, Wondai, Proston, Kingaroy and Nanango. If this drought keeps on, they may not have the water needed to maintain this industry. I just don't want to left holding empty IP's. Cool part is, you need a heck of a lot of them to get near paying land tax.

 

[flatout]

I have to agree that some of the investments being made in some regional towns are lunacy, particularly here in WA where much of the wheatbelt region consists of dyeing, one horse towns. It wasn't all that long ago that places like Bruce Rock were giving away free blocks of land in order to attract more residents. In other towns like say Cunderdin, the number of students attending the local school has been dropping consistently year after year. A road trip through the wheatbelt reveals town after town with empty shops lining the main street. Properties often sat on the market for years because of the low demand. And yet, this boom has seen house prices rise dramatically largely on the back of investors chasing +ve cashflow properties. In fact, without putting in a 20-30% deposit, it would now be virtually impossible to locate a cashflow +ve property. Scary thing is, apart from slowly decling populations, nothing has really changed with these towns in terms of ecomonic outlook, infrastructure or jobs growth. In other words, no justification for rising prices. I think it won't be all that long before we start hearing sob stories from those investors that bought into the whole +ve cashflow thing, enjoyed a short period of +ve CF, before the reality of buying into a dying town sinks in with prolonged vacancies, costly maintenance issues that often go hand in hand with older properties and declining property values. Some IMHO will be lucky if they can even sell their properties.

Flatout

 

[topcropper]

I've lived all my life 20 ks from a small country town. Population about 600. Went to school there.

When I was at primary school in the 70s, there was 30 in my class. 160 in the school. Today the same school has 55 kids total. The classrooms are still all there, just not used. Not only that, but the 55 kids come from a much bigger area, as 4 or 5 other tiny schools have closed in the last 30 years.

Country towns that rely on agriculture are dying for one simple reason. Agriculture is getting more and more efficient. In the 1880s it took 50 man hours per acre of wheat. 30 years ago it took 3 man hours. Today it takes less than 1.

The farms are getting much bigger and employing less labour. My farm is a two man opperation, father and son [I'm the son] and we grow 6 to 8 thousand tonnes of grain a year, easily. No other help needed. OK, it's not all easy, planting and harvest we work our rings out, but on average it's not back breaking work. 30 years ago my farm would have been half the size, produced a quarter the grain, employed a couple of workers and supported 4 families.

My father had to lug bags when he was young. The harvester pulled up and you bagged out the grain. Then workers came back and picked it up. A big day would have seen 30 tonnes harvested. Today, 300 tonnes is easy. No stupid bags. You harvest the crop in airconditioned comfort. Trucks cart the grain away at 35 tonnes a load. Tractors have auto steer and spraying has made ploughing redundant. I can spray a thousand acres in a day.


I have seen house prices in all the small towns near me double and even triple in a few years. It's all lunacy. And guess who rents these houses in these small towns that once housed farm workers? I don't know who they are, they just appear. They are the drop outs from the big smoke and the big regionals who can't afford to live anywhere else. They can all afford pay TV though. Funny that! Fair dinkum, next time you drive through a tiny dead rural town, check out the satelite dishes on the roofs.

See ya's.

 

[thefirstbruce]

I'd agree with TC's assessment on many small country towns. They are highly represented by welfare class. PI is just another demand meets supply business. Tenants are customers. I'd prefer to do my business close to job markets with people in stable jobs. And I am happy to let the govt meet the housing needs of those it gives money to for nothing. I know people who deliberately prefer to stay in small towns with no employment opportunity. It only takes a few weeks to exhaust job search requirements. As a bloke described it to me a few years ago, his job search consisted of every fortnight (for 6 years) at the pub asking the three main employers whether business was better this week than last.