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Why western Sydney is a magnet for investors

Posted by on February 19th, 2020 · Demographics, Finance, Housing, Private rental, Sydney, Tenancy
Western Sydney is popular with investors but most of these investors do not live there. Photo: Brendan Esposito

By Hal Pawson and Chris Martin, City Futures Research Centre. Originally published at Domain.

With the latest ABS statistics indicating a fourth straight quarter of rental investor housing finance growth, it appears that Australia’s private landlords are rediscovering a taste for house buying.

While relatively modest compared with the investor surge of a few years ago, this is a trend which will likely help push the Sydney and Melbourne housing markets towards new highs during 2020.

Because of their house price implications, the ups and downs of housing finance always attract attention in the Australian media. However, the bigger and longer-term story of Australia’s investor landlord phenomenon and its housing market impact is rarely told.

Our newly published research shows how landlord investors in Australia’s recent rental housing boom have preferred certain types of locations and certain forms of housing. These preferences matter, because they contribute to local housing market and neighbourhood change that is remaking the social geographies of our major cities.

Socio-economically disadvantaged areas of metropolitan Australia – typically middle and outer suburbs with below-average property values – have a special attraction for investors, most of whom live elsewhere.

In an age of increasingly savvy landlords empowered by online searching and informed by a burgeoning property investment advice industry, the traditional pattern of amateur landlords favouring property purchase in familiar local neighbourhoods may be breaking down.

Who buys rental properties in western Sydney?

Our research looked closely at nine disadvantaged western Sydney suburbs recording unusually large numbers of rental property acquisitions over the boom period of 2011-15. In our sample of 244 recent investors, only one in seven lived locally, while almost one in five lived at least 40 kilometres away.

Most of the purchasers were experienced landlords. Nearly two-thirds involved landlords who already owned rental property, with one in six homes acquired by owners already owning at least five investment properties.

Denham Court.
Only one in seven investors who buy in western Sydney actually live there. Most live outside of the area. Photo: Janie Barrett

We also saw evidence of portfolio-building among the first-time investors too: more than one-third of them had bought a second property in the time between their first investment and our research survey.

Most of the investors we surveyed owned their own homes, but a remarkably large minority did not. One in 10 in our survey lived in rental housing themselves; another one in seven were living with parents or others. Strikingly, among first-time investors, more than a third rented their own home, lived with parents or shared with others.

The reasons they buy in western Sydney

Unsurprisingly, the most important factor attracting investors to buy in western Sydney was the perceived potential for capital gain – more than 80 per cent in our survey nominated this as highly or extremely important in influencing their property and area choices:

“I’m always looking at properties, looking at areas of growth, looking for why places would grow in value, how to improve the value so if I renovate this property here what [sale price] can I expect to achieve … ” [Financial planner, owner-occupier 29 kilometres away, fourth investment property]

First-time investors, however, were more likely to nominate “affordability”: more than two-thirds of this group choose to buy in western Sydney substantially on the basis that this is simply the cheapest part of the city:

“My preference would have been closer to [home suburb] Parramatta [but] … too expensive”  [Personal assistant, owner-occupier 26 kilometres away, first investment property]

We also saw evidence of a secondary dwelling or “granny flat factor” drawing investors to the large suburban blocks of western Sydney.

Private open space can make a granny flat more desirable as a rental.
Western Sydney investors frequently look out for properties they can add a granny flat to, increasing their rental yield.

Strikingly, a quarter of the homes acquired for rent in the study areas between 2011-15 included a secondary dwelling. Since the proportion of all houses in these areas with granny flats will be far lower than this, it suggests a purposeful strategy to seek out such properties.

Moreover, many landlords quickly added such buildings to newly acquired dwellings. The scope for site intensification of this kind was clearly important for many:

“We wanted something that allowed for the granny flat build, and also a land size that met current council regulations for dual occupancy to allow for future development [to add resale value probably involving sale with Development Approval]”  [Teacher aged 45-54, owner-occupier, interstate resident, ninth investment property]

“The block was big enough [to add a secondary dwelling] – another reason we bought it”  [Professional asset manager, aged 55-64, owner-occupier, eight kilometres away, 10th investment property]

The addition of secondary dwellings by investors meant that within five years, the proportion of acquired houses with granny flats had risen from 26 per cent to 39 per cent, expanding total dwellings by approximately 10 per cent.

This strategy is especially popular among experienced investors –  practiced landlords who are willing to take on more debt to increase rental yields.

On the other hand, there is little declared support for “flipping” as an investment strategy: less than one in 10 of our respondents said they intended to sell their recently acquired property in the next five years.

On the contrary, just over half intended to hold the property for at least another 10 years. Just over half, too, intended to buy further properties in the short-to-medium term.

What does this all mean?

First, it seems likely that lower value urban housing markets such as western Sydney will increasingly feature rental (not owner-occupied) homes held by remotely located landlords with multiple agent-managed properties.

Since private rental is the prime source of housing for low-income households, this is likely to compound the 30-year trend of pushing the working and non-working poor towards the metropolitan margins.

Second, to the extent that the “cottage industry” status of landlords justified weak legal protections for tenants, a “business savvy” profile of recent investors justifies a stronger approach.

Suburban roof tops - Generic Sydney suburbs aerial view
Sydney’s western suburbs are likely to become more tenant-heavy in the years to come. Photo: iStock

Investors’ typical lack of a personal connection to the properties means current provisions that readily allow tenancies to be terminated could be tightened, with greater security for tenants.

Third, if properties are remaining in the rental sector longer, or permanently, without a spell in occupation by an owner who makes repairs and improvements for their own comfort, there is an argument that minimum property standards should be more clearly prescribed and actively regulated.

In other parts of Sydney, it is clear that investors have been recently dominating off-the-plan purchases too, generating twin growth poles in the city’s private rental market: high density units primarily in inner city urban renewal locations and low density houses in lower value middle and outer suburbs.

But with high-rise apartment starts now in steep decline, it is likely to be western Sydney that forms the main epicentre of sector growth over the next five to 10 years.

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