The performance of the rental market has diverged substantially between house and unit rents. Between the end of March and September, national house rents have risen by 0.4% while unit rents are down 3.3%, according to CoreLogic.
Every capital city has seen house rents hold up better than unit rents, however, the biggest difference between the two property types can be seen in Sydney and Melbourne where unit rents are down 5.0% and 5.5% respectively while house rents have fallen by a much smaller 1.3% and 1.0%.
The significant difference in rental performance is a combination of supply and demand side factors. Investment grade apartment markets have seen significant supply additions over the past decade, with a large portion of new apartments built in Sydney and Melbourne. The supply side has been further affected by short term rentals transitioning to long term rentals. While supply has surged, COVID-19 has brought about a significant demand shock from international and state border closures. Overseas migrants comprised a material component of tenant demand across inner Melbourne and Sydney, with many of these foreign students.
Add to this the fact that industry sectors such as food, accommodation services, the arts and recreational services have been hardest hit by job losses and lower working hours. Workers in these sectors are more likely to rent than in other industries, which has also negatively impacted rental demand.
Regional rent markets have held much firmer, with rents rising for both houses (1.4%) and units (1.1%) across the combined regional markets over the past six months. This is further evidence of the relative resilience of regional Australia throughout the pandemic.
With unit rents falling faster than unit values, the yield profile for Australia’s unit sector has deteriorated. Across the combined capitals, the gross rental yield for units is tracking at a record low of 3.85%, down from 4.23% a year ago. The lowest gross yields are in Sydney (3.4%) and Melbourne (3.9%), despite their low reading, however, gross yields for units remain higher than the yield for houses across every city.
With high supply and weak rental conditions likely to persist, at least until international borders re-open, inner city, investor-owned unit values are likely to remain under significant downside risk.
Change in rents, March 31 to September 30
Gross rental yields