There are two primary objectives for investors to weigh up when it comes to investing in real estate; yields or capital growth.
A yield-focused investor prioritises regular income from their property investment with the aim of maximising rental returns and cash flow. Typically, these investors look for properties that offer high rental yields relative to the purchase price and seek property in areas with strong rental demand.
On the other hand, a capital growth-focused investor looks at the potential for long-term appreciation in a property’s value. The focus is on properties located in areas with high growth potential, such as emerging markets, developing neighbourhoods, or regions experiencing economic growth. Accepting lower rental yields in the short-term is part of the deal, in return for a higher value over the long-term. At least that’s the objective.
There’s plenty of merit and considerations to both. Ultimately, the choice between yields or capital growth depends on an individual's investment goals, risk tolerance, financial circumstances, and market conditions. It’s also possible to strike a balance between the two strategies, sourcing property that offers a decent rental yield and potential for capital appreciation.
Definitions aside, how do you weigh up key property investment performance metrics, particularly in the current market? I took our new Market Trends dataset for a spin to analyse what real numbers showed when it comes to yield versus capital growth.
For this exercise I took figures from CoreLogic's Buyer Classification data, specifically multiple property owners (MPOs) in old Auckland City Council and Manukau. These two areas stand out because MPOs – that is investors - account for more than 40% of property purchases so far in 2023. To put that in perspective MPO activity in Franklin and Rodney is around 30%.
In Auckland City, a two-bedroom apartment has a current median value of approximately $741,000, down roughly 7% in value over the past year. Despite the decline, values are still 17% higher than five years ago.
In Manukau, three-bedroom houses have a current median value of approximately $925,000, down in value about 14% over the past 12 months. Again, despite the downturn, values of three-bedroom houses in Manukau are 23% higher than five years ago.
For rents, a two-bedroom Auckland City apartment is about $620/week and gross rental yields are 4.4%. Manukau three-bedroom houses rent for $670/week at an estimated gross rental yield of 3.8%.
At this point the example confirms the theory that apartments return a higher rental yield than houses, even if they don’t deliver as much long-term capital gain.
But why leave it there? Let’s consider some other metrics. Say an investor was to resell down the track. Average days on market – how long a property takes to sell – is an indicator of market demand and competition. Auckland City two-bedroom apartments are currently taking an average of 38 days to sell, a week longer than three-bedroom houses in Manukau at 31 days. That is even though fewer two-bed apartments have come on the market in Auckland in the past year (1.5% of available stock) compared to three-bedroom houses in Manukau (2% of available stock).
What impact does age of property have? Does something shiny and new – favourably treated within current policy settings – attract a new-build premium? It sure does. Market Trends data shows existing two-bedroom apartments in Auckland City have a median sale price of about $652,000 compared to an equivalent new build, which has been selling for a median price of $865,000.
The premium also exists on houses with established three-bedroom homes in Manukau selling for $960,000 compared to the new build sale price of $1.05 million.
While this is only one comparative analysis, there is evidence apartment rental yields outperform that of houses but the reverse can be said for capital gains – particularly over the medium to long-term. We’ve also seen evidence of a new-build premium across apartments and houses, and despite preferential treatment from a tax/lending perspective, it costs investors more upfront to purchase them.
Over the coming months, I’ll be using Market Trends extensively to get new insights into the market, both from a general perspective and some key investment performance measures. If you’d like to submit a Market Trends insights query for me to investigate, get in touch.