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Return dangers for rental apartments

Rental apartments

The risk associated with investing in rental apartments has increased due to the market effects of the coronavirus, a property research house has said.

A research house has warned the market effects of COVID-19 have increased the risk of investments in rental apartments with regard to capital and income returns.

With regard to capital gains for rental apartments, Riskwise Property Research chief executive Doron Peleg cited the closing of Australia’s borders and the increase in the number of individuals unemployed resulting from business closures due to the coronavirus as the main negative factors.

“With Australia closing its borders and the now dire economic projections, it is highly likely there will be a significant reduction in external migration. If Australia has a relatively high unemployment rate and it is far harder to find jobs, particularly for migrants with no local experience, then obviously not only is the ability to move to Australia reduced, but the attractiveness of Australia is also falling,” Peleg said.

“While it is a bit early to say what the price reductions will be, if these projections are correct, they will be highly likely across Australia as unemployment and underemployment materially increase.

“And this is the first problem for the majority of people when they buy an investment property because the key driver is long-term capital growth and not cash flow.”

He noted the increase in the unemployment rate is a factor likely to jeopardise rental income from apartments due to the typical demographic of tenants and their behavioural patterns.

To this end, he pointed out tenants who live in rented apartments tended to be younger with no children and had a greater ability and propensity to stay with their parents or change their places of residence should they suffer a significant change of circumstances in their lives.

“The bottom line is investors need to be careful at this point of time. First, they should ensure that financially they are in a very strong position to service the mortgage or to potentially address longer periods of vacancy or provide a discount on the rent,” he said.

“Then, if they do want to invest, they should pay a discounted price for the unit to reflect both the risk for a price reduction and the cash-flow risk associated with the property.”

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