Investors planning a foray into the off-the-plan apartment market should note that rental returns for Melbourne units are still falling.

The city’s metropolitan gross rental yield was just 4.04 per cent in February, according to analysts Residex. The figure – which is calculated as the median annual rent divided by the median unit value – has fallen by nearly 1 per cent in the past two years, thanks to rising prices but lacklustre rental growth.

In fact, rents have failed to even keep pace with the rate of inflation, increasing by just 2.9 per cent since February 2008.

Industry experts estimate a yield of at least 5 per cent is needed to attract investors into the market, though at this level it is unlikely to generate a positive cash flow.

Given the past performance and recent volatility of the rental market, which has occurred despite low vacancy rates, investors should be factoring both negative and positive rental-growth scenarios when making purchasing decisions.

Prospective off-the-plan buyers should also consider what kind of apartment stock and how much is planned in their immediate area, which could affect demand and rental levels by the time their unit is put on the market.

Posted by Chris Vedelago – Domain on 25th March, 2011