Smaller cities can expect an increase in demand from investors as the big cities lose their appeal in the wake of Covid-19, according to new research from CoreLogic.

CoreLogic head of research Eliza Owen says Covid-19 triggered a retreat of investors from favoured markets like inner city Sydney and Melbourne.

From an affordability and yield perspective, smaller capital city markets could grow in popularity with investors in the coming months, while the larger cities are unlikely to regain ground “until overseas migration and travel resumes”, she says.

At present, Brisbane, Perth and Adelaide offer much higher yields than the southern capitals because of lower dwelling values.

The latest ABS housing finance data shows current investor participation is 24%, well below the decade average of 36%.

Investor activity has been reduced because investor loans attract a higher interest rate, there is less appetite by lenders for high LVR and interest-only lending, the reduction of rental returns in the big cities, and the shocks caused by the pandemic.