Category Archives: Investors

Mining Towns and Bad Advice

The following is an extract of an email I recently sent to a client who had been convinced by someone that an investment in Karratha was a sound idea…

As for developers and real estate agents they  have a clear interest in talking up the market.  But many so-called “property investment mentors” also have direct financial interest.  This is from an article in the Property Observer July last year titled “Port Hedland and Karratha “the best places to buy”? Don’t get roped into that one”  read the full article here http://bit.ly/1vAaAex.
Another more recent article on what is happening in other mining ‘boom’ areas http://bit.ly/1v7OLID  where he points out “The decline in these markets is not just about hard times in the iron ore and coal sectors. It’s also about over-building by developers and a failure to appreciate the full impact of the growing use of FIFO ( fly in fly out) workforces accommodated in temporary workers villages.”
We have many successful clients with strong property property portfolios and some of them did well out of the mining boom, buying ahead of the market.  We also have some clients who didn’t – this is a recent example I came across:
I foolishly I bought in Blackwater and Mackay when rents were crazy and out look was bright. Now rents in Blackwater have gone from $950pw, purchase price $495k to now $350pw and an agent told me today if I sold now I would expect $200k as there is zero interest in a property like mine. Mackay is a similar story, rent $700pw, PP $485k to $300pw and a $380k expected sale price. I am currently on a fixed rate for the next few years of 4.89%.
This person has little choice other than to sell their  family home in Sydney losing all of their  equity.
So my negative attitude to your Karratha strategy comes from my experience over the last 15 years.  Keep in mind that lenders also know about booms and bubbles – although they appear to have completely ignored that in the case of many mining areas.  However for a lender the ideal property is a 3 bedroom brick & tile house within 20 kms of the CBD or a large regional centre.  As you deviate from that either way, such as a one bedroom bet/sit or a $5 million harbour-side mansion the size of the market for these properties decline and that makes lenders nervous as when things go wrong they want to be able to sell easily and the bigger the market the easier the sale.  As a result lenders will lower the equity share on property that has a restricted market by as much as 50% and in many cases lenders will decline to accept a security.
Typically regional areas offer higher rental return over metropolitan areas however the cities ( Melbourne & Sydney ) offer better capital growth.  You have stated that you are looking for a positive geared strategy with good future income flow.  In my experience any ‘residential’ property with a return in excess of say 6.50% starts to ring alarm bells.  I am not saying they don’t exist but let’s look at some of the common scenarios:
  • serviced apartment or student accommodation – management or zoning restrictions limited market results in 60% LVR (loan valuation ratio) at best
  • studio apartment under 40 sq metres – again restricted market, LMI ( mortgage insurance) not available further restricting market expect 60% LVR
  • hobby farm > 5 ha – restricted market 60% LVR
  • retirement village – restricted market and management restrictions – unacceptable security
  • converted hotel/motel – unacceptable security
  • guest house / student housing where tenants share common areas – usually unacceptable
  • remote locations dependent on single industry – case by case
  • rural/ regional towns under 10,000 pop – case by case but typically 60% LVR
  • resorts / holiday letting – strictly speaking they are not ‘residential’ ie: people do not reside there, usually unacceptable
  • display homes – very restricted depending on agreement may get 70% LVR
  • property with rent guaranteed  – these are usually a managed arrangement or an incentive from the developer, will be assessed at market rent and equity probably discounted
While all of the above (and many others) offer good rental yield you have to keep in mind that the equity restrictions mean that you have to use more of your money and  this will ultimately reduce your ability to acquire more property.
While Melbourne struggles to make a 3% rental return, Sydney around 4% there are parts of Brisbane and I am sure other major centres where 6% on standard property is achievable. If you are looking for property that pays its way and makes a real profit, you will probably be forced to look at the higher risk options above.  If you are looking for property that can start to pay itself off, gradually becoming more genuinely positively geared over the longer term and capital growth is not your focus then larger regional centres may be your best option.

Garages becoming a hot property commodity

New home buyers and potential property investors should think of ways on how they can make their properties turn into money making assets.  News.com.au exposed a story about a garage in Sydney’s harbourside location which has listed with an asking price of $120,000 – to put that in perspective the garage is worth more than buying the latest BMW X5 and the garage doesn’t depreciate.

As cities become more and more crowded, parking becomes a rare commodity that’s why having one could potentially be an asset in its own right or increase the value of one’s property especially when it is in a good location.

Having an extra space in the lot and turning it into a rentable garage could also add more money to the owner’s pocket which could in turn help pay with the home loan. People still paying off their home loans were once advised to add extra rooms in their properties to be rented but for those who are not really into the idea of having someone they don’t know live in close proximity with them; a garage would be a great alternative.

In February, 2010 the most expensive parking spot, which was sold for $240,000 in Sydney, was for a garage in Bondi Beach. The sale proved that there is a market for parking areas, something people and real estate agents never expected. In the eastern suburbs, the going price of a garage on a separate title is said to be from $50,000 to $100,000. According to estate agents lock up garages on separate titles are rare and are highly sought by buyers, selling only in a matter of days.

Laing and Simmons Potts Point’s Nuri Shik on one property. “I sold a studio once which had a parking space and I listed it as a ‘lock up garage with apartment attached’. We’re currently selling a 14sq m car space on Bayswater Rd, Potts Point which is expected to fetch more than $49,000, but a lock up garage could sell for about $100,000.”

Before you run out and start making offers on parking spots talk to your mortgage broker as there are many implications in arranging finance for this kind of property.

Housing – what people really want

People who are planning to buy a property for rent or for future investment should know what most people are now looking for. It might have been a “Great Australian Dream” but having a home in the suburbs is no longer what most Australians prefer.

Ben Weidmann and Jane-Frances Kelly of the Grattan Institute wrote What Matters Most? Housing Preferences Across the Australian Population, on Australian’s housing and location priorities. The survey was conducted with 706 Australian residents from nine demographies and some results were surprising.

Buyers are now more concerned with convenience and access to friends, family and other establishments rather than house features. It has long been presumed that living in a separate house on a large block of land is the Australian dream however it only ranked 5th and 20th most important variable.

The top ten results for all age groups were mostly all about location as safety for people and property came in second, near family and friends, third; near local shops, sixth; near a shopping centre, seventh;  near a bus, tram or ferry stop, eighth;  and little traffic congestion tenth.

Weidmann, the co-author said, “While it is true that the number of bedrooms was the highest priority, aspects of location including security and proximity to friends and family are also clearly important.”

“The data also suggests that there are real differences in priorities across the population.

“In particular, while young families were focused on house size and type, older and single-person households were much more likely to think that characteristics of where they live are more important.”

An excerpt from the report says, “With Australia’s population changing, understanding this link between housing preferences and demographic characteristics has become more important. As is well documented, Australian households are shrinking, and the population is ageing. The fastest growing household type is ‘single-person over 65’, and the ABS expects that by as early as 2013, couples without children could overtake couples with children as Australia’s most common household.

The study wants to answer some series of questions like, “do growing population segments demand types of housing that are not prevalent in the current stock? Is our housing stock a good match for future demand? Is the design of the housing market conducive to delivering the mix of housing types in the locations that our changing population requires?”

Of course location and style of property is also of great interest to lenders and sometimes their preference runs contradictory to the individuals.  Small studio apartments continue to be difficult to finance – as a mortgage broker even with over 20 lenders on our panel we often have to pass, on these deals especially if LMI is involved.

How excess equity could help you

After a few years of very little growth – indeed some declines in some areas – Australian property prices are on the move again – in fact the best property price research suggests that Australian house prices grew by 13% last year.

Meanwhile the share market has tanked.

My own assessment of the likely prognosis for the Australian economy is the same as the Reserve Bank’s and the Federal Treasury: there’s enough growth coming out of the newly emerging economies like China India and Brazil to mean that the economy will continue to do relatively well. And, though we will probably see some more increases in interest rates, the current American slowdown will relieve pressures on the RBA to lift rates further.

That means I think the Australian share market is already quite substantially oversold.

But the combination of these circumstances means that it is important to ensure that you are in a position to access any equity you have in your home or investment properties. Some people may need that equity to avoid a margin call on shares. If you do have a margin loan, it would be crazy to risk a margin call forcing you to sell into a bear market if you have equity you can draw on in your property investments.

And if this isn’t a concern for you, I can say that I personally am getting set to purchase some property (having been out of the market except for my own house for about five years). If you’ve got any additional equity, being able to write a cheque for a few thousand dollars to secure a property immediately it presents itself in the market is a smart thing to do.

So give us a ring and have a chat about your circumstances, and see what your options are. Visit our website or ring us on 1300 13 75 86.

Investment priorities for your portfolio

While the news looks bad for investors following the second rise in interest rates in recent months, there’s light at the end of the tunnel. Before I explain why, let me explain, once again, that my own investment philosophy is broadly and I might even admit crudely, contrarian. I believe that markets basically work pretty well, but that they go in cycles of optimism and pessimism and that one can make better than average returns by broadly betting against the market.

So if you did nothing else but bought into markets after they’d enjoyed some sustained period of price falls or low growth and sold after they’d had a sustained period of high growth I reckon you’d do better than average and indeed better than a lot of funds which tell you about their expertise in picking investments (but which broadly follow and often underperform the relevant index).

When I can I supplement that basic contrarian instinct with some research – or some reading of others’ research – to find specific opportunities to benefit, specific investment themes that are consistent with my broad contrarian philosophy. Obviously if there are good reasons for expecting an area to do well, then I’ll buy there if I think it’s a good time to buy real estate more generally.

Some of the takeouts of a contrarian philosophy are that when others are selling that creates a chance to buy advantageously – and vice versa. I bought some property during the property boom and sold it during the boom. Like a lot of contrarians I sold too soon – but at least I made good money and was limiting my exposure.

As I was selling the property, with the sharemarket having performed poorly I figured it would do fairly well (based on not much more than a contrarian perspective). Sure enough it did. But since it has outperformed for several years I’m lightened my exposure. I’ve put quite a bit into international shares via a fund manager I’m very impressed with – Platinum Capital.

I’ve recently started lightening my exposure more and winding back my gearing, and soon I may gear up some more. The evidence suggests that the time to wait to invest in residential property may be coming to an end. (Well the fact is that buying in WA over the last five years was a ‘no-brainer’ that I thought about but didn’t act on sadly. But as you’ll see below, now WA is not necessarily a better investment than elsewhere.)

Here’s a graph of how house prices have performed in the last few years.

As you can see, Sydney’s been pretty crook. But that’s why developers have slowed down their development plans there. And the result of a growing population and reduced development of dwellings is falling vacancy rates.

That’s led ANZ analysts to make this point regarding the NSW market.

With approvals currently trending at an annualised completions rate of 26,400 (compared to underlying requirement of 46,000 dwellings), shortages in rental accommodations and dwelling supply will intensify, providing a powerful catalyst for the next upturn in 2008. By that stage, we estimate the NSW housing market will have unprecedented levels of pent-up demand (equivalent to almost 10 months of production). We expect the current dire sentiment pervading the NSW housing market to improve over the next 12 to 18 months.

These words were written in July before the latest rate rise (though the analysts were expecting the rise that did occur.) Developers are thus operating pretty much countercyclically against the price cycle. They are providing more supply where dwelling prices induce them to – smoothing prices just like you’d expect in an economics textbook. In Perth with strong price rises building looks like outrunning supply putting a lid on price growth (Perth is now rivaling Sydney in unaffordability.) So prices may well come off there in the not too distant future.

For these reasons on the Eastern Seaboard, I think it’s starting to become a good time for renewed property investment, provided you’re in it for the long haul. Don’t expect the big price growth we saw in the late nineties and early naughties. That only comes around once in a long time, but with rental yields for decent investment properties at 5 per cent or so (usually lower in NSW) you only need to pick up a bit more than two per cent a year in price growth and you’re making money what with building depreciation allowances, negative gearing and concessional capital gains tax. Now price growth is most unlikely to be less than inflation over the longer term (which will be around 2.5%) and could easily be two or three percentage points above this – add another few percentage points per annum for well chosen property and you’ve got a very effective long term investment. Now you’ll notice these assumptions are pretty conservative. Even so, property becomes a good investment again!

Here’s ANZ’s snapshot of the next couple of years.

Until next time,