Reflecting on the Past; Considering the Future
20 August 2010
Portfolio Management Services recently forwarded their annual report to clients detailing the performance of their property portfolios. This included a commentary of the past and future year in our investment property markets, of which the following is an abridged version.
Portfolio's client property assets continued to perform impressively over the year, growing in capital value and maintaining healthy income streams for their owners. Growth, however, has been tempered by a combination of interest rate rises and ongoing uncertainty on recovery from the GFC.
Reflecting on the past year - The residential property market was heavily influenced by government actions, and the First Home Owner Boost saw activity driven from the bottom end as entry-level buyers took advantage of the "boost". This increased prices strongly in the range to about $450,000. The activity also softened rental yields as large numbers of tenants left rentals to become new home owners. The "boost" ended in December, with a flow-on fall in first home buyers and a steady increase in rental demand again.
Property prices, however, continued to rise strongly as those who sold to first home buyers then upgraded. Subsequently rapid price escalation in the middle market only evened out this winter. Premium property over $1m has seen a patchy and somewhat softer end to the financial year.
Considering the year ahead - The current hiatus in price growth is expected to act as a "pause that refreshes". Prices will remain flat before increasing again, albeit, at more moderate levels, while we expect rents to increase over the next 12 to 18 months.
Of many reasons to support our view the key one remains Australia's housing shortage. According to the Housing Industry Association, the current shortage, of 190,000 homes nationwide, will grow to 466,000 by 2020. While there are a variety of short fall estimates, they all agree it is a major ongoing issue, with variations by geography. BIS Shrapnel forecasts the housing shortage in Victoria to decrease slightly over the next year from about 40,000 to 35,000. In contrast, Sydney is expected to see the shortage worsen from about 100,000 to 112,000 homes this time next year.
Best opportunities - Sydney and Melbourne prices are now roughly equivalent on a like-for-like basis. Accordingly, investors are encouraged to look at Sydney residential markets with substantially better yields, and the prospect of higher medium term capital gains as their first option. Melbourne's Frankston and Geelong also provide excellent opportunities, especially for those investing smaller amounts of capital, or those interested in larger land parcels with development potential.
As relevant to the investor, there is also a growing case to be made for investing selectively in the non-residential sector. Commercial property can be secured on good yields, and has upside available as our economy recovers from the challenges of the GFC. Industrial property also has merit, but selectivity is key in a market that may get worse before it gets better. By contrast the retail sector of the economy remains weak and investment in the area is not strongly encouraged.
If this article raises any queries, please call Portfolio Management Services on 03 9621 1044.
Doing The Stress Test
10 July 2010
Herald Sun
Want to stress test your investments? Jock Bing, Director of Portfolio Management Services provides some guidance in the weekend's Herald Sun. Click here to view and read the article in full.
Where to for the Residential Property Market?
17 June 2010
Australian property markets generally, and those of Melbourne particularly, are notably less frantic of late, begging the question of what now? Our key observations currently include:
• Lower Sydney and Melbourne auction clearance rates, but still at relatively high levels
• Available properties are at, or near, record winter levels
• Auctions now see limited competition: commonly one or two bidders, compared to five or six until very recently
• Sales are increasingly around quoted ranges, rather than dramatically above them
We also note commentary suggesting interest rates are at or near ‘neutral’ levels, with further increases likely to be at a reduced pace. Also very significant is that, the ‘first home owners boost’ (FHO Boost) impact on the market has now played out. Generally poor levels of analysis, however, mean that the key significance of this change has not been acknowledged.
The Boost brought forward large numbers of FHO sales, so FHO activity has fallen dramatically since late last year. Thus, the composition of buyers has been altered dramatically, leading to a strong upward impact on median prices.
While there has indeed been strong price growth over the last 12 months, it should be understood that a significant portion of the growth is due to buyer activity moving from lower to higher priced properties which, by definition, supports higher median values.
The other, more commonly recognised effect of reduced FHO activity is the tightening of the rental market. It has recovered from a short period of softness, with prospective home owners no longer leaving the rental market. Many other buyers are also staying longer due to reduced affordability.
Overall then, property prices are ‘softer’ rather than weaker. A reversion to more normal levels of growth should be quickest in Melbourne, as a result of the recently strong price gains. Over the next year growth in Melbourne will be no more than single digit levels, while in Sydney it’s likely to be stronger, driven by good yields and a reassertion of price premiums over the Melbourne market.
Underpinning the lack of downside is the shortage of housing relative to demand from a growing population. Further, the likelihood of higher rental yields will see investors underwriting property prices at current levels. One threat to the outlined outcome is an increasingly unlikely GFC mark II.
The outlined scenario will not be felt consistently. Outer areas will generally be weaker than inner ones; well presented properties will gain stronger interest that ill-presented ones, and mid-range properties: $500,000 to $900,000 will perform more strongly than others.
Rents are expected to increase more strongly than over the past year, with significant growth a realistic possibility by year’s end. Given slower capital growth the likelihood is that yields will, therefore, improve. Again the impact will vary as tenants are increasingly chasing good houses, so well presented properties in prime locations will perform more strongly than others.
To ask questions on the impact of market changes on your property call Portfolio Management Services on 03 9614 8211 (property management) or 03 9621 1044 (property investment).
SHIFT IN SENTIMENT - Attitudes Are Changing
14 May 2010
Six interest rate rises, the unknown impact of a new resources tax, roller coaster share markets and a European debt crisis appear to have joined to form a “perfect storm” of uncertainty for Australian real estate buyers.
Add to this growing weariness from having to “weather” the ongoing economic uncertainty and people’s resolve seems to have melted a little.
We have noticed a shift in sentiment during the past few weeks from both buyers and vendors – and this is already offering some unique opportunities for buyers ready to make a move.
Melbourne
In Melbourne interest rates are definitely starting to bite. Melbourne sales are harder to achieve and agents are having to push buyers across the line. For their part, buyers have turned furtive, unwilling to give any indication of their hand and increasingly unwilling to bid at auction.
This doesn’t mean that properties are not selling. They are still, eventually, finding new owners. However, more and more homes are not selling until after auction and sometimes only after several days of negotiation.
Overwhelming the feedback coming from these deals is one of “grumpiness”. The buyers are pulling back and feeling increasingly unhappy about having to pay current prices. The next step from here is usually a withdrawal or slow down as property buyers decide: “No more, too high”.
Sydney
The Sydney market has already moved one step further than Melbourne. Sydney buyers have already shut down to a limited degree and prices have started to steady – if not reduce slightly in some situations.
A recent example is a property we identified on behalf of a Melbourne client which we had expected to purchase for between $850,000 and $860,000. On the day we bought the property for $830,000.
Conclusion
In both cities we had been getting constant feedback from buyer’s advocates that vendors are being too greedy. The advocates have struggled to buy properties within their value-based price ranges because most vendors want a higher result.
Now, however, in our own negotiations we are starting to see more willingness to get the deal done. There appears to be a strategic shift in the market.
Whether this is a temporary re-grouping before the market runs higher again or whether this is a consolidation where the market confirms its current level – is yet to be known. However, for buyers ready to make a move this hiatus looks set to offer some timely opportunities.
Property Managers
30 April 2010
As property investing has increased in popularity and sophistication so, too, has the role of the property manager.
These days an experienced and professional property manager often acts more like an advisor to a client. They guide, research, manage and advise on all aspects of the client’s investment property “business”. The role is far removed from the old style real estate agent and landlord relationship.
For example if your rental property was a company, the property manager should almost be like the managing director, using their expertise to look after the property, ensuring legal compliance, keeping the tenants satisfied, planning for the future and, of course, ensuring that all important income stream remains secure.
The manager also needs to provide many other roles within the “business” such as financial controller, accounts payable, valuer, mediator and administrator.
However it is probably the expert advice and experience that is the key difference between the old style agent and a professional property manager. Here are a few areas where advice can be crucial to the success of your property investment:
• Recognition and understanding economic circumstances and how they can impact on the investment property market.
• Choice and location of investment properties.
• Analysis of current and ongoing rental market conditions, including the impact changing conditions have on purchase prices and rental incomes.
• Advice on if, when or how to improve or renovate a property to achieve maximum return on investment.
• Understanding and compliance with tenancy obligations.
• Advising and helping keep the client/landlord up to date and informed on market and legal issues.
• Ensuring the long term security of the rental income stream.
• Advising on future investment strategies.
The property manager, however, must also provide practical everyday services such as:
• Assessment of potential tenants.
• Managing tenant expectations and requests.
• Initiating and acting on repairs and maintenance.
• Ensuring clear and accurate communication between all parties.
• Immediate response to client and/or tenant requests and queries.
• Ensuring unrealistic demands from tenants are mediated.
• Providing access to a qualified and experienced team of trades people.
• Representing the client in any tenancy tribunal issues.
• Providing accurate and timely financial reports.
We believe the advantages of a professional property manager significantly outweigh the cost of not having access to this type of advice and service. A professional manager not only manages your “business” but also respects and understands the many complexities of the property investment industry and markets.
Presentation Plus
How to maximise your rental property
22 April 2010
The appeal or attractiveness of your rental property can play a vital role in earning the best returns from your investment asset. A well presented, attractive property can make the difference between giving you the choice of three or four good tenants or tempting you to compromise on the type of tenant you would prefer - or worse dealing with a vacancy.
Even in times of strong demand for rental properties it still pays to ensure your property makes the most of its good points, after all, in most cases your property will be just one of many that could be available.
As a property investor, you should not just be looking for any tenant but for a good tenant: one that reliably pays the rent while also looking after the property. We know from four decades of experience, good tenants are attracted to well-presented homes. Which brings us to a few important points to make about ensuring the best presentation of your property.
Of course, a good first impression such as street appeal is always important but there are also several other key areas, most of which don’t involve substantial expenditure.
Bathroom and kitchen: a poor impression here will put the property at the bottom of a tenant’s list of options. Even minor expenditure, like a new mirror or vanity unit in a bathroom, can give an immediate lift. Keep main kitchen appliances up to date.
Cleanliness: Ensuring your property is clean is especially important. Nobody wants to move in to a property that is covered in dirt and grime, especially in hygene-sensitive areas such as the kitchen and bathroom.
Paintwork: Heavily marked areas or cracked walls, extra dark rooms and grimy passageways will benefit greatly from new paintwork. It’s also a good idea to stick to neutral colours. Don’t be tempted to splash out in the colour department as you run the risk of alienating potential tenants who might not be comfortable with an orange lounge room or a dark blue kitchen.
Floor coverings: Regardless of whether you have carpets, tiles or floor boards, regular replacement and repair is always necessary. Steam cleaning of soft floor coverings is a relatively cheap expense but could make a huge difference to the property’s presentation.
Storage: Built in wardrobes are vital these days but extra storage such as linen cupboards and pantries will also greatly add to your property’s attractiveness. Large storage areas such as tool sheds, garages or covered outdoor areas are also another big bonus factor.
Security: Intercom systems, security entrances and window locks are also often sought after by tenants, particularly single occupants. These items also reinforce the impression that the owner cares about the wellbeing of their tenant.
Outdoor space: Make sure courtyards, gardens or BBQ areas are well maintained and safe. Fencing should be secure and driveways or paved areas should be stable and not pose any trip hazards.
RENOVATIONS
More significant upgrades are worthwhile if the property has had steady wear and tear over several years but it’s worth keeping the following points in mind.
* Bathrooms without a bath have reduced appeal.
* People generally prefer a second toilet if possible.
* Heating and cooling are highly valued and can give a property at a competitive advantage.
* Off-street car parking will outweigh any disadvantage from reducing garden areas.
ALTERNATIVELY
If you are not in a position to improve the presentation and amenity of your property you always have the option of reducing the rent to ensure you attract a new tenant.
Even a relatively small reduction such as $10 or $15 dollars a week can make a difference. Of course, a bigger reduction is also worth considering if it means you can secure a tenant rather than have a vacant property.
However, if a vacancy occurs it could be the best time to take a more proactive approach and treat it as an opportunity to refurbish and improve the property. Even minor work can make a big difference. This will improve the chances of attracting a good tenant, increase the rent and help improve the property’s capital value.
But please contact us to discuss your property in detail, we will be able to give you specific advice as to the best options for your situation.
OFFSHORE BUYERS
9 April 2010
Property prices continue to rise as well-heeled baby boomers and cashed-up Asian buyers plunge in to the residential markets, despite attempts by the Reserve Bank to dampen spending.
The sudden increase in activity of these buyers is distorting values in some parts of the market which could create challenges for traditional “middle Australia” to achieve their home ownership and investment dreams.
Unfortunately, for many middle to lower income households, home ownership may be a thing of the past.
The mainly Chinese offshore buyers account for a relatively small (but growing) 5 per cent, or so, of weekly transactions in their target suburbs. However, when this is superimposed on current market demand the recipe produces even further price rises. Australia is already experiencing unprecedented population growth from our higher birthrate and soaring migration.
Offshore buyers also appear unconcerned about the traditional measures of value, based on a property’s income ability. Indeed, several offshore buyers have not even sought tenants and are willing to just hold empty properties.
It is these buyers which have also been extremely active in the $2 million to $4 million price bracket, almost single handedly pushing prices of these properties up another 5 to 10 per cent, particularly in Melbourne, during the past quarter.
The upsurge in international buyers has been created by changes to foreign investment rules. It is now possible for non-residents to own residential property on a permanent basis. Overseas students are now also unrestricted in buying property.
Overall, however, it has been a long time since residential property has been free of one distorting influence or another. Last year the market was artificially stimulated by grants to new and first home buyers. Unfortunately, in many cases these highly geared first buyers will now be watching the upward interest rates with great concern.
By contrast, Asian investors are unaffected by Australian interest rates.
Few other countries allow such unrestricted foreign property ownership, with some overseas buyers simply purchasing through the internet without even stepping foot in Australia. It is early days in the Asian buying spree but the emerging excess has the potential to create long term stress on the housing sector that is already one of the most expensive in the world.
Beware the Over-55's 'super' market
11 March 2010
What parent wouldn’t feel empathy for their offspring these days as housing affordability continues to get worse across Australia.
New statistics from the Commonwealth Bank reveal it takes today’s new home owner the equivalent of 19,300 hours paid employment, at the average income, to pay off the average sized home loan. Fifty years ago it took just 7,500 hours to pay off the average loan.
Comparing income to mortgage size is the easiest way to see why it has become so much harder to break in to the home market these days. But beware that this concern doesn’t put everyone’s future at risk. There are worrying reports of parents dipping in to the so-called “super” market to withdraw lump sums to give to their children.
This money is not just to help top up a house deposit, but we are also getting feedback that the money is being used on a more regular basis to maintain their children’s mortgage payments, pay for renovations and even meet other general household expenses because their cash-flow is so tight.
Not only can withdrawing money from superannuation severely damage the parents’ long term retirement, but it also creates an artificial situation for the home buyers and is generally helping to inflate the whole property market. More often than not, parents who have tipped in money for a bigger deposit then sit back to watch helplessly as their kids just buy an even more expensive house, instead of using the extra money to borrowing less. In turn this attitude of “borrowing to the hilt” puts them at risk of needing ongoing financial support.
One alternative, for people managing their own superannuation, is to investigate using warrants to buy a real estate investment for their fund and perhaps renting it out to the children, at market rental.
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