Keys to the City: Perth

PORTFOLIO POINT: Perth is strongly influenced by the fortunes of the mining sector. Here’s a guide to the property market, and how potential investors should approach it.

In every major Australian city, finding residential property with the best growth prospects requires an understanding not just of the property investment rules but also of the city itself. Each market has its own unique characteristics, its own sense of place, which holds the keys to smart investment. Nowhere is that more true than in Perth.

To find out more about the Perth market and what makes it that little bit different, I spoke with two veterans of Perth’s property scene, Gavin Hegney, executive chairman of the Hegney Property Group, and John Martin, managing director of Australian Property Consultants.

My first question was straightforward enough: what physical features drive the Perth market?

The conversations that followed revealed a lot. “Much like Sydney, people in Perth are fascinated by property that incorporates the water lifestyle,” Hegney says. “When I first started as valuer 25 years ago, houses in beachside suburbs were worth roughly the same as houses inland, but the beachside houses are now worth three times as much.”

Martin agrees, adding: “Perth is very much about living the summer climate lifestyle. While other amenities are important, it’s water views and recreational activities that make the difference. I would say river frontage is actually the best attribute for an area, particularly in that $2 million or more market, but beach areas like Scarborough are popular with the younger demographic.”

The price pulling power of the Swan River was underlined this year when the Mosman Park home (pictured) of iron ore heiress Angela Bennett sold for $57.5 million, an Australian house price record.

Perth’s metropolitan area covers a relatively small inland urban area with coastal strips stretching 60 kilometres north and south. Despite having the fastest-growing population in percentage terms of any major city, the Perth property market has recently experienced an intense roller coaster ride with a slowdown in 2008-09 and price falls of up to 20% in some niches.

Confidence oozed back in the second half of 2009 with a revival in the mining sector. The residential market recovered strongly, recording overall growth of 7.1% for 2009, according to RP Data.

Nearly all of that confidence came from one source: the mining industry. To truly understand Perth’s property market and where the best opportunities lie, it’s crucial to understand the mining sector’s influence.

“Mining affects the property market on two levels,” Hegney says. “In terms of sentiment, Perth has always been heavily influenced by mining boom-bust mentality. Combine this with that feeling of being cut off from the rest of the world, and sentiment in Perth can race through the streets like it does in country towns.

“The sector also directly affects property’s fundamentals. When there is a mining expansion or a recovery after a hiatus, we see an influx of highly paid professionals such as engineers and geologists jetting into Perth. They enter the top end rental market and shortly after become home buyers, providing an immediate injection to the property market, particularly for houses with 10 minutes’ drive of the beach.

“Interestingly, they tend to end up in enclaves”, Martin adds, “and this can affect the price expectations in specific areas. For instance, many South Africans arrive comparatively cashed-up and they head to areas like Wembley Downs and City Beach. The Brits, on the other hand, tend to buy houses in the middle price range in northern suburbs like Kallaroo.”

The influence of mining spreads further than just rentals and sales, affecting that constrained yet fundamental part of the property market equation: housing supply. Perth has one of the country’s most persistent shortages and mining demand for labour is a major reason behind it. Hegney says: “The mining industry recruits the same skilled labour required for land development and housing construction and they have a history of paying large wage premiums. They also have a history of not training people themselves, so during a mining boom we see an exodus of the workers needed to bridge our housing gap.”

All that makes Perth property strong, if episodic, with demand fuelled by a booming mining industry and a rising population, yet supply is constrained by insufficient new housing. But where do the best opportunities for investors lie?

“I would think that some of the better opportunities lie in the older-style duplex and strata properties located in those suburbs running from Scarborough on the coast through Churchlands and onto Joondanna north of the city,” Martin says. “Older duplex and strata properties typically share common land and that value can be released at some point in the future if these properties are redeveloped.”

The state government has a policy to curb urban sprawl, which would mostly affect the so-called R20 suburbs (restricted to 20 houses per hectare). If implemented, these established 1970s and 1980s estates would see large single-house blocks redeveloped into two or three-unit sites.

It’s this potential that seems to be front of mind for many in the WA’s property industry, and Hegney thinks it’s a factor investors should bear in mind. “Market prices for houses on an 800 metre square block in the right middle suburbs are 70% land value”, he says. “They are also achieving reasonable rent yields of 3.5–4%. This means an investor can buy a property with capital growth and rental returns now and the potential for significant capital appreciation in the future.”

Hegney particularly favours large house blocks in areas such as Duncraig, Greenwood and Hamersley, but also in southern suburbs like Bateman, Bull Creek, Leeming and Murdoch. While these areas and property types are different from Martin’s list, the potential in his choices is drawn from similar themes: close enough to the coast for that summer lifestyle and potential for releasing capital value if moves to consolidate Perth’s growing sprawl happen. In the meantime, these suburbs are close enough to the freeway and rail corridors that allow residents to move around the city easily.

That’s all fine, but what about those inner-city property types that have proven such reliable capital growth prospects in the past. Has the day of compact houses, strata properties and units in the suburbs adjoining the CBD passed?

Not at all, it seems. “There’s no question that these property types, particularly in areas like Subiaco and South Perth are a solid investment and they’ve certainly proved themselves in the past,” Hegney says. “Indeed they’re in hot demand at the moment. But for investors with a slightly longer time frame – say, 10 years plus – I would be looking at some of these middle ring suburbs as well.”

To my way of thinking, a history of reliable above-market capital growth sounds perfect for any property investor. That’s why I will continue to recommend investors focus on inner-ring property. But if you’re investing in the west and have a longer investment time frame, it may well pay handsomely to take a closer look at these other property types and locations.

Property Q&A

This week

• Should I buy into a converted factory?
• The whole suburb is renovating. Is this good?
• Do investment companies offer good value?
• Affordability vs investment.

Factory conversion

I have been looking at an apartment in a converted factory in the inner Sydney suburb of Marrickville for $700,000. It seems to be in a high land value area, so will it make a good buy?

Marrickville would indeed be considered an inner-urban, high land value area and while that is a good start, it doesn’t necessarily mean that this property is right for investment.

The future performance of an apartment like this one depends on the quality of the conversion, its appeal and amenity for tenants, and the future demand from both home buyers and investors. A well executed conversion of a factory into apartments is a little unusual but a reasonable alternative to a traditional house – particularly for singles and couples without children. However, they are not popular with traditional families, who make up the largest single segment of purchasers, and many tenants. Even though converted dwellings in an area like this often sell for about the same price as a quality period house in the same area, houses tend to have broader appeal. This is why the traditional house types usually perform better as investments.

As an investor with this budget, I would stick with an older-style or period two-bedroom house in Sydney’s inner-west. That said, if you’re very if you’re keen on this property, when considering a purchase, look at any detraction caused by commercial or industry activity close by. Is the scarcity value of the building compromised by too many conversions in this area, or is there any noise from flight paths into Sydney airport? If the apartment passes these tests, you should organise a building inspection to check the property’s structural soundness and acoustic rating, as many conversions have metal structures that conduct noise. If the apartment has high ceilings, you should bear in mind that heating or cooling costs can be expensive.

Finally, ensure the apartment has dedicated off-street car parking, preferably on the title, as this will add to the future value and investment performance.

Renovation time

We live in a sought-after, middle-ring suburb in Brisbane about seven kilometres from the CBD, which has good transport, schools and shops. Over the past six months, it seems that renovating has become the new pastime for all of our neighbours. Is this a promising sign for the area?

There are probably two reasons behind this sudden burst of renovations. First, with Brisbane property prices back on the rise, owner-occupiers in your street maybe choosing to extend or refurbish their houses rather than bearing all the imposts of trading up. This is typical of many inner and middle-ring areas. Second, older established areas are often characterised by houses with gardens, which allows for extensions when the owners want more accommodation. Many of these houses also have the classic period architecture, which is always in demand and lends itself to sensitive renovation.

I think another likely reason for this burst of renovations is that with the recovery seemingly under way many Australians have decided recently that it’s time to get back to the plans they put on hold 18 months ago. If this means that a proportionately large number of properties in your precinct are benefiting from significant capital injections, then this is indeed a good sign for you. The refurbishment of many homes is likely to translate into more buyer demand for houses in your area and higher resale values over time.

Investment companies

I know a few people who have recently bought investment properties through investment companies where they seem to "take care of everything". The company supplies the land and development expertise, finance, and property management. Would you advise investing this way or is finding a good investment property in the right area and arranging your own finance a better route?

When assessing these companies, schemes or clubs purporting to advise you on property investment my first question is always: How does this company make money? Do they charge purchasers a commission? If they do, how much is it and is it documented somewhere separately from the actual property and asking price or is just it loaded into the property’s purchase price – along with the developer’s premium? If there’s no fee or commission then it’s almost certainly included in the inflated purchase price.

Often these “investment companies”, “clubs” or “associations” are really just a sales front for a developer. Yes, they use the word “advice” a lot, which sounds nice, but their advice may not be independent: real advice that has been considered to meet your individual property investment and financial needs.

The offer to “take care of everything” sounds like it’s coming from the concierge of a smart hotel, but I always worry about organisations that will handle finance, legal documentation and conveyancing as a “one-stop shop”. This smacks of too many vested interests and a distinct lack of transparency.

If you want advice before investing in residential property, then my advice is to go out and get it. Just make sure the person advising you has your best interests at heart. Make sure their only source of income is the fees you and other clients pay, which should mean that this adviser is working for you. But if this adviser doesn’t charge fees or they’re making commissions or rebates from another source, then they’re not working for you: they are merely a sales person, not an adviser.

Always ensure your financial and legal arrangements are completely independent of the person selling or advising you on any property and check them with your accountant or financial adviser before signing any contracts.

Affordability vs investment

In your column, you often write that a property’s growth should exceed inflation by 6–8% and double in value every seven to 10 years. For ordinary young people with an average salary, how will they ever be able to afford property when it’s doubling in price that fast?

You’re absolutely right to have this concern. I believe that something does need to happen to ensure housing supply is boosted so that young people starting out today on the average wage can buy their own home. In particular, the state governments of Australia could start by looking at the many abandoned or undercapitalised commercial sites in our major cities and encouraging the development of units on these sites designed to be liveable and affordable for first time owner-occupiers.

But as investors, we shouldn’t confuse home affordability issues with the unemotional business of investing in residential property. Not all property grows ahead of inflation, nor does it uniformly double in value every seven to 10 years, as some people may suggest. Only prime inner-urban property with a high level of scarcity in the right locations achieves this kind of performance. As an investor, I would encourage any Australian to take advantage of this growth, quite simply because the right investment property remains one of the sure ways we have to help create our own financial independence.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.