Know your target area

Whatever asset class you prefer, it’s a given that you’ll keep tabs on price movements, key economic indicators such as inflation, interest rate movements, government regulation, tax changes and other generalised influences on the market. Without relevant, timely and accurate market data, any investor '” prospective or existing '” can be forgiven for feeling behind the eight ball.

However, when we start to dig deeper into residential property indicators, we find a confounding set of figures. Among the most confusing and often misleading are median values. It’s a classic case of information and knowledge being totally different things, and accepting much of the standard property data at face value is fraught with pitfalls.

Part of the problem stems from the fact that a once relatively uniform residential property market has evolved into a complex beast. It varies from state to state, city to city, suburb to suburb '” even street to street within the same suburb! Anyone looking for a system that reflects all transactions and is updated spontaneously in line with market movements, such as the All Ordinaries index, is destined to be disappointed and very confused.

First, price movements in residential property are not subject to volatile, rapid or daily fluctuations. This is because property is traded relatively infrequently and settlement periods are comparatively lengthy. Second, reporting of sales results and transactions from selling agencies to the state and territory real estate institutes on a quarterly basis is not mandatory so, by definition, the data is incomplete since it is only provided voluntarily and selectively.

To get a complete picture of all transactions expressed as median house or apartment prices, we have to wait for annual data from valuers-general or their equivalent. This data is at least complete because it is derived from all transactions as recorded by the titles offices. However, irrespective of the source of the data, the three-month time delay for the quarterly data and a full year for the annual data, investors must accept that median values are not a reflection of today’s property market and therefore are not useful in providing guidance on current values and price thresholds.

At best, quarterly median values will only provide an historical view of what was happening three months before and even then, the data will be incomplete. On top of this, the data will not reveal whether there has been a bias in the price bracket of the transactions, or whether brand new or recently traded and renovated dwellings comprise a significant proportion of the transactions. If so, these anomalies will skew the median to a level that is vastly different from established dwellings in the area. What the prospective investor might mistakenly assume is that an area previously regarded as depressed or undervalued is suddenly enjoying high percentage growth rates. If an investor acts on this without properly understanding why the increase in median values has occurred, the results could be disastrous.

Given that these varied market anomalies can creep into an already incomplete set of quarterly data, the most reliable figures are the complete annual list from the valuer-general or equivalent body. The longer-range data smooths out any quarterly anomalies. But, even this comes with another big rider: it is a year old, and therefore not reflective of current market conditions. At the very best, it will give the investor a longer term trend.

And all that leads to a truckload of false assumptions from investors about where and what to buy! Never act in a specific market based on historical as opposed to current data.

So, what is the beleaguered property investor to do?

There is no substitute for putting in some serious legwork and gaining on-the-ground knowledge of any area investors are interested in buying into. This involves tracking sales results in a specific precinct over two to three months for properties that are directly comparable in size, style, level of renovation and location to the kind of property the investor wishes to buy. It will also be important to track long-term data such as annual medians that will help identify a consistent track record of capital gains in a specific suburb that outperforms inflation.

Student accommodation

Where can I find information on student accommodation? At the end of 2003 we bought an apartment in the Melbourne CBD for just over $300,000 including stamp duty. I would like to know where I can find out more about this niche market and what the future holds. The apartment was not bought for capital growth, but for taxation purposes and this has proved beneficial. However, the drop in the market concerns me greatly. Financial advice suggests that we hold on as within a number of years the property wheel will turn around, they tell us. A similar apartment in the building was sold at around $195,000. There have also been several new buildings within the CBD and on its outskirts to accommodate international students and therefore supply appears to outweigh demand. I would be happy to sell it for what we bought it at. Any chance of this? The building is new and in excellent condition '¦ very well maintained. We have always rented to students and the trend seems to continue. I ask for any advice on where I can find out about student accommodation and what future trends might be. Perhaps a huge influx of international students. Is there something the Government hasn’t told us? I wish!

Let me start by saying we would all be happy campers if we could read any government’s mind! I’m afraid I can’t predict what might happen with international student numbers, but I can give you some insight into the CBD apartment market.

I assume your apartment is in a high-density or high-rise block. These apartments are in over-supply and we are starting to see low resale values and in some instances, increasing vacancy levels. Most of these new developments were sold at artificially inflated prices, which reflect the developers’ profit margins rather than the true market value. They are still frequently marketed with inducements such as tax incentives and rental guarantees that tap into a property investor’s greatest fear: a vacant property and loss of rent!

The only true reflection of a property’s investment potential is through resale. It is very common for us to see second and even third resales of inner-city units falling well below the original price. While you say your purchase was based on taxation concessions rather than capital growth, you need to weigh up the longer-term benefits of those tax benefits and rental guarantees as opposed to low or nil capital growth, rental vacancy or a significant dollar loss if you sell the property for considerably less than you paid for it.

The prime purpose of investing in property is to accumulate net equity through strong and relatively consistent capital growth '¦ never tax benefits. And capital growth is driven by scarcity value. If you intend to hold the property for the longer term, then proximity to university campuses is an added attraction. However, you can’t get past the supply versus demand and scarcity value issues. No property purchase should ever be based on “a huge influx of international students” or tax benefits. The market could just as easily go the other way. It may be worth reconsidering your strategy.

Renovation time?

Is now a good time to renovate our investment property? The property is Edwardian and in a good, sought-after, high capital growth area and we believe it is likely to keep increasing in price as it meets all the criteria you talk about. Our thoughts are that we would considerably increase its value and rental income with an extension and some more modern additions.

An investment property needs to be in good, clean, liveable condition. Cosmetic improvements and more modest renovations can often add value. A fresh coat of paint, new carpet or polished floors and even a modest kitchen or bathroom upgrade are perfectly reasonable over time. These can be done for between $15,000 and $20,000. If you have had consistent rental income since buying the property and tenants have been happy, then consider whether a more modest renovation would suffice. If you are holding the investment property for the long term, ask yourself whether the extensive and costly renovations would attract income sufficient to mitigate the extra cost of the improvements. If you intend to do a more substantial renovation, such as adding an extension or second storey, the time to do so is immediately before you sell, not during the holding period. This is because the homebuyer market will value a brand, spanking new renovation more commercially than the rental market and is likely to be prepared to pay something of premium for it as long as the additions are conventional and lifestyle enhancing.

Signs augur well

There is plenty of media coverage at the moment in regard to the top end of the real estate market seeing very high prices. Is this just the usual spring rush, or do you think it will continue?

We started this spring market with a lower than usual amount stock coming up for sale. While we have seen some buyer hesitation in the middle and outer-ring suburbs, this has not been the case for prime properties in the blue-chip areas. Good stock has been snapped up at higher-than-expected prices. Some key areas are still undersupplied. There has been very strong buyer competition, particularly for anything in the vicinity of $650,000 and above. Houses and prime apartments are showing quite surprising prices. Many of the sales we have observed are owner-occupier driven, but investors have also been very active. Family homes close to schools, shops, public transport and quick CBD access are moving off the market very quickly. Clearance rates are strong and if they remain so for the rest of the year, this augurs well for market conditions in 2007.

Sale or auction?

Can you give me an idea of when a property is best suited for an auction and when it should go to private sale? I’m not sure which way to jump on this one.

There are some basic principles you can follow, so use them as a starting point for discussions with selling agents before you appoint one. This sort of decision needs to be made on an individual property basis. Auctions tend to work best for properties with classic building styles in established, sought-after suburbs where buyer demand consistently outstrips the limited supply.

When used correctly, the auction method gives you three bites of the proverbial cherry. If a realistic reserve is set and an effective marketing campaign is carried out, you can sell before auction if a strong offer comes in; at auction under competitive conditions; or after the auction by private sale if the property is passed in. Private sales often achieve optimum results for properties that either don’t have scarcity value or are scarce, but won’t appeal to the wider market place or the majority of the population. Private sales are more common in outer-suburban or regional areas. The bottom line is that anything unlikely to attract sufficient interest under open and competitive bidding conditions may be better sold privately. If in doubt, engage the services of an independent adviser.

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

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