Property's scammers are back

Whenever there’s a whiff of a gold rush, it doesn’t take long for the “camp followers” to turn up with a wagonload of saleable items.

We might have swapped the wagon for a jumbo jet, but the result is the same: vast amounts of cash looking for affordable investment entry points.

There is a very strong sense of déjà vu as some eastern states developers wheel out aggressive marketing campaigns to cashed-up investors from “out of town” – especially from Western Australia – to sell off-the-plan apartments. Some of these promoters will bring you to Melbourne for tours of new developments, or you can stay home and have a virtual tour of yet-to-be-built properties.

Quite a few will offer the chance of “first pick – before the Victorians get a look in”, and many will have the word “bargain” attached to their offerings.

It amazes me how little time has to elapse before memories of disasters past are forgotten as the get-rich-quick promoters and scammers re-enter the fray and prey on the unsuspecting investor.

Typical traps include:

Inducements to buy off-the-plan. These properties are typically in high-rise developments that are, at best, run-of-the-mill, with little or no scarcity value. Beware of developments sold with tax, depreciation and rental guarantees as the cornerstones of the so-called “investment”. They are part of an over-supplied sector that has the capacity to produce an unlimited supply.

High-risk mezzanine finance schemes. Masquerading as property investment groups, these are in fact loan raising schemes that tout high returns. Recent disasters include Westpoint, Fincorp and Australian Capital Reserve.

Value-adding schemes. These encourage investors to buy under-developed assets, spend tens of thousands of dollars to improve them, then have them revalued in order to borrow against the supposed increased value to buy further assets. Promoters of this type of approach then encourage you to repeat this process.

Like any commodity, you get what you pay for in the property markets and it doesn’t necessarily hinge on the dollar amount! This is particularly pertinent for those buying sight-unseen and off-the-plan. New multi-unit developments are not a scarce commodity, and the difference in quality and value across the spectrum is vast.

Let me give you a typical example of where it can go expensively astray.

Apartments in a new high-rise development sold for $305,000 when they were released on to the Melbourne market in 1995, in a prestigious city fringe location. They were marketed off the back of a “big-name architect” and a high-profile developer. The current value of these apartments is in the vicinity of $400,000, an appallingly low level of growth over 12 years.

If the same $305,000 had been spent on an investment underpinned by the right criteria – high land value, right location, scarcity value and demand outstripping limited supply – the asset would now be worth $750,000–800,000. Not only did the original purchasers pay a premium price for the new development, their returns were further eroded by high body corporate fees charged to sustain lifts, security entrances and security parking. Depending on the location in the block, owners of the units with a less than optimal outlook or poor position would have fared even worse on their returns.

Because Perth prices have trebled in five years, making it the second most expensive Australian city after Sydney, there is an assumption that because Melbourne’s inner urban prices are gathering upward momentum, then any Melbourne property must be worth investing in, including the high rise apartment sector.

Think again! For a start, what drives Melbourne’s property market – and has done so over a much longer and more traceable history – is vastly different to what has driven its more modern western sister city’s recent property boom.

Given that scenario, the temptation towards new, high-rise developments is understandable. After all, they can attract higher rents because of their CBD or city fringe locations and they appear to offer an easy management and low maintenance option for the interstate investor. However, if capital gain is your main goal, then a five to 10 year investment in a run-of-the-mill new Melbourne CBD apartment is not going to double your money, let alone treble it.

All that said, not every multi-unit development is tarred with the same brush. If well selected, there is a handful of CBD and city fringe apartment buildings that offer exceptional quality and will show good growth and rental return on your investment. But, you won’t find any “bargains” – be prepared to pay a fair market price for a scarce, top notch asset.

Very specific characteristics to look for are:

• Pre-existing landmark buildings.
• Prime locations.
• In most cases, little or no likelihood of views being built out by other developments in the future.
• There are no other high-rise buildings nearby that would compete with or compromise the future capital growth potential or the lifestyle of residents.
• They are mainly owner/occupied and finished to a very high level of amenity.
• They possess a high level of acoustic privacy because of the commercial quality of the structure.
• They tend to be very tightly held, with buyer demand consistently exceeding supply.

Available properties in these types of buildings will usually be marketed and sold by well-known agents and/or developers and not offered at sales seminars, on bus tours or any other means of collective marketing.

Some prime examples in Melbourne are “Domain,” which was formerly the BP building on the corner of Albert and St Kilda Roads; “Panorama,” on the corner of Rathdowne and Queensberry Streets in Carlton and was previously an office complex; the “Republic” tower in Queen Street in the CBD; and “Kingston” on St Kilda Road.

It’s time for all investors to take a deep, unemotional breath and realise that successfully entering a buoyant market has nothing to do with missing the boat on a property rise. It has everything to do with what’s worth choosing from the cargo on board – and that hasn’t and won’t change.

Property Q&A

This week's questions cover:

• “Joint ownership” property ventures.
• Whether to sell in Engadine
• Prospects for the Perth market
• Speculating in Bunbury, WA

“Managed Joint Ownership”

Several subscribers have asked about information they have received from a company offering them the opportunity to invest in a “Managed Joint Ownership” property scheme. The scheme offers investors the chance to invest in “direct” property “for as little as $50,000”. The offer covers all aspects of the property market: residential, commercial, retail and industrial, plus vacant land sub-division.

The company in question is Queensland-based and the properties it either holds or proposes to build range from house and land packages to multi-unit high rise apartments, shopping centres, hotels and commercial, retail and industrial developments and vacant land sub-divisions. Each of these classes are subject to different economic influences and other driving factors.

This type of investment belongs on the “Watch Out!” list. You need to ask whether this is really a loan raising scheme that would allow the listed developments to go ahead. It is the ongoing quality and demand for the assets constructed, not the initial capital raising, that will determine how successful any of the property projects involved are and what your returns will be.

For instance, do any of the property projects listed fall into the category where demand will continue to outstrip limited supply for the longer term? Most of the properties and projects listed are new or yet to be built. At the very best, your $50,000 is being used to fund what appear to be highly speculative projects that may then be resold off-the-plan.

Whether to sell in Engadine

My husband and I have a dual-occupancy investment property in Engadine, on Sydney’s southern fringe, which being let on weekly rentals of $430 and $420. We have a loan of more than $1 million and are in two minds whether to sell one property to get out of some debt because we feel that the property market is not going to improve in the near future.

Sydney, like the other major CBDs has become a multi-faceted and multi-layered property market and each sector is subject to different influences. Because it leads the nation in terms of overall highest property prices, low affordability has hit hard in Sydney’s outer suburban fringe areas, according to figures from the Australian Bureau of Statistics and the 2006 Census.

Data from the Real Estate Institute of Australia shows there has been little, if any, price movement on the outer fringe and in some cases – particularly on the western fringe – prices have dropped. (To read more about the Sydney market read today's column from Peter Kelaher, click here.)

The upper end and inner-urban zone have started to move upwards again with auction clearance rates back to being close to record levels. You have obviously bought the investment property with a view to the longer-term retirement goal, so the question is whether you now have doubts about keeping your original retirement plans and/or whether this particular property will return the level of capital growth you expected.

Have the property professionally and independently valued and assessed for its future growth potential over the longer term. To give you a benchmark, you should expect capital growth to move ahead of inflation. If this is not the case then examine whether your funds would be better deployed elsewhere for a higher and more consistent growth rate.

Perth's prospects

I am considering buying an investment property in Perth. The property market has cooled after booming for the past few years. Where can I get some forecasts on possible growth –negative or positive – on the Perth property market.

Start by looking at the history of the Perth market. The past three years of growth has been nothing short of phenomenal, most of it fuelled by the resources boom. Prior to that, Perth’s prices showed very steady growth. However, within that market there will be areas that have consistently shown higher levels of demand over the longer term and it’s here you need to concentrate your research effort.

Rather than focus on the million-dollar mansions, concentrate on the consistent performers that range from well-located, older-style, one-bedroom apartments close to the CBD to smaller houses within an affordable price range, also close to all infrastructure and amenities. These types of properties are underpinned by demand that exceeds supply on a very consistent basis. You must buy into high land value areas rather than so-called growth corridors further away from the city.

Notice how growth in the Perth market is starting to stabilise as overall supply begins meeting demand. The outer-urban, new-growth areas of Perth are now starting to see prices levelling right off, according to figures from the Real Estate Institute of Western Australia. Once you determine the areas that have shown the most consistent, longer-term capital growth, keep a close watch on sales results for these areas over several months. Steer clear of off-the-plan property or anything speculative. REIWA data will give you an historical perspective, but concentrate on annual, not quarterly data.

The Bunbury attraction

A subscriber asks about property in regional Western Australia, particularly Bunbury, where prices have also risen sharply off the back of the resources boom, but according to the subscriber, are now starting to fall. Bunbury has seen $8 billion worth of mineral exports, with an additional $5 billion worth of projects mooted for the next three years with an expected influx of 5000 workers. The subscriber asks why prices have fallen in light of this and whether the initial jump in prices was too high for a regional city such as this to sustain. Also, what will happen to the upper end of the local property market and can a regional city sustain $1 million plus properties?

Bunbury has a population of about 60,000 and is about two hours’ drive south of Perth. Its economy is entirely reliant on the mining industry. By regional city standards it is a relatively small centre. Prices were pushed up dramatically through a sudden upsurge in demand as mining companies brought workers in and accommodation was at a premium. Sometimes a sharp rise in prices is due to either a higher than usual number of transactions in a particular price category or a lot of sales associated with a new development in which the prices are above those of similar stock in the established sector of the marketplace.

This regional market will even out as supply meets demand, so there is likely to be a limited pool of buyers seeking any $1 million-plus properties on a consistent basis in a small centre such as this. This is because the major cities and larger regional centres are largely driven by the demand that arises from a diverse range of economic activity as opposed to centres that are solely reliant on one economic sector. Also, ask whether the current population growth is likely to be permanent. It will take several more property cycles before a consistent pattern of demand emerges.

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.

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