Property's tarnished trophies

PORTFOLIO POINT: It’s getting bumpy at the top end of the street, but property investors should avoid that zone anyway.

This Christmas, why not spare a thought for the rich and famous? By all accounts, times are tough at the top of the property market – north of $5 million.

While Australians in Battler Avenue are resigning themselves to a modest 5–10% capital growth rate for 2010 after a bumper 2009, their rich cousins in Loaded Heights have seen the value of their trophy residences drop by millions of dollars.

It’s important to note that by and large we are talking about primary residences here. And the questions that inform the purchase of a residence are vastly different that those that inform an investment.

But before we get into that, let’s take a look at some of eye-watering prices out there.

In March, 'Carrara', a three-level villa in Vaucluse, Sydney, sold for $27 million. Across Sydney Harbour, Mosman recorded sales of $10 million for 'Sabina’ in February and $13 million for a Morella Road abode in April.

However, the vendors may have been a little disappointed. I’ve tracked down previous sale prices and calculated that these properties have experienced annual capital growth of just 5% (over four years), 4% (over 20 years) and 6% (over three years), respectively.

That doesn’t take into account inflation or the high maintenance costs of these properties. The prestige market has weakened further since then.

Number 3 Balmoral Avenue in Mosman sold for $8 million in August. In December 2006 it had sold for $7.75 million, so it has gone sideways in four years. Number 6 Wonga Road was marketed for $8 million in May 2009. Presumably after struggling to sell, the agent was changed and it was re-listed at $5.9 million in January. It finally sold for $5.3 million in September. The previous sale had been in January 1992 for $1.5 million – a nominal return of 7% per annum over 18 years (but less than 5% after inflation).

Of course now that billions of dollars in raw materials are being ripped out of the ground in WA, Perth now holds the record for Australia’s most expensive residential property transaction.

Angela Bennett's Mosman Park property sold in late 2009 for $58 million. However, it was on the market for a couple of years with a quoted price of $85 million, so it was either heavily discounted to sell or overpriced in the first place. And at this end of the market it’s hard to tell and that’s what makes investing in it so fraught with difficulty.

While Melbourne can’t boast the highest prices, prestige property appears to have performed better than in Sydney and Perth in recent times. New Premier Ted Baillieu might have been a little sore to see the Toorak house he and his siblings sold in 2009 for $15 million fetch $25 million in March 2010. Meanwhile, steel magnate David Smorgon sold his Toorak pile for $16.5 million in February 2010, a 12% annual return from his $3 million purchase in October 1995.

“Melbourne’s prestige market doesn’t have the dramatic upswings and downswings of Sydney or Perth,” says Scott Patterson, a director of Jellis Craig. “Prestige properties have performed broadly in line with the rest of the market. They rose until April, when prices regained their 2007 peaks. Since then increased supply and the distractions of elections and the AFL Grand Final replay has seen prices soften. Brighton and Stonnington have fallen by 5–10%, while Boroondara is tracking better. I put that down to the sustained attraction of the best schools,” he says.

Rich Harvey, managing director of Sydney-based Propertybuyer, says the current market is very patchy. “The second half of 2010 has been worse for vendors than the first half of the year. Enquiries from expats and foreign buyers – a significant buying group – are significantly down,” he says.

Harvey believes there are a few distressed sellers out there. “Of course, they won’t be marketed as fire sales. Properties in areas like Mosman and Vaucluse will be sold discreetly off-market.”

Nevertheless, Harvey is confident of future growth prospects in Sydney. “Property tends to move in cycles of 7–10 years. Sydney’s last boom peaked around 2003. So we’re due another peak around 2013. And with the recent weakness in the market, I think there is good value out there for the buyer with $10 million to spare.”

Scott Patterson feels the Melbourne prestige market will provide steady growth in 2011. “I think the market and prices will be more predictable, with results falling in the quote range more often than earlier this year.”

While wonderful to live in, and fabulous to show off, in my opinion, prestige property is not for investors. “Investing in prestige properties is a high-risk, speculative strategy,” Harvey says. “You certainly wouldn’t do it for yield. You may get the capital growth but you can’t bank on it.”

As the examples illustrate, you can go many years with modest compound growth in this market. In fact, I don’t recommend investing in properties above $1.8 million in Sydney or $1.5 million in Melbourne. If you buy an investment property you need to know you can rent it out and then sell it later, having achieved solid growth that outperforms the wider market.

There are too few people who can afford to rent and own these properties so your potential market is unnecessarily limited. Renters rightly expect a prestige property to be beautifully renovated and maintained, which is incredibly expensive. It is also hard to find long-term tenants. Usually, prestige properties are let to the likes of blue-chip CEOs who have moved interstate or from overseas. Invariably, they only hang around for a year or so before they move home or decide to buy.

With its shallow supply and demand, the market in prestige properties often exhibits substantial volatility, and is economically more reactive or vulnerable to changing conditions than the broader market.

Should you be fortunate enough to have several million dollars to invest in property, you are better served purchasing a number of sub-$1 million properties in a variety of locations than one super-prestige mansion. A portfolio need not have the cachet of a blue-ribbon manor, but over the long run the rental returns and growth are likely to be greater, and the diversified investment will certainly lower your risk.

Property Q&A

This week:

• Seaford, SA
• Kardinya, WA
• Noosa, Queensland

Seaford’s prospects

I am 58 and planning to work for another 10 years. My wife is 55 and works one or two days a week. We hold two investment units in Sydney’s eastern beaches and one in inner Brisbane. One area I am looking at is Seaford, South Australia, which seems to have strong growth drivers and strong rental demand. Seaford is showing steady growth but, despite an extended rail line opening there in two years’ time, I am a bit concerned about its distance of about 35 kilometres from Adelaide’s CBD. A more than adequate rental home can be bought in Seaford for $400,000, returning about $380 a week.

Seaford marks the effective southern edge of Adelaide – for now. Its attractions include the beach, close proximity to the McLaren Vale wine region and reasonably priced housing.

However, as you have noted, it is a fair hike from the CBD by road, and with the rail extension, it will be 20-plus stops to the Adelaide CBD. As such, Seaford does not have the appeal of inner Adelaide suburbs for city desk jockeys. I also see that there are plans to develop an adjacent suburb – Seaford Heights – which promises significant additional supply in the area.

You have invested well to date in Sydney and Brisbane. There is a reasonable case for investing in Adelaide. In the past its capital growth has tended to lag the bigger capitals. A number of commentators tip South Australia to reap the resource industry gains of Western Australia and Queensland once the Olympic Dam project reaches its potential in a few years.

However, I would recommend an established suburb much closer to the CBD than the areas you identify.

Kardinya’s future

How do you envisage prices will perform in the established suburb of Kardinya in Perth in comparison with new developments such as Beeliar, Success and Hammond Park, 10–15 minutes further south of the CBD? We’ve recently paid $550,000 for our first home – a neat, bright three bedroom property on a 700 square metre corner block with dual access, directly opposite two parks and close to the shopping centre.

There is some redevelopment underway, which I welcome and hope that it continues as it breathes a new lease of life on the area. Ultimately (within the next six years) we would like to build or buy a new/near new home in Melville. From a capital growth perspective, would we have been better off buying a new home in the new developing areas? They seem to have had some significant price increases over the past couple of years owing to the influx of first-home buyers.

The first point I’d like to make is that you must keep your lifestyle decisions quite separate from your investment decisions. As such, I suggest you focus on reducing debt on your home and investing using very specific investment criteria. Neither Kardinya nor the other suburbs you mention are prime investment areas. Their distance from the CBD is a long way out for a small city.

Kardinya is a 20-minute drive from the Perth CBD and 15 minutes from Fremantle. It is close to Murdoch University and the Kardinya Park shopping centre. Median house prices are about $600,000, with five- and 10-year annual growth of about 12%. Beeliar, Success and Hammond Park have indeed marked up greater returns over this period, albeit from lower bases, and median prices remain about $100,000 less than Kardinya.

Saying that, I believe Kardinya’s proximity to Murdoch University makes the suburb a better prospect than those to its south. The neglect of some of the rental properties may reflect landlords targeting the University market and students of modest means not presenting properties in top-notch condition. Over time, these properties tend to tread water in view of the transient nature of the rental population.

With a median price around $700,000, Melville may be a desirable – and attainable – next step on the home ownership ladder for you. I think it is sensible to wait a few years, so you are not wasting money on transaction costs. While Melville may well appreciate faster than Kardinya in the interim, you should still have sufficient equity in your Kardinya property to put a solid down payment on your Melville dream.

If, however, you are serious about investing to make money, focus your attention on one-to-four kilometres from the Perth CBD.

Noosa bust?

We live in the wider Noosa region and all properties have hit a wall, especially apartments. Homes will sell if desirable and discounted. The top end has dropped a minimum of 20% and I have examples of properties that had been priced at $2.5 million selling for $1.5 million, excluding resorts that have gone bust. In the Sydney market, we left almost two years ago the Mosman area is in big trouble. Most people with regional investments would be hard hit. Obviously the near-city is good below a certain price level. Is there a bust?

Prices for apartments in Noosa Heads have seen negative growth over the past five years, according to Australian Property Monitors. The area is a salutary lesson about the consequences of investing in non-prime real estate.

When interest rates rise and economic and/or tourism spending is tighter, then areas that will be hardest hit are: oversupplied; reliant on just one or two industries; lacking a diversified population profile; or have sparse employment opportunities.

Unfortunately, Noosa ticks all these boxes and appears to be in the midst of a downturn in its fortunes. Despite their allure, the fact is that small resort-type property markets display substantial volatility and are most vulnerable to economic ups and downs. In spite of Noosa’s waning market conditions, it will recover in time.

Although I question whether matters are as bad as you portray in the other regions you cite, I’m happy to share your views with subscribers as another voice to consider. I’m confident that barring a return to GFC conditions or an external factor that causes the banks to raise interest rates another 100 basis points (say an incredible tightening of access to overseas finance), then I see prices remaining steady. We are not in a national property bust by any means.

Monique Sasson Wakelin is Managing Director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors.

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? Send an email to monique@eurekareport.com.au