Question Mark

The sell-down of commercial property portfolios launched earlier this year by high-profile players such as Sportsgirl's Marc Besen and Cape Bouvard's Ralph Sarich signalled that returns from Australian commercial property have reached their peak.

Investors are also being warned they can no longer expect the above-average returns created by listed property trusts (LICs) to continue in the future. Moreover, the nature of many LICs '” with a growing dependence on development profits and overseas assets '” has drifted a long way from the original notion of locally listed landlords.

Now, investors who prefer to retain a stake in bricks and mortar are searching elsewhere for the strong returns. Surprisingly, some are finding them in a sector not traditionally associated with high returns: residential property.

In most residential development projects, retail investors get the crumbs, while the developer takes the cake.

When a developer starts a project, most of the profit is made at the initial subdivision stage. As the project progresses, the profit margin gets progressively smaller. By the time the individual investor buys the finished product, it may have been used up altogether.

A prime example of this is the recent high-rise development explosion. The developers made a fortune when they bought land in what were then relatively undesirable locations, and built hundreds of units. The fact that they were able to obtain permits to build multiple units, and then carve the property up into so many titles is what made these developments so profitable.

Now, a new breed of unit trust managers are redressing the balance so that individual investors can access a slice of the profits at the more lucrative end of development projects.

WealthShare, a privately owned Victorian developer is one of the new entrants in the market. Spearheaded by property developers Greg Cotton and Frank de Groot, the company buys up small to medium-sized parcels of land and sells shares to investors via a unit trust. WealthShare subdivides the land and installs infrastructure such as roads, power and water. They then sell the blocks to first home buyers or builders looking to build homes.

Cotton says the trick to this strategy is buying into area where population growth is strong and consistent. If WealthShare gets this right, the rewards for investors in the trust can be substantial, with some projects in Victoria (Pakenham and Phillip Island) and New South Wales (Newcastle) returning about 20–40% gross in the past few years.

I want to make it clear that I’m not associated with WealthShare in any way, but I do like to see new options emerging for property investors in a market where there has been little innovation in recent years.

In an industry dominated by big developers taking the lion’s share of profits, it’s nice to see a company giving private investors a chance to get more direct access to property assets.

My mother’s house

I am a recent subscriber to Eureka Report and enjoy the high quality, no-nonsense journalism.

When my mother died late last year, my brother, my sister and I inherited the family home, located in well sought-after suburb of Sydney. The property was purchased in 1968 for $14,000, and was recently valued at $850,000.

We’d prefer not to rent the home out, and none of us can afford to buy it from each other because we all have mortgages on our own homes. We are resigned to selling it. Will we have to pay capital gains tax? If so, is there anything we can do to minimise the size of the cheque we have to send to Canberra?

Your property was purchased before September 20, 1985, so the tax office won’t ask you to pay capital gains tax on it, provided the property is sold within two years of being inherited. The tax office cannot extend this period.

It does not matter what you use the property for in the interim. You can keep it vacant, rent it out or live in it.

The tax office has very clear information on CGT. (Click here. Page 80 relates to your situation.)

Beach block

Two friends and I are looking at pooling our resources and purchasing a property as tenants in common in the Dunsborough/Yallingup area, part of the Margaret River region near Perth in WA. We’ll be doing this instead of paying extra into super, because we’re wary of locking up money until we retire, and we like the idea of using the property for our own holidays occasionally.

All of us have paid off our family homes, so we have a lot of equity at our disposal.

What are your views on the long term outlook for this area? Should we go for a small block with ocean views close to the beach, or a larger block further inland? How much do ocean views really matter?

Many coastal areas close to Perth have already had a very good run, so there’s unlikely to be significant growth in the short term. You should take a long-term view with any investment in these areas.

Gavin Hegney, chairman of Hegney Property Group, believes that just as growth in the Perth market is driven by the resources boom, growth in the Dunsborough/Yallingup area is driven by a burgeoning number of Perth baby boomers using the increased equity from their Perth homes to buy in coastal areas and change pace as they enter retirement.

Once the Perth market cools '” as it inevitably must once it grows too far above the reach of purchasers '” it’s likely there will also be a cooling in nearby coastal areas. The money invested in holiday areas is usually discretionary, so holiday homes are the first to be sold when money gets tighter.

Regarding the property’s size and location, a smaller block will be less expensive to maintain and will likely be in a more sought-after location. A larger block set further away from the beach may create the possibility of a subdivision later on, enabling each of you to own separate parcels of land.

Regardless of whether you opt for a small block near the beach or a larger block further away, the key is to look for property that has a genuine point of difference from others in the area.

For example, property with water views, within walking or short driving distance of shops and cafes, will be more sought-after, and therefore more likely to deliver sound capital growth.

Loss on an investment property

My husband and I bought a residential investment property in Brisbane in 1976. It had a written valuation of $600,000 about one month before my husband’s death in 2003. Now, a real estate agent has estimated a potential sale price of $550,000. I’m in my early 60s and want to sell that property to free up money for my retirement. Can I claim a capital loss for the $50,000 gap between the previous valuation and current likely sale price?

You are not able to claim the $50,000 as a capital loss. A capital gains tax event only occurs when a gain or lost is “crystallised”, that is, when it is sold. A valuation is not considered a capital gains tax event and as a result the loss was not crystallised.

On a more positive note, you purchased the property before September 20, 1985, so you won’t have to pay any capital gains tax when you sell it. I suggest you talk to your accountant for a full review of your situation before making any decisions regarding the sale of your property.

Land in the country

My partner and I are in our forties and own our home outright. We also have a two hectare residential-zoned block of land an hour’s drive north of Melbourne. The land is worth $300,000 and the value has not risen in the past 12 months or so.

We have a small number of shares, no debt and no super and we run a business with just enough income to cover our living expenses. Because the land produces no income, we are thinking about selling it and diversifying into shares or investment property. Should we hold or sell? What’s your opinion?

I haven’t seen your block of land so I can only respond in general terms. Broadly speaking, if you have $300,000 invested in property that’s not returning any money, the asset isn’t working for you.

Before you sell, however, give some thought to what’s likely to happen in the local area over the next five or 10 years. Speak with the local council and find out whether any residential development is planned for the area.

If the land is in a future residential growth corridor, you may be sitting on a potential subdivision that could significantly improve the capital value of the land. If the potential for subdividing and capital growth is poor, then you may be wise to sell the land and invest the proceeds in a more productive asset.

Mark Armstrong is Director of Property Planning Australia, an integrated property advisory and mortgage sourcing service. He
also writes for Australian Property Investor magazine.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au