The dollar and your property

PORTFOLIO POINT: The strong Australian dollar will only affect a niche of the Australian market, attractive to overseas buyers, but it has led to more Australians considering buying offshore.

The Reserve Bank’s unexpected 25 basis point increase in the benchmark cash rate last week prompted a surge in the Australian dollar above parity with the US dollar for the second time in a month.

The strength of the dollar is great for overseas travellers and importers, but what impact will it have for Australian property investors in our own market? And is it a good time to buy property overseas?

The impact on property can only matter if there is a significant volume of overseas property owners and prospective buyers. Earlier this year, there was a furore over whether Chinese nationals were taking advantage of the Foreign Investment Review Board’s (FIRB) supposed lax oversight of rules restricting temporary residents to secure prime real estate and bid up property prices in the process.

The federal government responded by tightening up the rules. At the time I stressed that it was all a storm in a tea cup – an unpalatable brew of xenophobic scaremongering and populist political rhetoric (see Canberra’s latest property puzzle).

True, foreign buyers may have an impact in some niche property sectors (see Property and the China effect), but overall it is too small to affect prices for the broad residential property market.

And as you’ll recall from Economics 101, the strength of the Australian dollar in recent months will have likely discouraged many overseas investors.

Rich Harvey, managing director of Sydney-based Propertybuyer, says overseas buyers have had a marginal impact on the Sydney market in some specific instances. “Foreign investment rules limit most temporary residents to the new apartment market, and in Sydney you need a decent budget to buy in this space. On occasion, we have seen an effect where a local development has been heavily spruiked abroad. But these are the exception.”

Anecdoctal evidence indicates that overseas buyers target areas around elite schools and universities, according to Harvey. “We’ve seen a lot of interest in property near Loretta School for Girls, North Sydney Boys, North Sydney Girls and Killara, to name a few schools.”

Harvey believes the strong Australian dollar has been a brake on activity. “Typically, overseas buyers are delaying their entry into the market, waiting for the dollar to fall again. Or with their diminished purchasing capacity, they have opted to buy something cheaper.”

Harvey warns about overstating the overseas effect. “In many ways, overseas buyers are simply mirroring the approach local buyers take, by choosing quality properties in quality locations. And despite the stereotype, they aren’t reckless purchasers who pay over-the-top prices.”

Perhaps a more genuine trend at the moment is the interest from Australians in investing in overseas property markets, particularly the US and the UK. At first glance, the rationale seems sound: an apparent once-in-a-generation opportunity to snap up super-cheap overseas property depressed by the GFC, supported by a very favourable exchange rate.

Indeed, a number of firms are marketing this very appealing offer to Australian investors. For instance, My USA Property has a number of three-bedroom houses listed on its website for $50,000 or less in Memphis, St Louis and Kansas.

The principal selling point is the high rental return, purportedly 10–20%. There is also the hint of a prospect of future capital growth. Or, as My USA Property puts it: “Once American banks start lending again, the US market will recover. So you’d be wise to invest in an undervalued market now since every Australian dollar buys more.”

As reported last week, there is no doubt these advisers do their homework in terms of the differing tax laws, ensuring transfer of properties accords with local rules and so on (see Your US property primer).

However, based on fundamentals, I have to say buyer beware. In short, there is a terrible danger of buying in an unfamiliar market, and doing so sight unseen.

Many of the properties for sale are highly questionable assets. In some cases they may have been vandalised by their foreclosed owners and need substantial investment to restore them to a tenantable state.

Regular readers know that our approach to property investment is focused on finding those assets that will provide the best capital growth; yields from rental income are a secondary factor.

The US is far from out of trouble economically. Only last week the US Federal Reserve pumped another $US600 billion into the economy to stave off deflation, and with near-zero interest rates and mind-boggling public debt, the government is running out of ways to turn things around.

Even if you believe things will get better in the US sooner rather than later, and really want to get into that property market, it is a false economy to buy something because it is “cheap” or a “bargain”. It does not usually translate into high-quality performance.

It is the higher-priced properties in more affluent US cities that are more likely to bounce back quicker and higher than fire-sale dwellings in rustbelt counties.

The grass is not always greener on the other side the low land values and massive overhang of US properties show. My advice would be to stick with high-quality property in Australia.

Property Q&A

This week:

• Should we buy in the UK?
• Is a Victorian replica a sound idea?
• I’m considering an NRAS property.
• Should I stay in Morningside?

UK connection

My daughter and her English partner, who live in Sydney, are contemplating buying a residential property in the UK. They see an opportunity to take advantage of the depressed UK market, favourable interest rates and foreign exchange position. Then, in say five years, they may be able to take a profit and enhance their residential position in Sydney. A good idea?

These are uncertain economic times in the UK. A recovery of sorts is under way, with GDP rising and unemployment falling in recent months after an 18-month recession. Last month the new Conservative/Liberal Democrats government introduced major spending cuts to reduce debt, including an expected 500,000 job cuts in the public service. Economists and commentators are debating whether these austerity measures will kill or support the nascent recovery.

House prices in the UK are about 15% off their pre-GFC peaks of late 2007, having recovered somewhat in the last year from the 22% peak-to-trough drop in early 2009. The latest data suggests prices are softening again. While the circumstances of each individual are different, I am prepared to offer the following assessment based on the limited information you have provided.

Like the US market, the UK housing market is not homogeneous. The national figures mask large variations in performance across the country, and there are wide differences in socio-economic conditions and outlook. London and the southeast – the most affluent part of the UK – will contain more quality prospects than elsewhere.

Your daughter’s quest will be aided by her partner’s local knowledge (assuming you’re buying in an area where he has lived), but that market is on the other side of the world, with all the problems distance brings. Remember that a five-year investment period is also a little short to ride out the economic cycle and the acquisition and disposal costs of housing. Consider seven to 10 years as the minimum.

You’ve mentioned the fair winds of low interest rates and exchange rates in the UK. They’re in your favour now, but it is difficult to predict what will happen, and how the interplay of these factors will affect the investment. Suffice to say that investing in property abroad is much more complex than doing so at home, and is not for the faint-hearted – especially when there are such good investment opportunities available on your doorstep.

Victorian replica

A prospective investment property I’m considering is a replica or reproduction Victorian weatherboard that is in keeping with the original houses on the street. Do you have any concerns?

A well-executed replica house has a number of attractions: the aesthetic beauty of a timeless classic with 21st century building standards and fitout. Ideally, it will include a modern internal layout that appeals to contemporary tastes, such as having the living area at the back of the house. Maintenance should be significantly lower, and buying a reproduction property could deliver substantial building depreciation benefits. These factors will entice renters and support a higher rental return.

It is important that the reproduction is authentic. When poorly done – with, say, aluminium windows on a weatherboard cottage – the resale value will be diminished compared to the well-maintained originals on the street. Avoid being smitten by a beautiful replica if it means that the building is now more expensive than the land it sits on. Land content must form the major part of value for any successful property investment.

I would never rule out the investment potential of a replica out of hand. If the design and implementation is first-class, and the house is in the right suburb and right street, then the prospects are promising.

NRAS property

I have just read your article on NRAS (National Rental Affordability Scheme) subsidised housing in the western Brisbane suburbs and agree with your wary view. However, I am tentatively looking at apartments in the Brisbane CBD, which seems to fit your criteria for quality assets. It is part of a NRAS scheme and would be positively geared and potentially have the growth you estimated. I would be interested in your opinion. It would be purchased in our SMSF.

As previously discussed, the NRAS is an initiative whereby the state and federal governments provide incentives for investors to buy new rental housing that is then let to disadvantaged members of our society.

The NRAS is a very worthy scheme from a community point of view but these property types tend not to perform as prime investments. The properties are typically in compromised locations and of a type without the lack of architectural scarcity required for optimal growth. However, they might suit investors who are happy to forgo investment performance in order to be part of a community scheme that aids affordability.

Although buying a quality apartment in Brisbane’s CBD (and by quality I mean low-rise, a small number of units and with a degree of architectural scarcity) allays some of my concerns about NRAS-related investments, there is still a problem. I don’t recommend positive gearing unless it is legitimately achieved via a strong equity position. High levels of gearing that still produce a positive cash flow should be a loud warning to investors to steer clear because it’s a signal for very low growth and underlying demand. The NRAS subsidy – about $10,000 a year – will not compensate for the lost capital growth an investor could gain from a superior property.

Morningside

I am seeking your advice on whether to sell my property in Morningside, Queensland. I have a property that is only five minutes from the station. However, there have been units built around the area and my neighbour has just informed me that they will be building eight multi-unit dwellings. I only bought the property in 2007 for $406,000 and the rental has been $435 a week, which does not cover the interest and is therefore still negatively geared.

For investors unfamiliar with the region, Morningside is about five kilometres southeast of the Brisbane CBD. It has a large proportion of owner-occupiers, and exudes a sense of owner-occupier pride. It is well served by the restaurants, cafes, parks and shopping, and it is close to a number of schools.

Transport connections are excellent: the city is close by and easily reached via road or by train. Brisbane international airport is only a 20 minute drive away. However, these communications links are a double-edged sword. Much of Morningside is under an international flight path. The noise detracts some buyers and often sees a large turnover of tenants.

Morningside is a destination for first-time upgraders – such as growing families – looking for more space. Home-owners and investors are attracted to Queenslander-style housing that is common in the area and since 2007, property price growth has been modest, averaging a single-digit figure.

A large number of multi-unit dwellings in the vicinity of your home – especially an adjoining one – is cause for concern. It is also possible that more developments will be approved. These factors suggest that the capital growth prospects of the property may well be seriously compromised. It may be time to look elsewhere.

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