The outlook for the west and the rest

PORTFOLIO POINT: Apart from Canberra, where property prices might firm during 2012, the outlook is flat for other capitals away from the east coast.

Last week I considered the outlook for Australia’s three biggest cities: Sydney, Melbourne and Brisbane (see Will property rise in the east?). I now want to look at the prospects for the other five capitals: Perth, Adelaide, Canberra, Hobart and Darwin.

Here is how I see the cities performing relative to one another and Sydney, Melbourne and Brisbane.

Perth

Perth property performed comparatively well in 2011, behind Sydney but ahead of Melbourne and Brisbane. But in absolute terms, the 4% drop in prices was nevertheless disappointing. Perth’s weakness appears to be based on depressed sentiment brought on by anxiety about the world economy rather than local fundamentals, which look positive for Perth.

This disconnect between market sentiment and the fundamentals is having a curious result, according to Gavin Hegney, executive chairman of Hegney Property Group. “By the end of 2011, we saw Perth rents rise by 6.5% over the year, of which over half of the rise came in the last three months and that’s because the vacancy rate dropped significantly,” he says. “If the trend continues, we’ll have yields on residential property this time next year of 5.5%, with interest rates on bank savings likely to also be around 5.5%. In all my time observing property, I’ve not see yields equalling interest rates before.”

In theory such circumstances would be a signal for property investors to jump into the market and drive property prices higher. However, Hegney doesn’t expect strong price performance. “I expect some further losses in the first quarter of 2012 – even three to six months out – and then some gains in the second half of 2012,” he says. “Gains will be unspectacular. I see price growth in line with GDP, say 2–3% for the next three to five years, so in real terms property in Perth will probably go backwards.”

I am perhaps a little more optimistic than Hegney about Perth’s outlook. I suspect sentiment will shift into line with fundamentals more quickly, and price growth will be a bit stronger than GDP over the coming years – assuming the mining sector remains relatively robust.

Adelaide

Traditionally, Adelaide has been characterised as the Mr Average of Australian property. It tends to be in the middle of the pack in terms of price performance and values. Last year was no different, according to Adelaide-based Mark Robbins, director of valuers LMW Hegney. “Whilst the number of transactions was down and the marketing periods required to achieve sales were typically longer than that of previous years, prices declined only marginally with the median house price over South Australia declining by less than 5%,” he says. “Given that Adelaide has historically been less volatile than the eastern and western seaboards, this result was expected.”

Robbins believes the Adelaide market will be flat in 2012. “On a quarter-by-quarter basis I would suggest continued marginal decreases in Q1 and Q2, with marginal increases in Q3 and Q4 as the impact of the interest rate cuts filter through. Overall, I predict that prices at the year’s end will be steady.”

Canberra

Canberra continues to surprise on the upside. Despite only Sydney having a higher median value, Canberra recorded the second-best result for capital city price growth in 2011 – down just 2%. With its economy reliant on being home to federal public servants, I believe its property market is vulnerable to cuts in government expenditure. Those cuts should eventuate if the Gillard government is to return its budget to surplus in 2012-13, as promised.

Perhaps those in the know in Canberra just don’t believe those cuts will actually come! Further, Canberra is benefiting from the long-term trend for power to be centralised away from the states into Canberra.

Median rents in Canberra jumped 6.4% during 2011, according to Australian Property Monitors, which has been linked to a rental stock shortage. In light of the above, I suspect Canberra prices will see further modest price growth in 2012, although I still believe the long-term outlook remains volatile and too dependent on which way the wind blows on Capital Hill!

Hobart

It’s hard to identify a catalyst for property to perform in Hobart, notwithstanding it and Tasmania’s beauty. Hobart tends to experience capital growth during strong national economic and property growth after other cities become much more unaffordable and also when mainlanders look to buy holiday homes there. With affordability improving elsewhere and the holiday home market fraught, these drivers are not in place.

Economically, Tasmania is struggling, with unemployment at 6.4% in December, according to the ABS, compared to a national rate in the low fives. Hobart’s economy and property will naturally obtain a boost from lower interest rates. However, Hobart’s lower property prices equate to lower levels of debt than in other cities, so I expect to see its market stagnate in 2012. Investors can therefore take their time to ensure they buy an established property within three kilometres of the CBD.

Darwin

Investing in Darwin is a high-risk activity. It is a property market whose dynamics are more akin to a resources boom town than to that of a conventional capital city. It has a population of just 130,000, but it has the highest median rent of all our capital cities, and the fourth highest median prices – for now.

Much of the town’s touted future prosperity is dependent on the offshore gas industry being planned off its coastline. I suspect the positive impact of that prosperity on the Darwin economy and its property market may be overdone. But nobody really knows what will happen there. In the meantime, Darwin property may do well in 2012 off renewed economic optimism.

Note that together these five cities have a significantly smaller weight than the top three in terms of population, economic output and diversity. For instance, Sydney, Melbourne and Brisbane are home to 10.7 million Australian residents, or 47% of the population, according to Australian Bureau of Statistics figures. In contrast, a total of only 3.6 million or just 16% of the population live in the smaller capitals.

I include this data to give you pause for thought before investing in the smaller cities, simply because some may be due a good year in 2012. With the exception of Perth and Adelaide, our smaller capital cities represent a speculative property proposition. This is because small city populations tend to be less economically diverse and therefore are more vulnerable to economic shocks. Consequently, demand for housing and property prices are generally volatile and it makes forecasting the outlook inherently more difficult.

For those who are keen to invest in our smaller cities, stick to established properties within a handful of kilometres from the CBD, and understand that this is an investment choice that needs vigilant monitoring due to its speculative nature, and may only be a short term option.

Property Q&A

This week:

• An investment in Canberra.
• Should we switch from shares to property.
• Newcastle student accommodation.
• Calculating strata fees.

Canberra

We are selling our family home to fund entry to a retirement village. However we wish to retain an interest in the property market and are thinking of buying an investment property (negatively geared) in or near the CBD in Canberra where we live. What sort of property should we consider and how do we find a reliable property adviser?

Your budget will determine whether you opt for a two-bedroom house or a one or two-bedroom apartment. Whichever it is to be, ensure you stick to a zone spanning one to four kilometres from Lake Burley Griffin. Only buy established properties with a track record of performance, on a quiet street. Look out for where top public servants gravitate to in terms of residences and socialising. And remember that property in the ACT is leased for 99 years rather than bought.

A good property adviser can help you identify the performing properties. Contact the Real Estate Institute of the ACT, which should be able to provide a selection of firms. Ensure that the adviser does not have an association with a developer or real estate agent and that they operate exclusively on a fee-for-service basis. When they recommend a property to you, they must only be receiving remuneration from you.

Shares to property

With the outlook for the sharemarket looking flat for some time, and talk of inflation rearing its head again, would now be a good time to switch from shares to property for a greater lift if inflation rises? I am disappointed with the greed of those running companies and looking after themselves while shareholders are left to fend for themselves. It may be opportune to look at property as the preferred investment for the next decade or so. It should be safer, less volatile, starting from a low cost base, always on the demand curve, less subject to manipulation, politically sensitive, and can now fit within an SMSF, geared or not, if desired. Would you give your comments and experience on this topic to assist readers analyse their own ideas?

What a well put and articulated question. I understand your anger with many in the corporate/finance world; it is absolutely justified in many instances. It may be the case that the lessons of the financial crisis are eventually learnt and issues of corruption, greed and poor governance are genuinely acted upon and resolved, but I am not naïve enough to be too hopeful. I agree with you that direct residential property investment allows investors to avoid many of these corporate sins.

Saying that, I don’t believe it is a case of either/or when it comes to investment strategy. A key principle is to have diversity, so I think investors should ideally seek to have shares and property, and be very selective and obtain truly impartial advice in both areas.

Of course, one of the great attractions of residential property that you touch upon is the versatility and control. But control can be a curse if not wielded carefully. Too many property investors buy the wrong sort of assets, especially when it comes to SMSF ownership. Moreover, many relinquish this control to financial advisers and developers who dupe them into buying second-rate assets. We have to remain ever vigilant to these spruikers, many of whom will have jumped ship from peddling stock market scams.

On the matter of rampant inflation, I’m not sure that we are likely to see its return in the foreseeable future – at least not in Australia – as the Reserve Bank would proactively use higher interest rates to combat it.

Newcastle

My husband and I are thinking of buying an older house in good condition in Newcastle, about four kilometres from the university, with the intention of renting it to students. The purchase would be unencumbered through our SMSF. However, a friend who was a real estate salesman some years ago (and often quotes prices in the past!), has warned us that the price of property is going to drop 20% and that we should wait. We know that rental returns in Newcastle are good and that there is a rental crisis. We are aware that a lot of mining goes on in the Hunter Valley, which must benefit Newcastle, and are also aware that there is simply not enough uni accommodation at the present time. Our concern is to what extent the global situation could possibly cause property values in this area of Newcastle to drop significantly.

There are two issues to consider here. Is it a good idea to invest in Newcastle and is the student accommodation market a segment to pursue?

With a population of more than 500,000, Newcastle is bigger than three of our capital cities: Canberra, Hobart and Darwin. It has a reasonably diverse range of industry, although mining remains a big driver of economic activity. Investors contemplating Newcastle often view it as an alternative to buying in Sydney, and are attracted by prices that can be $200,000 cheaper than equivalent properties in the capital.

My preference, however, is for investors with small budgets to use the funds to buy high quality one-bedroom units in Sydney rather than a house in Newcastle. I doubt Newcastle is due a 20% drop in prices – unless China implodes and its demand for coal does likewise – but smaller cities are always more reactive to economic ups and downs.

It is true that there is a shortage of university accommodation in Newcastle. However, unlike many other universities in Australia, the University of Newcastle has chosen not to increase its intake in 2012 despite the removal of intake caps by the federal government, so demand is likely to be stable rather than increasing.

I’m not a fan of student accommodation as an investment. Generally, these properties are purpose-built or are offered to students as a last resort because people who are willing to pay more find them unattractive either due to the location or the state of the property. The low and narrow demand for student property, combined with a lack of qualities that would make them a scarce commodity, do not augur well for capital growth. There is also a high level of wear and tear on student accommodation due to high tenancy turnover.

Strata fees

How are strata fees calculated? We note some units (both residential & commercial) have higher than usual strata fees. Is this set by managers or committee?

Strata fees are calculated by the Owners Corporation or Body Corporate or Community Corporation (the nomenclature differs between states but the purpose is effectively the same throughout Australia), an entity that consists of all the unit holders in a building. Each year a budget is created by considering the annual common area and building maintenance costs, gardening, security, necessary insurances and so on plus (hopefully, if the corporation is astute) a contingency of some small amount for a “rainy day” sinking fund. Fees are divided according to individual owners’ apportionments as per the legal document that governs the owners’ entitlements and liabilities.

As you can see, it is a fairly democratic and transparent way of doing things. It is certainly true that strata fees vary dramatically from building to building. This can be due to differences in facilities. A building with multiple lifts, a gym and a swimming pool is far more expensive to maintain than a two-storey, four-unit apartment block with one flight of stairs.

However, note that low strata fees that are out of line with norms suggest that the Owners Corporation is skimping on maintenance, usually a sign of dysfunctional governance. This short-term attitude will of course eventually lead to the building deteriorating, which will affect resale value of individual units. Hence, it is always important to look at the minutes of recent Owners Corporation board meetings before you buy a unit to see what is really going on.

Monique Sasson Wakelin is managing director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter @WakelinProperty.

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