Upmarket, in a narrow street

PORTFOLIO POINT: Top end property that appeals to relocating executives may not always make the best investment. Intending buyers should do their homework.

An interesting property caught my eye recently, a smart looking townhouse developed out of an old shop in a high land value suburb next to the CBD.

Marketed as the perfect investment opportunity, the property was in a mixed location surrounded by shops, houses and small office suites. Inside, the floor plan featured a wide and open entertaining space downstairs, but upstairs the plan struggled to integrate two bedrooms and a bathroom. The interior design was very modern, giving the townhouse the feel of a boutique hotel.

Then it dawned on me: I was standing in one of the growing number of properties designed specifically for the executive relocation market.

Once the exclusive domain of CEOs and CFOs, executive relocation has grown rapidly over the past decade with organisations finding it cheaper to move top talent interstate or even overseas. As relocating has become more common, the profile of the people being moved has changed too, with many more specialists in areas such as finance or IT moving to a new city for a project or a business launch. Often singles or couples in their 20s or 30s, they come without children or a house full of furniture, which makes their property needs quite different from the traditional family.

Investors tapping into the market often focus on this younger demographic, so to get an insight into this group, I spoke to Kathy Nunn, who founded Elite Executive Services in 2001.

“There has been a real change in this market over the last two years”, she told me. “Many of the properties in the $2500 a week category for the more senior executives and CEOs are now in extremely short supply. During the GFC the number of Australians being relocated overseas shrank significantly but there’s no shortage of overseas executives who want to come here. That makes finding the right property in the top end difficult.

“But what I find really fascinating is the mindset younger executives bring to choosing a property in a new city. For a start, they ignore everything locals think about a suburb and many deliberately set out to experience a different lifestyle than they would have at home, knowing it will only be for a comparatively short period of time. They are attracted to townhouses or modernistic conversions in cosmopolitan areas close to the CBD, parklands and entertainment strips. Weekday traffic or commercial activity doesn’t bother them much at all. The right property in the thick of areas like Paddington, South Melbourne or Subiaco fits the mark precisely.”

In Sydney, the most popular locations for relocating executives stretch from Double Bay in the east to Alexandria, with Surry Hills a particular favourite. Peter Natoli, director at Ray White, Surrey Hills, told me: “We see lots of property conversions around areas like Waterloo and Redfern which are popular with relocating professionals and locals as well.” In Brisbane, the favourite relocation spot is Kangaroo Point and its adjoining suburbs, while in Perth, Victoria Park and Subiaco are also popular.

In Melbourne, transferring executives tend to favour the suburbs running from Southbank to Port Melbourne. Michael Szulc, a director of Cayzer Real Estate located in this strip, told me that while relocations were only a small percentage of the market, overseas postings in particular were important.

“It’s a good market, which mainly transacts between November and January either directly or via relocation consultants,” he said. “We find interesting differences, such as how the UK newcomers jump at Victorian cottages while the Asian expats are more than happy with a spacious apartment. The older executives tend to prefer the waterfront views in an area like Port Melbourne, while the younger set has no problem living in a villa-loft above an art gallery.”

The experience-seeking mindset some new arrivals bring to property decisions is intriguing mainly because it runs contrary to the mainstream. The behaviour in the relocation market is quite different to most buyers and tenants, who commit to the long term in areas they know well. It’s the broader market’s consistency of choices that underpins the market’s predictability.

So how do properties targeting the younger section of the transferring executives market perform?

Many of the properties I’ve seen target the needs of this niche very well, but appeal in the wider market can be overlooked. The agents I spoke to confirmed that it’s the locations of some of these properties that often prove to be the issue when it comes to capital growth.

Natoli said: “Vacancy rates are tight and rental returns are strong across inner Sydney, but owners always make better capital growth from properties in quiet residential streets.” Szulc was emphatic: “We’ve seen excellent capital growth in the inner bayside over the past three years but finding the best growth always comes back to the right property in the right location. In this area, a property in a quiet residential street near a shopping strip always maintains its premium value.”

Investors seeking to enter the market should by all means consider whether demand from the executive relocation market will help their investment. But they should also bear in mind two facts about this property niche.

First, in my conversations with relocation experts and real estate agents, I’ve found that properties targeting this niche typically rent for the market rate or a slight premium despite many having extensive renovations. It seems the extra expense for a post-modern look doesn’t often bring in a rental premium.

Second, while many recently arrived executives opt to spend a year nestled among the cafes of a lively mixed-use precinct, these locations don’t rate nearly as well with the vast majority of the market: locals choosing a property for the long term. Most Australian home buyers prefer an uncompromised residential location over the hustle and bustle. The young and cool factor may work for some tenants but the majority of buyers still vote with their property dollars for a little peace and quiet.

It’s these two reasons that underpin my advice to investors: always stick to the tried and tested principles of property investment. An underperforming asset is one experience an investor can definitely do without!

Property Q&A

This week:

• Should I buy in Hervey Bay?
• Shares versus property.
• Taxes and housing affordability
• We’re buying a South Yarra apartment.

Hervey Bay

I am considering buying a three-bedroom house in one of the suburbs of Hervey Bay in Queensland – Scarness, Pialba, Torquay or Urangan. My plan is to spend $250,000 to $330,000, let it for five years then retire there.

I understand you very well. The last time I was in Hervey Bay, I had the same feeling: buy a house and send a note back to everyone in Melbourne saying, 'I’m here and I’m never coming back!’

This sounds very much like a lifestyle decision for you but I sense you want some commentary on the likely property value outcomes in this area. There are some real positives for Hervey Bay; most importantly, it’s popular with retirees relocating from the southern states and with tourists drawn by the area’s natural beauty and climate. Hervey Bay has a very good airport for a town of its size and this area regularly pops up as one of Australia’s fastest-growing regions.

Over the past five years, townhouses in Pialba have seen capital growth of 29.4%, in Torquay 27.7%, in Urangan 11.4% and in Scarness just 2.2%. REIQ cautions that these growth numbers may be affected by the fluctuations in quantities sold but these results may be indicative of the different strengths of each area. Scarness is probably a little too close to the central activity centre of the town for good capital growth, while the Urangan area is home to some large resorts, which may affect the capital growth prospects of adjacent properties.

If you are buying property in coastal towns, it’s often best to look in locations favoured by locals; close to the beach and with good access to the centre of town, without being in the middle of it. But I should caution you that properties in coastal centres are not often the best long-term investment. Compare the capital growth outcomes of townhouses in the suburbs you’ve asked about above with townhouse values in Brisbane, which grew by 38% over the same period. Property values and the local economies in coastal towns such as Hervey Bay usually have a high reliance on tourists and retirees, which we can see now from the downturn in overseas tourists affecting many Queensland centres. This over-reliance explains why some coastal properties, particularly above the $1 million mark, are struggling to find buyers at the moment.

An alternative to your current strategy is to invest about $400,000 in an investment-grade apartment in an inner suburb of Brisbane. It might not have the same lifestyle benefits over the next five years, but it’s more likely to provide better capital growth, which will give you a better budget to buy a property in Hervey Bay when you retire. It also should accommodate your plans if you change your mind about where you want to retire to.

Investments compared

If I want to earn $20,000 from an investment in a year, I would need to either: buy $100,000 in shares which are going to have a 20% return; or invest $500,000 in property with a return of just 4% but borrow 80% of the funds. To my mind, the main advantage of shares is their high liquidity whereas property’s main advantage is the high leveraged returns you can make when 80% of your investment is financed by borrowings. Is this right?

You have illustrated one of the key points of comparison between these two investment categories here, but there are some other points as well. The first point is that the investor’s time frame is much longer than a year: five to seven years is a more feasible time frame to think about your investment.

Second, investment returns depend on the asset that you buy; not all investments within the same category produce the same results. For investment-grade properties, investors should be aiming for capital growth of 5–7% above inflation with rental yields at 3.5–4.5%, depending on which city you are investing in.

The liquidity of the stockmarket is often highlighted as an advantage as it allows investors to sell an investment within seconds. But liquidity can also prove to be the downside of some share investments. When there is a poor set of results an investor can see the value of their share investment drop considerably in a matter of minutes as thousands of investors quit the company or the market simultaneously. By comparison, the sale of residential property is time-consuming and this prevents nervous runs on the market occurring.

That’s one of the reasons residential property tends to show great capital stability as an investment. While the property market’s growth does vary over time, it typically proves to be more resilient in the face of financial market corrections and fluctuations in the economy.

Affordability

I am passionate about first-home buyers and 'un-affordability'. While building my own home in my home town of Caboolture, Queensland, it has come to my attention how much money goes to the government as GST. On a $200,000 home, the GST is $20,000 and the first-home owners grant of $7000 is a pittance. The government is still ahead by $13,000.

Well you have found a fellow traveller in me. I am also quite passionate about ending Australia’s chronic housing affordability problem.

There a couple of issues you raise, which I should respond to. First, in theory the GST portion of a $200,000 house should be $18,812 (one eleventh). There should be no GST charged on the unimproved land component although we have seen reports from time to time of some developers attempting to do this. Second, I don’t think the first-home owners grant of $7000 is a pittance. Indeed when this grant was introduced in 2000, it immediately led to price spikes in the cost of land and new housing. When it was boosted in 2008, a similar price distortion was recorded in the market place. Finally, while no one enjoys paying tax, we should remember that the arrangements put in place to introduce the GST included cuts in income tax, which on balance was not a bad outcome.

But you’re absolutely right to note that while governments tend to give with one hand, they tend to get it back with the other. State governments give incentives to first-home buyers in the form of discounts to stamp duty in Queensland and grants in other states, yet they take tax back in the form of stamp duties or other charges.

The Commonwealth also gives grants to first-home buyers but takes money back in the form of the GST. Unscrambling the omelette of state and federal grants and taxes would be quite a complex task but I am on the record saying that governments should look to reduce their reliance on property taxes as much as possible. The best way to do this would be by ending inflationary grants and restructuring duties, taxes and charges wherever possible.

South Yarra

We are first-time investors and have just put a deposit on a one-bedroom, north-facing apartment on the 11th floor of a new complex in South Yarra. The complex cannot be built out and will be completed in late 2012. The apartment will cost us $499,000 and we have bought an offsite car park for $40,000. I believe most buyers in this complex will be owner-occupiers. What do you think of the long-term outlook for this property as an investment?

I am aware of this development and the location but I should be clear that I have not seen the plans for the apartment you have bought, nor for the development.

Let’s take a look at the positives first. The location certainly has a lot going for it as it is within walking distance of two tram lines and a train station. It is close to parklands, the Yarra River, one of the best shopping strips in Melbourne and a host of good schools. This development is a little too close to the train line for my liking but the elevation should alleviate that somewhat. The elevation of this apartment is a major plus as it will provide you with some of the best views in Melbourne.

There are a couple of problems with buying new apartments, however. First, I don’t know how large your unit is, but I suspect you will find that your purchase price includes paying the developer premium of about 20%, which is one of the greatest drawbacks of buying units off the plan. You should also know that if your apartment has an area of less than either 50 or 40 square metres, this may limit your resale market as many banks won’t lend to purchasers buying an apartment under a certain size.

New complexes also typically have costly facilities such as pools, gyms and concierge and in a high rise, you also need elevators. All of these things cost the owners money, which eats into investment returns. In these complexes an owner’s corporation fee of $3000 a year or more is not uncommon and these fees have a tendency to rise faster than inflation.

The other issue to bear in mind is that South Yarra is set to have large increases in new apartments coming on to the market over the next few years, including two new developments on Toorak Road and two more on Chapel Street. This coincides with the thousands of new apartments being approved for the CBD this year. That’s a lot of supply creating competition for your unit when it comes time to sell. You should monitor the supply of new apartments in South Yarra and neighbouring areas as it may limit the investment performance of new apartments like yours.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

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