Value for cautious investors

PORTFOLIO POINT: Astute investors looking to enter the residential market can dig out some good returns if they buy well. Here’s where to buy in Perth, Sydney, Brisbane and Melbourne.

Caution is the byword of our investment era. Out are aggressively geared instruments such as contracts for difference and other exotic derivatives. Low stockmarket volumes show that even our appetite for blue-chip shares has waned.

In their place, capital preservation is the new name of the game. Individuals are saving more through deposit accounts and holding greater reserves of cash in their super funds.

Of course, it makes sense to hold cash and other liquid assets in times of uncertainty – what Australians are feeling now – and definitely during recessions, which is something, thankfully, we’re not in.

But eventually there comes a time when investors have to emerge from the shelter that is cash. Ultimately, so-called low-risk investments like cash deliver low returns. This is especially true during periods of inflation which, despite central bankers’ best efforts, is the beast that is never truly slain – it is only placed in hibernation. Over the long term, the returns from cash are insufficient to deliver financial security. Paradoxically, low-risk investments eventually become high-risk ones.

So, with the Reserve Bank board stating last week that “dwelling prices have firmed a little over the past couple of months,” we may see more investors demonstrating an increased appetite for measured risk and reward by entering the property market.

Even so, I anticipate that many investors will be more conservative with their property investment budgets than in the past – a smart approach. So whereas they might have been confident to deploy $700,000 or $800,000 three or four years ago, we may see the same investors spending $400,000 or $500,000 today.

Such a strategy is prudent, but only if high-quality assets are purchased. Unfortunately, it is common for conservative investors to get this part wrong, and they are not helped by a whole industry trying to entice them to invest in dubiously ‘cheap’ propositions such as student accommodation or off-the-plan bedsits in high-rise apartments in our CBDs.

So what levels of funds does the cautious but astute investor require, and into which assets should they deploy their funds?

I took soundings from experts in the Sydney, Brisbane and Perth markets.

Perth

Gavin Hegney, executive chairman of Hegney Property Group, agrees this is a timely issue. “I’m being asked regularly by investors about entry-level prices,” he says. “In Perth, you’ll need around $350,000 and that will buy an older-style apartment in a small block of eight-to-12 units in an inner suburb.”

Hegney lists scarcity and transport as key criteria. “I seek out apartment blocks that are one-offs in their area. I want there to be a shortage of supply. And although Perth doesn’t have the sorts of transport problems of bigger Australian cities, congestion is getting worse. I believe access to transport links will become the number one factor for choosing property in Perth in the future.”

Hegney’s suburbs of choice include North Perth, Mount Lawley and Inglewood just north of the city, Subiaco and Leederville to the west, and East Fremantle and Melville to the south.

Sydney

According to Brendan Jack, owner of Buyers Service for Real Estate, the price for conservative, quality assets in Sydney varies depending on location. “In the inner-west, $450,000 will secure you a quality one-bedroom apartment. In the eastern suburbs, the figure is closer to $500,000-plus,” he says.

Newtown, Enmore, Camperdown and Dulwich Hill in Sydney’s inner-west are Jack’s choice suburbs for the cautious investor.

Jack emphasises two factors that separate quality prospects from the rest. “Choose what I call ‘an evergreen’ rental area. This is where there is strong demand for rental properties through the thick and thin of the economic cycle,” he says. “Further, only select property that has demonstrated strong capital growth over many years.”

Brisbane

Meanwhile, in Brisbane, Meighan Hetherington, director of Property Pursuit, cites $380,000 as the threshold for an investment that combines quality with prudence. “That will secure you a quality two-bedroom apartment in a circa 1980s two-level walk-up brick-style apartment with a balcony that is only a short walk to a train or bus station,” she says.

Hetherington discourages investors from buying one-bedroom apartments in Brisbane. “Unlike say Sydney or Melbourne, we find that one-bedroom apartments generally don’t perform very well in terms of capital growth.” This is an interesting assessment and a strong demonstration that you can’t assume that what works in one or two cities works everywhere. Markets are anything but homogeneous.

The presence of some sort of outdoor space – be it a balcony or garden – is also more important in Brisbane than other cities. “Queenslanders love the outdoor life. Properties without an outside space tend to struggle in Brisbane,” she says.

Hetherington’s stand-out suburbs for the cautious investor are Gordon Park, Kedron, Lutwyche, Newmarket, Windsor, Wilston and Alderley, all of which are three- to-seven kilometres from central Brisbane.

Melbourne

Back in my home city of Melbourne, investors who are ready to dip their toes into the water will want $400,000. This can secure them a quality one-bedroom apartment in well-positioned suburbs such as Elwood, Prahran, or St Kilda. However, they must be both patient and decisive. Patient because the supply of these target properties is thin at the moment and it may take time to secure something that meets the criteria; and decisive because good opportunities won’t hang around. This is, of course, in contrast to the much talked about oversupply issues in outer suburbs and for high rises.

Indeed, the conundrum facing the cautious prospective investor more generally is whether the budgets that will suffice today will continue to be sufficient come spring or indeed 2013. That, in large part, will depend on whether higher seasonal demand associated with spring will be matched by supply. Given the scare stories about oversupply, it may well be the case that it won’t, which may see prices and investors’ minimum budget creep up. So by all means be cautious, but do invest with purpose.

Part of caution and purpose is keen observation of present conditions. In a transparent market like this we see clearly the difference between assets that have underlying strength and desirable characteristics and those that don’t.

It’s the opportunity to secure the former and turn prudence into profit rather than allow caution to turn into immobilisation.

Property Q&A

This week:

• Is the National Rental Affordability Scheme a good opportunity?
• Using super funds to buy in Sydney.
• Does the City of Churches stack up?
• Should I buy first, then sell, in the current market?

Is the National Rental Affordability Scheme a good opportunity?

I have a development site in Geraldton, Western Australia, that will consist of 16 two-bedroom units and I have the opportunity of receiving some National Rental Affordability Scheme (NRAS) credits for the development. What are your thoughts on the NRAS scheme from a developer’s or investor’s perspective?

The National Rental Affordability Scheme (NRAS) is a government initiative to increase the supply of affordable accommodation by providing a financial incentive of around $10,000 per property to investors who lease their property out at a rent 20% or more below the prevailing market rate.

NRAS is a wholesale investor initiative in that it is open to developers building large numbers of properties rather than the retail residential investor who has just one property to lease out. It is, however, possible for an individual investor to get involved by buying an NRAS property from an accredited developer and having the NRAS credits passed onto them, so long as they continue to meet the “affordable rent” criteria.

I tend to warn investors away from NRAS investments because, in order to meet the NRAS criteria, the properties tend to be in areas with lower land values and poor capital growth prospects. Yes, the combination of rent and government incentive might provide a high yield, but your capital would be better off in an area where capital growth is strong.

Your situation is slightly different. You already have the development site in Geraldton. I assume that if you participate in the NRAS scheme that you’ll either market the properties direct to NRAS tenants or on-sell the properties with NRAS credits to private investors. Ultimately, don’t let your decision making be distorted by the NRAS scheme. Decide for yourself based on fundamentals what the best strategy for your development is – be it holding for the long term or short term, budget apartments or something more upmarket. Only if your objectives, and what NRAS can offer you, mesh should you consider the scheme.

Using super funds to buy in Sydney

I have a single member self-managed super fund. It owns a one bedroom unit in Glebe that meets your criteria. I wish to buy an additional property in my super fund up to $650,000 with no borrowings. I live in the inner-west and wish to diversify. Manly has been suggested. I would appreciate your suggestions.

This, on face value, appears to be a sound strategy. Manly is a highly desirable Sydney northern beachside suburb. Being north of the Harbour, it provides a degree of diversification to your Glebe investment and diversification is a wise approach, especially when it comes to super funds.

The most vital decision is asset selection. Avoid high-rise apartments. Instead use your $650,000 to purchase a high-quality one-bedroom apartment in a small block in a quiet location. Make sure it ticks all the boxes in terms of street, position, quality outlook, a logical floor plan and off-street parking.

Does the City of Churches stack up?

Although you raise many positives around investing interstate in your recent article, I’m not really attracted to the efforts involved. As a South Australian, where do you think I can reap a good return in Adelaide for around $700,000?

I accept that interstate investment isn’t for everyone. In fact, there’s a lot to be said for knowing your own backyard. There is certainly investment-grade property in the City of Churches. It’s just that due to its smaller population and economic base, over the long term Adelaide property doesn’t tend to quite match the likes of Sydney and Melbourne for capital growth. But it also tends to be less volatile than Sydney, in particular.

The most compelling investment prospects in Adelaide are to be found in an arc stretching from just beyond the CBD and the parklands to around six kilometres out on the south and east and three kilometres out on the north-west side. Investors should focus their search in areas like Unley, Goodwood, Maylands, North Adelaide and Thebarton and certainly avoid new developments in areas like Port Adelaide.

With a budget of $700,000, look for a good period sandstone house in a street with consistent architecture, ideally within two-to-three kilometres of the CBD.

Should I buy first, then sell, in the current market?

I’m looking to move home to an adjacent suburb in Melbourne’s eastern suburbs in order to be closer to my child’s school. I’m planning to buy a similarly priced home to the one I’m selling. Is it better to buy first or sell first in the current market? I don’t have a mortgage.

For much of the last decade the market was either rising strongly or on the cusp of rising, so in the immediate past it was often prudent to buy first then sell next. In those times, it was not unknown for the market to jump 5% or even 10% in some months, with the result that a buyer-then-seller could make tens of thousands of dollars in a matter of weeks.

In today’s environment, prices are more stable but there is a risk that a property will take longer than expected to sell. Consequently, it probably makes more sense to sell your current home first, ideally on a long settlement period – think up to 120 days – and then buy on a shorter, more conventional settlement.

The most important thing to remember is that you must sell and buy at roughly the same time in the cycle. Avoid a lengthy delay – e.g. six-to-12 months between transactions – as market conditions can change unexpectedly, especially now given we are at the beginning of a new cycle.

Monique Sasson Wakelin is a co-founder and 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