PORTFOLIO POINT: Property remains a conventional investment alternative despite the current market downturn.
One of the joys of writing for the Eureka Report is the questions I receive from readers. It’s a great barometer of what issues are really important to you, the sophisticated investor.
So it was a thrill to be part of the recent Eureka Congress in Melbourne and Sydney. Not only was I able to take plenty of questions as part of the master class I led on investment property, but it was wonderful to mingle with subscribers and really get a feel for what’s on your mind.
I’d like to share some of the main themes with you. Perhaps, not surprisingly, a recurring theme was around the long-term outlook for property. One gentleman asked how I could be so confident that investment property could continue to meet the benchmark of doubling in value every 7-to-10 years, when there were so many other commentators saying that capital growth will be negligible in coming years. On a related note, another questioner wondered if property had shifted from being a growth asset to an income-producing asset.
In essence, at the heart of these questions is the notion – or perhaps fear – that there’s a major structural change under way around how the property market operates that will permanently curb capital growth.
Now I have sympathy for those who have endured 18 months to two years of market weakness – albeit relatively modest falls of around 10% in our capital cities – whilst being assailed by the perilous prognostications of property bears. But ultimately, we can be confident that the price falls are a cyclical phenomenon. Like most markets, property has a tendency to overshoot on the upside, and undershoot on the downside. So after the very strong growth in 2009 and 2010 off the back of government handouts to first home buyers, we shouldn’t read more into the price falls beyond them representing a correction.
As I told a number of subscribers at the Congress, to focus on the short-term woes is to discount the numerous long-term positive factors at play. These include the strong population growth revealed by the 2011 Census; the sizeable retreat of investors out of the volatile stockmarket who are looking for a conventional alternative beyond cash in the bank; and the growth of the self-managed super fund sector in association with the loosening of rules to invest in property.
Several subscribers were interested in the high-rise apartment area. One questioner asked whether a potential glut of new apartment blocks in our major capitals could damage the established apartment market. I know this to be a long-standing fear of investors. But history has shown that the overlap between the two markets is very small.
First off, the two property types tend to reside in different areas due to planning laws. Second, buyers don’t tend to see high-rise apartments and established apartments as substitutes – they are generally interested in one type and not the other. The one aspect where some 'spill over’ occurs is among renters. Undoubtedly, there is a sizeable cohort of renters who will consider high-rise or low-rise accommodation. Consequently, a glut of high-rise rental apartments can reduce rental yields in the broader rental market. However, my experience is that this impact is modest, and doesn’t affect capital growth.
Another subscriber wanted to understand the profile of a typical buyer of high-rise apartments. I explained that a large number of buyers are from Asia, in particular China. There are a number of good reasons why they are attracted to this sector.
Primarily, Australian law disallows non-nationals from buying established property, so overseas buyers effectively have to buy new or off-the-plan properties. Given that many Asian cities have very high population densities and so high-rise living is more prevalent there than in Australian cities, culturally Asian buyers often have a 'bias’ towards high-rise apartments as opposed to say a land and house package on the city fringe.
Moreover, many Chinese nationals prefer buying these high-rise apartments rather than assets in China. It’s simply not a case of the properties providing international diversity to their portfolio, although that is attractive. More fundamentally, notwithstanding tremendous Chinese progress in the last 20 years moving away from being a communist state, private property rights there are not completely sacrosanct. Owning property in Australia ensures some of their assets are beyond the reach of Chinese authority. Finally, with Australia’s large overseas tertiary student market, some overseas buyers find it fruitful to buy an apartment to house their student children when they study here.
Note that I don’t see overseas demand for apartments as sufficient to lift its poor capital growth performance. Unfortunately, even with this boost to demand for the sector, developers will continue to over build, maintaining a lack of scarcity.
On the lighter side, I was quizzed a few times about my insistence on apartments including dedicated parking, not least by the emcee in Sydney, one James Kirby. Contrary to what some might think, it’s not because I’m opposed to environmentally-friendly living. However, cars remain an important part of the Australian lifestyle and most prospective tenants will have a car, even if they don’t drive to work. Further, if you have a lock-up garage it offers additional storage, especially for those without a vehicle. Our experience shows that properties without dedicated parking take longer to lease, and deliver a lower rate of capital growth.
My sincere thanks to all who attended the Congress. Keep your questions coming!
- Expressions of Interest sales on the rise.
- DIY conveyancing to save on costs.
- How much to spend on renovations and marketing.
- Renting a property out as shared accommodation.
Dealing with Expressions of Interest sales
I have noticed that more and more properties, particularly at the upper end of the market, are being advertised with 'Expressions of Interest’. What tips do you have for the inexperienced buyer?
A property sold by 'Expressions of Interest’ (EOI) is essentially a private sale where the agent doesn’t provide a sales price. The agent is placing the onus on prospective buyers to submit their best offer.
You’re right that they are more common for higher-valued properties, where there is usually a relatively small pool of buyers and where there may have been few comparable sales in recent months. In some cases there might only be one likely buyer in the market. In these instances, the market price is what that buyer is willing to pay!
The EOI is designed to allow the agent not to 'show their hand’ with respect to what they would accept before buyers have indicated what they would be willing to pay.
Prospective buyers need to tread carefully with EOIs given the lack of transparency in the process, and avoid being passive and out-negotiated. First off, you need to have done your homework regarding recent comparable sales to know what the value of the property is.
Don’t be afraid to talk to the agent and ask them what price will buy the property. Some agents won’t respond, but others will understand that buyers need a guide. That conversation alone may stop you from paying over the odds.
Note: Given the non-standard nature of an EOI sale, there may be some unusual terms or special conditions surrounding the sale, so review the contract closely.
Is DIY conveyancing the way to go?
One downside of buying property is the hefty fees. I’m planning to trim some of that cost by using a DIY conveyancing kit. It seems quite straightforward. Any risks?
In this day and age, any property purchase will amount to several hundred thousand dollars, whilst it will cost somewhere between $500 and $1,500 for a standard conveyance.
Given the very large sums of money involved in buying a property asset, shaving your costs by undertaking the conveyancing yourself may be a case of 'penny wise, pound foolish.’
Whilst it might not be rocket science, it is always good to have a professional who is experienced and can be accountable. Do it yourself and you can make expensive errors through missing deadlines or practical omissions in your paperwork. Further, whilst a DIY kit might cover run-of-the-mill eventualities, they don’t equip you to address unusual problems relating to titles, the bank and the other party you are settling with.
Conveyancers and solicitors are competitive on price – choose one you can trust and make your money through the selection of the asset and the price you pay for it.
Renovations and marketing in a weak market
I’m about to put on the market my slightly worn-looking two-bedroom house in Leichardt, Sydney. With the weakness of the current market, do I need to spend more than usual on renovations and marketing to make the property stand out and ultimately sell?
Whilst I always advise vendors never to compromise on the marketing of their property, especially when conditions are soft – because it is a false economy – I don’t think 'over-presenting’ a property in a weak market will give you value for money either.
Regardless of where we are in the market cycle, it is a case of doing the basics of presentation well. Any presentation works should be cosmetic – i.e. paint, re-carpet, polish floors, install new light fittings and new blinds and tend the garden. This is what attracts buyers. More extensive renovations generally don’t deliver sufficient price uplift to provide a return on your renovation dollars. The one exception might be re-instating some original period features in an older house or apartment, but only if the work isn’t too expensive.
Ensure you have a realistic idea of the price, and ensure you choose the right selling agent who has a good knowledge of your area. Provide the agent sufficient marketing budget to enable comprehensive but not excessive advertising in the papers and online. Also pay attention to the timing of the sale, so that you avoid marketing the property through school holidays, long weekends and major sporting events.
Your property is in a great location, where demand tends to outstrip supply. Do all of the above and you should do well. Good luck.
Renting a property as shared accommodation
I have had a four-bedroom house as an investment property for many years. The tenants have always been families. The property is now vacant and the managing agent is recommending I market it as shared accommodation to professionals. He argues this will maximise the rental return. Is this the right strategy?
Whilst this approach may maximise your rental returns, it may also maximise wear and tear and your level of stress, and you’ll need to weigh this up.
With three or possibly four distinct tenants as opposed to one family unit, you’re increasing the complexity of the lease. First off, each prospective tenant will need to be screened. Inevitably, you’re likely to see a higher turnover of individual tenants over any time frame, which requires more interactions between you, the agent, tenants and prospective tenants. And as mentioned above, more tenants usually results in higher wear and tear and greater maintenance costs.
One of the reasons I recommend one or two-bedroom properties as investments is that occupancy or usage tends to be lower impact. This is the cornerstone of successful property investment – ensuring that the journey is as stress free and passive as possible.
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 email@example.com