From the Boardroom – 2012 Summer Edition

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What do you do if you are young and thinking about investing in property?

A 19-year-old I know has plans to save up to buy his first property, and mentioned that he’s not too sure where to start. Should he do a property course, he wondered? And how do you know where is a good place to buy? Let alone what you should pay.

He’s thinking not of giddily purchasing his first property to live in, but of buying an investment property and slowly, over his lifetime, purchasing some others.

What do you do if you are young and thinking about investing in property?

A 19-year-old I know has plans to save up to buy his first property, and mentioned that he’s not too sure where to start. Should he do a property course, he wondered? And how do you know where is a good place to buy? Let alone what you should pay.

He’s thinking not of giddily purchasing his first property to live in, but of buying an investment property and slowly, over his lifetime, purchasing some others.

We’ve been hearing for a little while now how this is a trend among 20-somethings, and those into their 30s. Buy a place as an investment, often a cheaper unit in a less desirable area, and then tap into the tax advantages of negative gearing (by keeping your outgoings on the property higher than the rent coming in) and either rent yourself in an area you want to live, or stay at home with the baby boomer parents where the board is minimal and the washing comes for free.

So for Jake, and any other young people wondering which way to go, here’s a few tips. And I’m sure readers will offer up plenty more in the comments space below.

1. Ask yourself, should I be investing in property at all, and what do I expect to get from it?

If it’s a road to quick riches you want, then this is not the path to take. Yes, we have seen some huge run-ups in prices over the years, and it’s true that property prices, like the economy, tend to run in cycles, so we will obviously see increases in years to come, even despite the current negativity enveloping much of the globe.

Because property buyers are human, and love to follow a trend, and for some bizarre reason feel more comfortable buying when prices are running hot, there is no doubt there will be price rises once again in the future.

There are a whole bunch of other factors pointing to future price increases too – in some cities the lack of building will keep the supply lower than it should be, the population continues to grow meaning so does demand, and in Australia at least, we remain a wealthy country still experiencing household income growth.

However, don’t bet everything on this happening and by how much prices will go up – instead expect to see, over a longer period of time, steady increases with plenty of troughs along the way as the economic cycle rises and falls.

And now, here’s the cue for all the readers who argue the market is about to tank and that now is not the time to buy property. And with Europe perched on a precipice and the US still in an uncertain state, you do have to question whether the bottom of the market has been reached yet despite the pretty strong fundamentals underpinning the Australian economy at the moment.

However, if you are a young person just starting to save for your first property, you have a bit of time to sit back and watch the market while you save anyway, so don’t fret too much at this juncture.

2. Educate yourself

The mere mention of "property course" sends shivers down my spine. Often it’s run by property spruikers taking hundreds or thousands of dollars off gullible people who are then, at best, fed information they could find themselves by reading widely, or at worst, the poor souls are flogged the company’s own products or services, all with the shiny promise of sky-high returns.

There has never been an easier time to learn the whys and wherefores yourself. The internet has opened up a world of information, and young people wanting to learn a bit more about property should be heading there (to reputable sources) as well as to the property lift outs in newspapers, and better quality magazines.

Want prices? Find them on websites like Domain.com.au or Australian Property Monitors (both owned by Fairfax Media). Want to find the best loan? Check out a loan websites such as ratecity.com.au. And need to know where the market is headed? Read plenty of stories and opinion pieces and rather than taking just one as gospel, glean the general themes from what all have to say.

If there’s a few property terms you don’t understand – such as negative gearing – look them up and get your head around what they mean. That won’t unlock a magical key to property investment for you and land a bag of gold at your feet, but it will stop spruikers taking advantage of your youth and naivety.

3. Take a balanced approach

Property holds a certain glimmer for some young people – perhaps under the encouragement of their parents who prefer a bricks-and-mortar approach. And also because everyone has lived in a house or a unit, but not everyone has held shares or gold or even superannuation.

But if you are young and have the advantage of having your head screwed on the right way and are already thinking about investing, you should be looking at all investment classes impartially. Sure, consider property, but look at it as part of building a balanced portfolio.

Even at 18, 19, you’re not too young to start putting a few extra dollars into super, keeping some of your money in cash in the highest-paying account you can find, and also thinking about a small parcel of blue chip shares to start you off, all while saving to buy your first property. Education, it must be said, can also be considered an investment class in the fact that you are boosting your own potential earning capacity.

And when I say dollars, I really do mean just a few dollars. Even small amounts each week from a meagre income are better than nothing.

This is a smart approach because it lets you spread your risk, and not put everything into the one basket. Sure, this mean it will take you a little longer to save for the first property, but time is on your side if you are young, and to use a cliché, Rome wasn’t built in a day.

4. Save as much as you can before buying

If you plan on being a landlord, you will need to have some extra cash available to cover the loan in between tenants, and also to pay for any repairs to the property. If you are buying into an apartment block or townhouse, you may need also extra money to pay for special levies such as building repairs not covered by the sinking fund (the general fund amassed by the body corporate from strata levies).

So the smart thing to do is to save a good amount of money before purchasing so you’re not taking an uncomfortable risk.

5. Research where to buy

The old adage is buy as close to the city as you can and look for properties that don’t have huge outgoings due to lifts and fancy add-ons such as gyms and pools, but do have the advantage of being near good infrastructure.

Closeness to the city can be good but I would also focus on the infrastructure side of things, and whether or not the suburb has the potential to develop over time.

Buying near rail (heavy or light) infrastructure is always a good bet as the infrastructure will stay there for a long time, and as populations continue to grow and further congest areas, the infrastructure will become even more important.

Do carefully think before buying in areas with inherent negatives, such as heavy flight paths or a lot of noise. Also very busy roads can be a problem – it can be smarter to buy just off them.

Keep your tenant in mind – what type of person would like to rent this and do those people generally live in this area?

Do try to buy something that would be easy to sell again in a hurry if you needed to, should your circumstances change. If a property you are buying has sat on the market for months and months, be sure to find out why and be realistic about encountering the same selling problems if you should buy it.

For that same reason it is good to try to buy something that is around the median price for a suburb, as it should have a larger pool of potential buyers.

6. Keep some cash aside after buying

When you buy the property, don’t sink all your money into the loan if you can help it, keep a good chunk in a flexible high-interest earning account (not a term deposit, as you may need to access it at short notice).

Use this as your maintenance fund, and to top up the property loan if you need to (and for many properties, in the early years at least, the rent won’t cover the mortgage, council rates, strata and water supply charges, so you need to be in a position to pay for the gap yourself).

The cash you keep, though, must strictly be for investment and as a reserve for maintenance and loan top-ups, not for holidays or random spending, as you always need a buffer so you aren’t forced to sell at the worst possible time.

7. After you buy, keep saving

Direct any spare cash to your savings account, not your investment loan. Or if you decide to buy a property to live in, use the cash to pay down your own home loan as fast as you can, rather than the investment loan.

By doing this, you make negative gearing work for you because, by keeping the loan against the property larger, you are paying the highest amount of interest you can, while earning interest off your other money you are keeping in cash.

Or in the case of living in your own property you do want to pay that off as soon as possible to get rid of non-tax-deductible debt.

While I’m advocating not dumping all of your extra cash into your investment loan, it is prudent to pay the property off over time to gradually reduce your liabilities, rather than remain solely focussed on negative gearing.

For that reason, interest-only loans on investment properties may not be wise in the longer term, as you are basically betting on price increases to cover you. Yes, price hikes will probably happen over the longer period but you don’t want to bank your entire savings on them.

8. Get your hands dirty

If you buy a property that needs to be fixed up, and you have time on your side, get in and do it. Many things such as pulling up carpets and painting can be achieved with little experience – you just need to have a go.

You might be surprised at just how much painting kitchen cupboards, tired tiles and old baths can rejuvenate a property.

Do be aware of any dangers that lurk in the property though, such as asbestos, and treat them appropriately. And do call in trades for jobs that are beyond you, such as electrics, plumbing and larger tiling jobs.

9. Be a good landlord

Be prepared to spend on maintenance over time and keep your property up to scratch. You’ll attract better tenants, and your property will also hold its value better. Rundown rentals look shabby and often don’t command a good price come sales time.

10. Take your time before buying again

If you have your sights set on owning more than one property, don’t be in too much of a rush. Keep your investing balanced, putting some funds into other classes such as cash, shares and super.

And when you have built enough equity you can then consider buying a second property. Balance your risk though and don’t get yourself in over your head. You want the power to hold each property for as long as you see fit, rather than be forced to sell should disaster strike.

Story by Carolyn Boyd, a property journalist and keen follower of Australia’s housing market.

Source: www.domain.com.au

Asian property investors are feeling extremely optimistic, according to the recently released Colliers International Global Investment Sentiment Survey for Q3 2010.

91 per cent of Asian respondents to the survey said they wanted to buy property in their domestic region and 73 per cent of Asian respondents expect to expand their property portfolio over the next year. Shanghai followed by Hong Kong and Singapore were the most desired locations for commercial property investments over the next 12 months, while many respondents showed interest in second-tier Chinese cities like Hangzhou and Nanjing for residential investments.

“Amid the prevailing negative interest rate environment and the sustained rental growth, investors remain keen on real estate assets in Hong Kong.  They include private investors, real estate funds, developers and a number of cash-rich corporates.” said Richard Kirke, managing director of Colliers International Hong Kong.

“The survey shows that Asian investors are confident on the macro-fundamentals in the region,” said Piers Brunner, CEO of Colliers Asia. “Personal and corporate debt levels are low.  Interest rates are low and liquidity is high. Optimism in the market is reinforced by 75% of respondents in Asia saying a double-dip recession is unlikely.”

Asian investors do have some concerns though, the survey showed, mainly overheated markets, change in market liquidity, and interest rate increases.

The survey showed a strong desire in Asian respondents to invest outside of their home countries, with 59 per cent saying they wanted to buy property overseas as opposed to just 30 per cent of all respondents. Desired hotspots for Asian investors included would Sydney office and Brisbane retail assets in Australia and office properties in New York and Chicago.

Around the globe the survey showed generally greater optimism, which Colliers said indicated that markets are on the upswing and are characterized by rising demand, falling availability and vacancy and rising headline rents.

Story by Byron Perry www.property-report.com

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AUSTRALIAN real estate investment trusts are very attractive to international investors due to the underlying quality of assets and stable economy, according to United States property advisers.

Ron Sturzenegger, the global head of real estate for Merrill Lynch, who is attending the firm’s inaugural Australian REIT conference in Sydney this week, said the one hurdle for his clients was the strong Australian dollar.

But he said the stronger fundamentals of Australian property such as high office occupancies and capital values, made the impact of the dollar more palatable for overseas investors.

Speaking to BusinessDay, Mr Sturzenegger said he also expected another round of mergers and acquisitions within the Australian market and new floats in the US, although that would depend on availability of capital.

Australian investors are awaiting details on the proposed Goodman takeover of ING Industrial Fund, Investa’s rumoured tilt at ING Office, a possible takeover of Centro Properties from a suggested consortium of Singapore GIC and Lend Lease, and a move on FKP by Stockland.

There are about 14 initial public offerings planned in the US, but not many are tipped to come to fruition until that market improves.

”The US market has stopped declining, but until we see sustainable jobs growth, conditions for real estate investment will remain tough,” he said. ”More investors are looking globally and many have Australia in their sights.

”Clients tell us they want global opportunities that match up with the local [US] real estate companies. These include trusts with office and retail assets.

”The UK REIT market has been as hard hit as the US, so the Australian market, despite the strong Australian dollar and higher interest rates, still offers the best opportunities. Japan is also emerging on the radar.”

The AREIT conference mirrors the firm’s investment conference that has been held in New York for the past 25 years and at which property groups such as Westfield and Lend Lease have attended nearly every year.

Story Carolyn Cummins www.smh.com.au

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MUM-AND-DAD investors are buying bargain-priced houses in the United States for the cost of a new car.

They are cashing in on a combination of a rising Australian dollar and a depressed US property market which has seen recently built five-bedroom houses in cities such as Atlanta, Georgia, selling for as little as $35,000 – or the price of a new Holden Commodore.

They are also avoiding excessive stamp duty costs on buying property in Australia.

More than 200 people attended a seminar about buying US houses at Adelaide’s Hilton Hotel last Monday.

The cheap US prices have seen a surge of Australian agents setting up businesses promising to match buyers in Australia with potential US rental properties.

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Centro Properties Group (CNP.AU) shares have risen by 3.1 percent as the company announced it is engaging in new negotiations with possible new investors interested to acquire its business and assets.

The real estate firm is set to engage in talks with new investors willing to acquire its assets and other lucrative pieces of property.

Centro Properties is up at 16.5 Australian cents as of 12 noon in Sydney with the company’s disclosure that it had been approached by a number of parties with expressions of interest for its businesses and assets.

In a statement, Centro will start to evaluate these expressions of interest and is now in assessment mode.

“The significant interest in Centro’s businesses over recent months has been encouraging,” Centro Chairman Paul Cooper said in the statement today.

In a related Bloomberg report, the company is seeking buyers for more than A$4 billion ($4 billion) of assets, a source familiar with the matter last week said.

The Australian shopping-mall owner has given management control to creditors in 2008

Centro has set a Dec. 25 deadline for indicative bids for more than 40 properties, including the Galleria in Perth and The Glen in Melbourne, said the person, who declined to be identified because the plans aren’t public. Prospective buyers will be given access to financial information on the assets in the next few weeks, the person said last week.

Centro, which manages an A$18.6 billion collection of 712 shopping centers in Australia, New Zealand ,and the U.S., said in July it was in talks with lenders about debt due next year. The company had A$18.4 billion of debt as of June 30, company filings show, as the value of its properties fell and debt costs soared following a A$9 billion buying spree in 2006 and 2007.

Australia’s 16 listed property trusts reported combined losses of A$19.5 billion and write-downs of A$21.7 billion in the year to June 30, 2009, after their strategy of borrowing to fund overseas investments backfired when property values tumbled and borrowing costs spiked during the credit crunch.

Story by Christine Jared-Perrin www.au.ibtimes.com

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I’m sure you will have read this past week about how the Australian dollar now buys $US 1.

This, of course, affects US investors, making our residential real estate, in their eyes, twice the bubble.

In US dollar-terms, Sydney real estate has risen by 20 per cent over the past four months. Having said that, I’m not sure there were too many US investors looking at our residential property market in the first place, given what they have gone through with their market.

Still, given that the Chinese Yuan is pegged to the US dollar, it also means our currency has leapt against the Yuan. Unsurprisingly, anecdotal evidence suggests the rise has stiffened Chinese investment in off-the-plan developments over the past few weeks.

Residential property development tsar Harry Triguboff, who never minces words, nailed it this week when he explained how the rising dollar was affecting business.

If you are a potential buyer, you may well think that’s great as it may lower prices for these developments, but I doubt very much it will have an impact on prices given so few developments are out there now.

If anything, it might cause more problems for rental vacancies over the medium-term if developers remain held back from building new dwellings.

There may be slightly more overseas sellers in the marketplace as foreigners cash in on the high Aussie dollar.

Remember we went through a brief period where there was a wide loophole for foreign investors to buy established properties in Australia before the federal government closed it up earlier this year.

However, in locations where the local economy predominantly relies on tourism, there may be an indirect impact as international tourist numbers are likely to fall away.

This is likely to feed into local job losses, which can negatively affect the real estate market.

Yes, folks, I am thinking of the Gold Coast real estate market – a market that is truly ugly one day and sinking the next.

However, there are other holiday locations that will also be affected. It is possible that the affluent
end of the housing market may be also indirectly affected.

This part of the market certainly does contain an elevated proportion of overseas investors, however it could be affected by a slower local economy, which tends to occur after a period of an inflated local currency.

Overall, I believe the impact will be fairly minimal for the Sydney housing market which, as described here before, is experiencing an acute shortage of accommodation and will remain that way as long as the economy stays out of a recession and we find more ways to not build new housing stock.

Louis Christopher is the managing director of SQM Research, sqmresearch.com.au.

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With Australia’s residential property sector finally coming off the boil, investors should be set to head back into the market to take advantage of easing demand and weakening buyer competition.

But while owner occupiers and first home buyers are fast disappearing from the market, the latest figures from the Australian Bureau of Statistics show that investors aren’t exactly jumping in to take their place.

It’s a sign of just how strong Australia’s property market became over the last 18 months that investors are now finding it a bit of a struggle to see a profitable way in.

One of the biggest problems is the across-the-board decline in gross rental yields seen in every capital city for both houses and units in the last year, according to analysts RP Data.

(Gross rental yield is calculated as a percentage of the annual rent versus the purchase price; it does not include expenses in maintaining the rental property.)

RP Data estimates that it takes a rental yield of 5.5 per cent or better to be attractive enough to draw investors into the market in any great numbers.

Many capital cities – particularly for houses – don’t even come close to that threshold:

HOUSES               Jul-10                    1 Year Change

Melbourne             3.5                              -0.6                        

Perth                     3.8                              -0.4

Adelaide                3.9                              -0.3

National                3.9                              -0.4

Sydney                  4.1                                0.3

Brisbane                4.2                              -0.3

Canberra               4.6                               -0.3

Hobart*                 4.9                               -0.1

Darwin                  5.2                               -1.2

UNITS                 Jul-10                    1 Year Change

Melbourne            4.1                               -0.5

Perth                    4.3                               -0.2

Adelaide               4.5                               -0.3 

National              4.8                               -0.3

Brisbane               4.9                               -0.3

Sydney                 5.1                               -0.3

Canberra              5.3                               -0.2

Hobart*                5.4                               -0.5

Darwin                 5.6                               -0.5

Sure, gross rental yields are a blunt instrument for measuring the profitability of an investment  — because they don’t account of other expenses and outgoings – and what ultimately matters is the rental yield calculated for an individual property.

But the data does point out pretty clearly how spiraling property prices in many of the capital cities have put real pressure on would-be investors.

Vacancy may be tight in many cities but rental growth has proved weak-to-moderate, which means investors are having to wait longer to see a decent rental return after paying those high purchase prices.

Then there’s the other risk that comes with buying into a near-peak market — pay too much above market value and you can end up sacrificing months or even years of potential capital growth.

Avoiding both these scenarios are sure to be on the forefront of investors’ minds heading into the spring property season.

*Due to the low volume of sales in Hobart, rental yield figures cited by RP Data cover the period from June 2009 to June 2010. 

Story by Chris Vedelago Fairfax Digital

Property industry groups have slammed the New South Wales Government’s decision to introduce a new tax on property transactions, but what impact will it really have on the market?

In the shadow of the Federal Budget last week, the NSW Government announced it was introducing a new transaction charge of 0.2 per cent for properties valued at $500,000 and above, or 0.25 per cent above $1 million.

The decision to introduce what’s become known as the ‘ad valorem’ levy (ad valorem is Latin for ‘according to value’) brought a furious response from the property industry.

The acting executive director of the Property Council in NSW, Glenn Byres, says the new tax will “hurt homebuyers and hurt the NSW economy” and deliver “a significant hit” to “homebuyers, the residential development market and (the) commercial property market”.

“NSW is barely creeping back from 50-year lows in residential construction levels,” Byres says. ”We can’t afford to strangle progress with a new stealth tax.” Sal Carrero, chief executive of property accountants Chan & Naylor, says the move will worsen affordability and hurt many prospective homebuyers in one of the most active market segments in the state.

“There are few family homes under the $500,000 threshold, particularly in Sydney, which will penalise families hoping to enter the market. This tax hits first homebuyers square in the eyes,” Carrero says.

“It’s also an added burden to property investors, who are likely to pass on the increased cost to renters. Increasing the cost of property to investors may seem like a populist approach but it will hurt the vulnerable as well.”

Urban Taskforce Australia chief executive Aaron Gadiel says the tax is merely a disguised increase in the rate of stamp duty.

“It again sends the message that anyone who invests in NSW will be subject to unpredictable and ever-changing imposts.”

NSW Opposition leader Barry O’Farrell has also chipped in, saying the “unfair” tax would make it even tougher for families looking to buy a home, and potentially impact on jobs if businesses took their investments interstate.

So just how big is this tax slug that’s going to hit homebuyers “square in the eyes” and “strangle progress”?

Well, as it turns out, it would total $170 on the sale of a $585,000 house, which RP Data puts as the current median price in Sydney.

That sounds more like a small pain in the behind rather than a true punch right between the eyes, but perhaps Aaron Gadiel gives a better picture of how the new tax will affect the marketplace.

He points out the levy would be a $23,500 impost on the purchase of a $10 million development site and a $123,500 impost on a $50 million development site.

That seems less like chump change.

Or perhaps the hyperbole over the new property tax is less a case of how much it will cost, and more about, as Wakelin Property Advisory director Monique Wakelin puts it, just how dysfunctional property taxes have become.

“Federal and state governments alike are growing increasingly dependent on taxes raised from property owners and this over-dependence comes at a high cost,” Wakelin writes for the Eureka Report this week.

“Rapidly decreasing housing affordability, a growing shortage of housing for buyers and renters and significant financial penalties for residential property investors are among the chief symptoms of a chronic problem requiring urgent reform.”

By Mathew Liddy Australian Property Investor