Investor update – autumn 2013

Since preparing this autumn report, we have spent four days in Sydney inspecting more than 30 properties.

Our marketing intelligence during this period indicates that our predictions for greater confidence emerging in the Sydney market in particular is gaining momentum.

The first marker for this is a shortage of stock, which is combining with lower interest rates to create an aura of urgency in inner city pockets such as Surry Hills and Darlinghurst. This, in turn, is creating competitive bidding, particularly in Sydney housing. However, we are finding good value in ‘off market’ older style apartments.

Next month, we hope to give clients a comprehensive report on the Brisbane residential market where a lack of confidence with local investors is throwing out some excellent traditional Portfolio criteria for existing housing investment.

We look forward to sending this report to clients in mid to late April.

Jock Bing, CEO, Portfolio Management Services

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Overview – renewed signs of confidence

Cuts to interest rates in the closing weeks of 2012 were a catalyst for prospective buyers who had been sitting on the sidelines waiting for a sign prices were rising again. They did their home work over summer and were ready to step in to the action as the property market kicked off for the new year.

Inspections and auction attendances have risen measurably this year and interest rates this low have not been seen since the 1960s.

The attraction of housing as a solid investment always underpins long term demand. This holds even more so now, particularly as there are such low returns from cash investments, and the share market continues to be volatile with ongoing warnings from companies of flat or lower profits to come.

Banks are also lending more freely but they are still conservative and avoiding certain types of property assets such as large high rise developments, especially in Melbourne.

We think it is probable that there will be an increase in buying activity in most markets after the Easter break. Some sellers who deferred making a decision prior to the summer and holiday season are expected to gear up from April onward with public sale campaigns.

Investors also need to keep an eye on the Federal Budget for any new measures such as tax imposts or changes to investment deductions.

Overall, however, Australia has a chronic housing shortage and our population continues to expand. That underlying factor alone provides a long term support mechanism for most housing markets and should provide investors with significant reassurance.

Sydney on the rise – but still good value

The year opened with a rumble rather than a bang for property buyers and investors in Sydney. Although slightly muted it is an indication of growing confidence.

Sellers are now emerging after an extended real estate holiday during summer. By mid–March activity had increased to around 1,000 houses and units coming to the auction market each weekend in both Melbourne and Sydney.

However, the Sydney market is where we see a rare window as relatively large numbers of properties emerge for sale. We believe it is the start of a new cycle and because of the momentum with which Sydney generally rises in recovery, investors should consider some timely decisions.

Market activity is likely to be sustained after Easter, as the regenerated interest in established housing strengthens into longer term confidence. There is a long tradition of Sydney housing moving higher and more rapidly in recovery than the Melbourne market, which tends to speed up later in the cycle.

Sellers are meeting a warm welcome from buyers in both cities so far this year. Clearance rates have been above 65 percent in March, after three years during which they were close to just 50 per cent.

The median price of established Sydney houses during the December quarter was 4.2 percent more than the same quarter a year earlier. By comparison, other state capitals (excluding Perth) were flat or only fractionally higher.

Sydney prices have also risen in the March 2013 quarter, up 5 percent compared with a year earlier.

The potential for Sydney’s rapid recovery is accentuated by the construction downturn in that city since it peaked in 2004. This underpins an underlying housing deficiency. Already, rental incomes are rising again and yields of 4.5 to 5 percent are more readily available. A terrace home valued at about $850,000 in a near–city suburb can now rent for $950 per week.

Because of their ready access to the CBD the inner western suburbs such as Glebe, Chippendale and Erksineville are particularly attractive in the current market.

However, it should be noted that these suburbs are also becoming more attractive to owner occupiers, thus gradually driving up prices.

Investors who want to take advantage of remaining recessed price levels have probably only about 12 months to act. With prices in many cases providing true investment value, the 5 percent increase during the latest March quarter could potentially translate to a 25 percent capital appreciation in parts of Sydney during the next 18 months.

Melbourne flat but pockets of growth

Melbourne’s market is in a different phase to other cities. During the past difficult five years, at no time did Melbourne prices decline to the extent of other markets. Indeed, many Melbourne suburbs reached their peak as recently as 12-18 months ago, and rents have remained steady. While good news for existing owners, it means the scope for further increases is limited.

There are still opportunities for rewarding investment in 2013 but not across the board. Fitzroy, East Brunswick, Carlton, Frankston and Footscray show potential. Established units, often older style, close to the city and in high value suburbs also offer good opportunities, as they can be purchased well below replacement cost. A number of owner occupiers are also returning to areas such as Footscray as the population of overseas students coming to Australia falls.

Footscray, with its access to employment in Melbourne and Docklands, is proving an attractive suburb to owners and renters and therefore we expect rental returns to increase in time.

On the other hand, properties that recorded sustained rises a few years ago have since stood still. For example, in Melbourne’s bayside suburb of Albert Park, houses that sold for $1.2 million last year are likely to bring much the same price at the end of this year.

In contrast, Paddington terraces in Sydney sold at a similar $1.2 million in 2011 have already enjoyed a lift in values and higher rentals.

Melbourne high rise

There is a spate of high rise unit housing being completed and coming on to the market in Melbourne during the next 18 months. At the same time there is already substantial stock for sale not always openly declared in existing high rises, particularly in the Docklands.

Now that the summer holiday lull is over, we have noticed an increase in these properties for sale. Many of the units that have recently come on the market were the same stock left over from last year. It will be interesting to see how much fresh property is also added for sale.

Infrastructure

Good infrastructure has an important influence on investment property locations. The impact this year of Melbourne’s Peninsula Freeway and its connection to the EastLink network is having a dramatic and positive impact on travel to the southern suburbs and the Mornington Peninsula from central Melbourne.

The new road has cleared the transit cars out of Frankston and made it a more pleasant suburb for residents and businesses. Frankston has some enticing investment values, at prices well under replacement costs. Its historic residential base is also expected to change, not only from the increased desirability given it by the new road network, but also from plans to upgrade the rail line to Melbourne.

For similar reasons, Geelong is also developing at a faster rate than for many years. It also has enhanced road and rail link connecting it to Melbourne, with unprecedented numbers of people now commuting to the capital, as well as greatly improved access to the Bellarine Peninsula and Great Ocean Road resort locations.

For a more in-depth examination of potential for these two areas, see our post of May 1, 2013.

Brisbane – time to take another look

Brisbane is showing signs of a return to an attractive investment prospect for established housing.

In the long term, the median house price in Brisbane since 2000 has increased 9.5 percent a year compound. Double figure annual growth was achieved in two three year periods between 2000 and 2006 but activity has slumped in recent years. Only 10,600 houses sold during 2012, compared with 25,000 that changed hands during Brisbane’s market peak in 2002.

Critically, the past two years have been affected by floods of the Brisbane River. As a result the median sale price for houses fell by more than 4 per cent last year, although prices edged up 0.7 percent in the December quarter 2012.

Local investors, perhaps reacting to the recurring floods, have not shown much confidence during the past couple of years. But Brisbane is a big and rapidly growing city and areas close to the CBD are cheaper than Sydney and Melbourne. Brisbane also has good and rapidly expanding infrastructure and a lifestyle that attracts southerners. Population growth is strong and suburbs such as New Farm, Newstead and Ascot benefit from this.

The population exceeded 2 million people last year for the first time, with an annual growth rate of 2.2 per cent in the five years prior. This compares with 1.6 per cent for the rest of Australia.

Coastal areas

The two big coastal leisure markets south of Brisbane, the Gold Coast and Sunshine Coast, have been among the worst hit by the housing slump. Generally,however, there is a substantial amount of property up for sale as these markets attempt to recover.

Investing in retirement

Retirees are an important part of the investment housing market, reflecting greater longevity and the demographic bubble caused by the Second World War baby boom.

Changes in regulations have also enabled self managed superannuation funds (SMSFs) to more readily invest in property such as housing. Most retirees are conscious of the advantages of property investment. They’re also aware of both the capital gains tax-free status of personal home ownership and the existing tax-free or tax advantages of income created within a superannuation fund.

One of the first moves by retirees is to downsize their personal accommodation whereby, in many cases, the switch also leaves surplus funds for investment.

Negative gearing

Buying property outside a super fund and negatively gearing it can also provide effective returns that are superior to those of traditional superannuation assets.

Generally, retirees are conservative investors and like the proven and understood property sector. They also like the recurring income from rentals and, of course, the long term capital gains.

The old fundamental rationale of buying in good locations, when values have eased off their peaks always holds true.

New Housing

Australia has had and still has an underlying housing shortage. The supply of new homes lags behind population growth caused by birth rates and immigration.

New housing construction rates still do not meet the long term requirements needed to meet the shortfall, although the imbalance is narrowing.

The population flow–on from the mining boom has evaporated (temporarily). There are also fewer overseas tertiary students and the spike in birth rates appears to have also been passed, perhaps reflecting the tighter economic conditions.

New construction approvals are concentrated in what the Australian Bureau of Statistics calls private sector dwellings other than private ‘houses’. In other words, apartments and units.

These other dwellings used to account for about a quarter of new homes under construction. Now the trend has them edging toward half.

About 26 percent of total housing approvals in 2009 were other dwellings and in January 2011 they accounted for 33.8 percent. By January this year, however, this type of housing represented 40.7 percent of all new housing approvals.

Apartment values

The proliferation of apartments caused by a surge in new developments (particularly in Victoria) is creating its own legacy. The lenders and banks often require buyers to provide higher deposits and they are also tightening their loan ratios to the developers.

Generally, Portfolio Management Services tries to stick with houses as an investment asset, but we do buy apartments for investment clients and owner occupiers. We do not, however, get involved with off-the-plan arrangements.

High rise living will continue to increase its penetration of the total housing market. It has appeal to many in the 28 to 40 year old age group, especially busy, time poor dual income households.

Retirees, however, have so far not been amenable to high–rise living and they have also, rightly, been cautious of investing in off-the-plan units. This group should continue their focus on established housing and more boutique art deco or period style apartments and older style units.