Tips for Apartment Investors

Domain had a good story with tips for apartment investors.

See full story.

Extract:

"Many people invest in apartments because they often have a cheaper buy-in price than houses and are also thought to be a lot easier to maintain without gardens to worry about, and with the costs of building maintenance shared across other owners.

But what makes a good investment unit?

Location, location

You can't get past the fact you need to look for an apartment in a good spot. In the city, walking distance to public transport and shops is a must. Nearby schools can be handy but many renters are single or young, childless couples, so a school nearby is probably going to be third on the list after a train or tram station or a very reliable bus route that is here to stay, and shops, cafés and other services. Buyers agents say you should look for a quiet side street rather than a busy main road.

Many renters are professionals who want to get into the city fast. For that reason, apartments closer to town are recommended over those on the outskirts by many buyers agents who argue they will attract higher capital growth. The downside is they often cost more to buy than units further out.

An apartment in an area where there's high development and plenty of other similar flats around would probably grow in value more slowly than an older unit in a pre-1980s building. That's because at sale time there could be stacks of similar new flats on the market but a well-built, well-located older unit will be a scarcer find."

Property Investor Information

Two sites with useful information for property investors:

• negativegearedinvestmentproperty.com.au
• My Tax Zone

Tax Reform and Property

The Henry Tax Review was released at 2.30pm today. It was expected to have an impact on property investment, but it appears that the impact will be minimal in the short term. See Summary of Report and Mr Swan's response: www.futuretax.gov.au

From the Report:

• Over a long transition period, a land tax should be introduced on all land on a more efficient and uniform basis linked to unit land values, removing disincentives for institutional investment in rental property and integrated over time with property rate assessments.
• Over a similar period, transfer taxes on property should be reduced, and ultimately removed, with revenues replaced by efficient taxes, preferably annual land tax.
• Subject to transitional provisions, and following action to improve the current shortfall in housing supply, a more neutral personal income tax treatment of private residential rental investment should be introduced, with less volatile market effects, through a 40 per cent discount on all net residential rental income and losses, and capital gains.

The structure of land taxes could be improved by broadening the land tax base to eventually include all land. Land tax rates should be based on the value of a given property, so that the tax does not discriminate between different owners or uses of land. A tax-free threshold based on the per-square-metre value of the land could be set such that there would be no tax liability on most agricultural and other low-value land. Higher-value land could be taxed at differentiated rates based on the per-square-metre value of the land.

Stamp duties on conveyances are inconsistent with the needs of a modern tax system. While a significant source of State tax revenue, they are volatile and highly inefficient and should be replaced with a more efficient means of raising revenue.

Conveyance stamp duty is highly inefficient and inequitable. It discourages transactions of commercial and residential property and, through this, its allocation to its most valuable use. Conveyance stamp duty can also discourage people from changing their place of residence as their personal circumstances change or discourage people from making lifestyle changes that involve a change in residence. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth.

Reforming land tax and conveyance stamp duty arrangements, along with the proposed changes to the taxation of rental housing and Rent Assistance, will go some way toward improving housing affordability. However, to a significant extent housing affordability is a supply issue (see Box 6.1).

Media Reports:

"Likewise the second part of the Henry Review’s two “key directions for efficient land and resource taxation”. The first part is the idea of a 40 per cent resource rent tax, which was first leaked in January. The response to the leak was obviously sufficiently mixed for the thing to become the centrepiece of Mr Swan’s tax reform.

The second part – and given equal weight in the review – is a national land tax of 1 per cent applying to all land regardless of use. Absolutely no mention of that in either leaks or today’s statement.

The Henry Review also recommends a 40 per cent discount to individuals for net interest income, residential rent, capital gains and interest related to listed shares. Also leaked, but rejected."

Business Spectator

The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.

These recommendations were widely flagged prior to today's announcement, with critics saying the current system doesn't give enough incentives for workers to put money in savings accounts.

Currently, interest earned on all savings accounts and term deposits is taxed at a worker's top marginal rate.

It is far less generous than the tax treatment of other investments such as shares and property, which the review says encourages investors to take on too much debt.

"The tax advantages from borrowing to invest in a rental property, also relevant for shares, leads to investors taking on too much debt and distorts the rental property market," the review says.

News Corp

Flat Market in Brisbane

In talking with people in the real estate industry in Brisbane recently, it seems to me that the market is relatively flat. At some open homes for houses in the $600,ooo price range, only 1 family will turn up for an inspection. Off the plan sales for apartments are, for the most part, slow. Prices are relatively stable for apartments. It is not a booming market at present. On the Sunshine and Gold Coasts, the market is very dead.

There are pending risks that may dramatically impact investment apartments in Queensland:

• higher interest rates
• risk of lower numbers of overseas students and tourists visiting Australia (including due to the higher Aussie Dollar)
• The review of the Australian Tax System, due within weeks, which will likely impact the treatment of capital gains for real estate, and probably recommend the removal of negatively gearing of losses from investment properties to offset income tax from income earned from other sources
• difficulties in obtaining investment loans, and the banks requiring a higher deposit for investment property loans
• increased school fees, which impacts the ability of many families wanting to invest in property
• increased body corporate fees and rates, making returns less
• poor performing vacation rentals and low vacation rental returns, often less than 2% net returns

Promised Infrastructure

I often visit off-the-plan sales offices for apartment projects, and I am often told about planned infrastructure. A new pedestrian bridge, or a new CityCat ferry stop, or a new bus route, or a new supermarket planned for a neighbouring or nearby site, or restaurants about to open. I go back a number of years later, and the planned infrastructure is still not there.

Sales agents often talk about stuff that will improve the area but that never actually eventuates. So be careful about such "promises". It is best to look at what the area is like now, because this is how the area may look for some time to come. Do not pay extra for future benefits that may never arrive. If they do arrive, then you will get some capital appreciation.

I walked around West End last night. A Saturday night. Boundary Street was alive and hoping. South Bank was busy and bustling. Montague Road was dead. It was dark and no people were around. Nothing was open. It is still a scary semi-industrial area. So be careful if buying into Flow, or Waters Edge, or Koko or Riverpoint. There is a lack of public transport, and it is a very isolated area. I would not walk home from the city at night to Flow or Riverpoint. The promises made by sales agents to me a number of years ago (new park, CityCat terminal, new coffee shops and restaurants opening, a new supermarket on Montague Road, a new bus route with regular buses for all the new residents) just did not eventuate. Still many light industrial uses and sheds for spray painters.

Matusik On Rents

"The unfortunate news about rental growth for this year is that there probably won’t be any. In fact, not only do we foresee a dismal year in 2010 for rental growth, we anticipate limited investor interest in residential property to accompany it.

As we have said previously, our analysis shows that the Australian and Queensland rental market is adequately supplied overall, and recent predictions of rental growth exceeding double figures are unlikely to happen. Expect rent rises of 3% to 5% at best, and more realistically, 0% to 2%. ...

To begin with, existing landlords need to temper their expectations, and new investors should be somewhat conservative on a likely rental return. ...

Make sure your property is “share” friendly. The key here is to provide separate ensuites and bedrooms of equal size, positioned some distance away from each other. Adequate storage and off street parking also helps renters share in relative peace. Research shows that when choosing a property to rent, tenants look at the size and number of bedrooms first, followed by car accommodation and then the indoor/outdoor living space/s.

Location and views are important when it comes to capital growth, but are less important when it comes to renting out a property. Don’t expect a lot more rent for a property with a view or in a trendy spot.
Michael Matusik"

Timing the Market - Letter to the Editor

A good letter from yesterday's AFR:

"The latest APM report clearly shows that house prices are rising mainly because of resurgent interest in high-end properties; but many people will sadly delude themselves that this is a sure sign of capital growth in their own, low to mid-end houses or investment properties. They should understand that the property markets do not all move in the same way at the same time.

By selling and trading up to a more prestigious area now, there is the real risk of "buying into the rise" and paying a premium to do so. Time in the market , or timing the market? The time to buy into high-end property was when no one could service the debt or sell it - during the middle of the financial crisis. It is very difficult to do well in an asset class when everyone else is interested in it."

Chris Embery, South Australia.

The Bottom Has Passed?

"Australia's top institutional and private investors believe the nation is well and truly past the bottom of the property cycle and now heading towards upswing, according to new survey findings released by Colliers International.

The second Colliers International Investor Sentiment Survey, conducted late last month, has shown investors around the country believe that if the property cycle were a clock, with the top of the market at 12 o'clock and the bottom at 6 o'clock, Australia moved upwards to 7 o'clock in Q3-09, after the majority of investors believed the same clock sat at 5 o'clock when they were first surveyed in May for Q2-09. ...

The majority of investors, at 52 per cent, believe Australia is not only past the bottom of the property cycle, but 64% also believe the upswing will occur earlier than indicated in the first survey - by Q2/Q3 2010 or even earlier, instead of in Q4 2010. ...

When asked how they would describe their property investment strategy over the next 12 months, the majority of investors, almost half at 49 per cent, identified they were heading into growth mode, with 43 per cent in defend mode or holding steady. Only 8 per cent were expecting to contract holdings.

Investors also signalled the green light to purchase property is now definitely on. 69 per cent now expect to buy property in Australia over the next 12 months, up from 63 per cent in May. Investors also expect it will become easier to buy property with 47 per cent believing access to debt capital will become easier in the next 12 months, versus just 20 per cent in the May survey.

Most investors, at 45 per cent, are looking to buy office property, with the top 5 buy markets identified as Sydney Office (20 per cent), Melbourne Office (15 per cent), Sydney Residential (7 per cent), Melbourne Residential (6 per cent) and Sydney Industrial (6 per cent). ...

Residential was again the standout property sector with the majority of investors believing values had only declined by 1 to 10 per cent since the peak of the market, while 16 per cent believed residential values hadn't changed at all, or even witnessed some growth. The majority of investors believe there will be no further softening to residential values and 8 per cent believe there will now be growth."

http://www.colliers.com.au/site/page.cfm?c=1305

Investment in Dwellings

"... the Australian Bureau of Statistics' figures on the country's national GDP expenditure for fiscal 2009 revealed dwelling investment slumped a seasonally adjusted 10.9 per cent. In the June quarter it dived 5.5 per cent."

The Australian

Investor Sentiment - Still Not at the Bottom

"Colliers International’s Investor Sentiment Survey reveals bottom of property cycle now imminent with upswing
predicted to be well underway by 2010. Property investors around the country believe Australia is now approaching the upswing point of the property cycle with the majority of investors believing the industry is currently between 4:00 and 6:00 on the property cycle clock (where 6:00 is considered bottom). This was the major finding of the inaugural National Investor Sentiment Survey conducted by Colliers International. Colliers International surveyed institutional and private clients across Australia to attain their sentiment on the current climate of Australia’s property market, and their views on the next 12 months. The investment calibre of respondents was exceptionally high with 42 percent stating the value of their portfolio was greater than $AUD1 billion. Felice Spark, Director of Commercial Research at Colliers International says the majority of investors believe we are now fast approaching, if not already at the bottom of the cycle, poised for upswing. “36 percent of investors surveyed believe Australia is currently at 5:00 on the property clock with a further 36 percent identifying either 4:00 or 6:00.”
Summary of key findings:
• 72% of investors believe we are between 4:00 and 6:00 on the Property Cycle Clock, poised for upswing
• Residential sector is the standout with values holding steady or possibly growing
• 63% said they were looking to buy property in Australia within the next 12 months"
Source: Colliers
So based on this survey, more than 60% of property investors think that things are going to get worse before they get better.

Investors Returning

"Increases in rents have seen yields for Brisbane houses and units (at 4.4% and 4.9% respectively) increase, and yields for houses are now back to levels last seen in 2002. This together with lower interest rates is starting to make a more compelling case for investors, and counter cyclical investors are starting to return to the market."

"Prices did not peak until early 2008 and have only come back 5% since then. Whilst there is potentially further downside in the short term, the market is likely to stabilise and the high levels of demand are expected to see growth return once the economy starts to pick up. Brisbane has generally had high demand for apartments and units, and this means that the fall in prices for other dwellings has not been as much as for houses.

MLG Property Report - March 2009