Monthly Archives: October 2012
Rent rises today mean capital growth tomorrow for next property
By Terry Ryder
Thursday, 18 October 2012
Page 1 of 2
Rents rise first and prices follow.
That simple formula provides a clue to investors in choosing where to buy property for future growth.
Anyone following that recipe a year or so ago would have had solid capital gains in Gladstone and Mackay in Queensland.
We’ve seen it start to happen in Darwin as well.
The locations now poised to follow suit include Perth and Townsville.
Some 18 months ago I was scratching my head wondering why there had been little in the way of price growth in the nation’s number-one boom town, Gladstone.
Gas projects and other enterprises were bringing thousands of new workers into the place, and everything that mattered was in short supply – but the only reaction from the property market had been a massive hike in residential rents.
Then, almost belatedly, prices followed the rental trend. In the past 12 months, the median price in most Gladstone suburbs rose 17-18%. Mackay is a little behind Gladstone in the cycle but is now exhibiting similar patterns.
Darwin has been leading the state and territory capital cities on price movements, by a considerable margin. It, too, experienced big lifts in rental levels before prices started to follow.
Australian Property Monitors records a 27% lift in Darwin’s median house rent in the year to June, with the median weekly asking rent for apartments rising 15%. In the September quarter, Darwin recorded the biggest increase in home values among the capital cities.
Perth is set to follow this trend. It’s had a 15% rise in its median house rent in the past 12 months, according to Australian Property Monitors. The median rent for apartments has climbed 11%.
Perth prices so far have moved little, but that is soon to change. Strong demand for accommodation has led to a 0.5% vacancy rate, according to the latest figures from SQM Research, and WA housing finance commitments by owner-occupiers are up 18% in the 12 months to the end of August (the biggest jump in the nation). Loans to investors have risen solidly, as well.
WA has the nation’s strongest economy and leads on population and employment growth. The projects that really matter in the WA resources sector – the mega gas projects, not the iron ore ones – are now starting to crank up their construction phases.
Against that background, price growth is inevitable in Perth, particularly with rents strongly leading the way.
Townsville is another significant market where rents have been pressured by high demand, but prices remain in the doldrums.
That will change. Townsville gets my vote as the strongest regional economy in Australia, with not only diversity but considerable muscle in all its multi-faceted economic sectors. It’s a city that doesn’t need the resources sector, but gets considerable oomph from it anyway.
Queensland is Australia’s most decentralised state, with numerous strong regional centres, but Townsville is undoubtedly king of the regions. Despite being impacted by the state government’s manic cost-cutting, job-shedding and plot-losing, Townsville is experiencing expansion in many other key sectors, particularly its already-substantial military economy.
Its spinoffs from the resources sector include an expanding port, processing facilities and lots of fly-in fly-out workers who reside in Townsville.
People want rentals in Townsville but can’t get them. Prices will react sooner or later.
|Linda J. & Carlos Debello, LJ Gilland Real Estate Pty Ltd
Tel: (07) 3263 6085 | Mobile: 0409 995 578 & 0400 833 800 http://www.ljgrealestate.com.au
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Choose the best area before considering investing in a new or old property: MLomas
By M Lomas
Monday, 15 October 2012
It’s probably one of the original property investing debates – should you buy an established property or a new one? And, as in most debates, there is no single answer. In fact, the answer is – it depends.
Ask any property developer and you’ll hear "buy only new".
A new property comes with significant depreciation benefits, meaning that you are more likely to see a positive cashflow – a situation where the shortfall between income and expenses on a property is removed by tax benefits that exceed that shortfall.
Of course, we should ignore the fact that of course a developer thinks new is best, and also that, depending upon whom you buy from, very often developer profit hikes your buy-in price above that which you would pay for a similar property a few years old.
The point is, you need to consider the entire argument before you decide what to buy.
New properties do carry depreciation benefits. However, if you have ever fully read a depreciation report (and why wouldn’t you, such scintillating reading they are!), you may have noted that often the depreciation available in years two and three is higher than it was in that first year. Why is this? Once items fall into a "low value pool", as they tend to do after a few years, you get to claim larger chunks of them in one go. And so the argument for buying a brand-new property to improve tax benefits is actually mostly moot.
I’ve also found that often a property that is two to three years old is better value than the new one.
It’s like that brand-new car that loses 15% of its value as you are driving it out of the show room – with a new property the premium you pay for having everything shiny and new is quickly absorbed and value is lost almost immediately.
The property that is a few years old has also been run in a little, with any major issues most likely identified and fixed already. These points have little meaning for the owner-occupier, who most likely plans to stay for years and whose asset is capital gains tax-free, but for the investor, who needs every dollar of equity to enable future leveraging, that premium can be costly in the bigger picture.
Remember, too, that the "value" of a property is determined by the recent sales in the area.
A new property is harder to value, as there is little to compare it with. I’ve lost count of the number of times that I have seen investors buy property in massive new developments, only to find that a year later the property is worth $40,000 less.
This loss is likely due to a combination of factors – the developer profit (and middleman commission) made it more expensive in the first place, the size of the development created a supply issue for which there was not enough demand, and the market was now undergoing its first real test – re-sales were happening and the true value was finally being realised.
|Of course, where that new property is not part of an overall estate, then it’s easy to tell if it’s at market value, as it will be compared to the older properties around it.||Demand is a big consideration, both from purchasers and renters.
An older home situated within a swathe of brand new properties would make an unwise choice and is likely to have less demand from the available renters than a property which is more the norm for the area.
But where the area has a greater proportion of established properties and a demonstrated demand for them from renters, that "new" property might not add any bottom-line benefits to the investor, and might just cost more.
If the new property is the same price as the older property, then the newer one is the intelligent choice, as maintenance costs should be less. However, I don’t think I’ve ever seen a new property available at the same price as an established one, so the extra that you will pay has to be considered alongside the savings you might make on maintenance.
Investors really should not be starting their search for property with a decision to go out and find only a new property, as this suggests that all they are considering is cashflow. I’ve seen many beautiful new properties full of tax benefits being sold by middlemen on big commissions to investors who simply want to see a positive cashflow, and those investors didn’t bother to analyse the real viability of that underlying asset in investment terms.
The result is a positive cashflow property that fails to thrive and a disappointed investor who realises that you cannot retire on cashflow alone!
Rather than take part in the ‘new or old’ debate, all investors should first determine where the best area is in which to buy. Then they should find out what type of property is most in demand there.
It’s likely that an established property, as long as it’s not too old and therefore a maintenance trap, fits the bill quite nicely and doesn’t carry the premium that a brand-new property does. It’s also likely that, as long as it’s only a few years old, the tax benefits will be just as good anyway, the rent return the same, and the lower price will mean that great cashflows still exist and there’s profit to be made.
Linda and Carlos Debello
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