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Factor’s driving continued Chinese investor interest in Australian property

The continued appreciation of the yuan could put pressure on the Chinese Government to ease the capital outflow restrictions which have impacted investment in Australian commercial property.

The issue for China is that the yuan is up massively over the last 12 months and that has been driven by the new capital control regulations which have been very effective in turning around the outflow of capital.

However that appreciation could see Chinese goods becoming less competitive and that is not what the Chinese will want to see.

If that is the case then it seems clear that some tinkering with those new capital outflow regulations, and among them those pertaining to real estate transactions, will occur and that will help to both stabilise the yuan at a level that is acceptable to China, and of course benefit Australian commercial property.

According to a report from London based Pictet Wealth Management, China’s total capital outflow was estimated at US$166 billion in 2017, down 78% from US$761 billion in 2015 and 67% from US$500 billion in 2016 as a result of the new regulations.

China’s initial tightening of capital outflow rules in 2016 followed a fall of nearly 7% in the value of the yuan against the USD which had been the largest depreciation since 1994.

The foreign exchange turnaround, he said, had seen the yuan appreciate 10.4% against the USD over the 12 months to December.

But more importantly if we look at the movement over the last two months from December when  1 USD bought 6.62 yuan and then last week when 1 USD bought 6.29 yuan we see an appreciation of 5.2% in just six weeks.

That is a huge appreciation of the yuan on top of the significant rise over the last 12 months, and, if it continues, then it must be troubling for at least some sectors of the Chinese manufacturing industry which of course is a hugely significant contributor to capital inflow.

The sheer weight of Chinese capital seeking offshore property investment remains very significant with Australia still the number two destination in the world behind the US for Chinese investors.

We need to keep in mind that while investment outflows from China have been curbed, Chinese investors are adjusting to the new rules and fine tuning their investment strategies.

To date in the new year we have seen little change in interest from Chinese investors, if anything, what may have restricted sales volumes, has been as much about the lack of quality stock in increasingly tightly held markets.

That has been particularly the case in the retail sector, while falling vacancy and incentive levels have been very encouraging for office market landlords.

A further factor driving continued Chinese investor interest in Australian property were regulations aimed at curbing Chinese domestic real estate activity in restricting developers’ ability to raise finance for their projects.

On the one hand we have the regulations restricting developers from seeking off-shore opportunities and on the other hand also being restricted in their activities at home.

It is a difficult time for property developers on the domestic front, who, under the centralised banking system, already face limited options for funding new projects.

It is not inconceivable then that the further restrictions on their ability to raise finance through debt and equity, may have them looking offshore where finance for their projects may prove easier to come by. Source CBRE


Best Regards Linda & Carlos Debello “Your Local Property Sales & Management Specialist” LJ Gilland Real Estate Pty Ltd PO BOX 19 ZILLMERE 4034 0413 560 808 (Mob 2) 0409 995 578 (Linda) http://www.ljgrealestate.com.au/index.php?lan=ch Chinese website https://www.facebook.com/ljgrealestate


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Aging Population Threatens Society with Unsustainable Debt

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.


In Table 1, we present the growth rates and other statistics for our housing markets across Australia.

Table 1: Market Performance

Sydney is continuing in its ‘boom’ growth path. The median value of all houses in Sydney is now a staggering $911,500. Growth in dollars for the month was $11,000. Sydney home owners are doing well, but how can young people save at a rate that keeps up with property growth rates? The trend data, as shown in Graph 1, does not seem to point to any slowing in this market. The current trend is not what we had expected and is probably a consequence of the expected lower interest rate environment.

Graph 1: Sydney Trends

Rental yields in both Sydney and Melbourne are falling away as the increase in values outstrips dollar weekly rental growth. The yields in both cities are becoming unattractive and will sooner or later cause investors to slow their investment activity as some purchases become uneconomical.

The market is patchy and while Sydney is ‘booming’, Darwin is shedding value. This is a consequence of it being in the midst of economic slowing as the wet season slows activity and some resource projects also slow.

This will be my last newsletter to all of you as I will move to the next part of my life mid next month. I have enjoyed my discussions with a large number of you and trust that I have helped many in their endeavours to improve their personal wealth. It’s hard to believe that when I started analysing the property market, the median value of a Sydney house was in the order of $175,000 – a huge difference to today’s median value of $911,500 (the average per annum rate of growth over the last 25 years has been 6.8 per cent). Although I am leaving, Residex commentaries, statistics and reports will continue. I am leaving you in the capable hands of Eliza Owen – Market Analyst and Editor. Eliza has a Bachelor of Economics (Hons I) from the University of Sydney, and 5 years experience in the real estate sector.

In case you were wondering, I am not leaving to retire. The word retirement doesn’t sit well with my fertile mind, but it does make me think of an issue that is very topical: how do we help to make people independent in retirement and less reliant on the government pension? It is clear that this has to happen for the good of our country. Unless we do, there is a real risk that the standard of living of our aged, and all of us generally, will reduce. This is because government can’t spend more than it receives forever (That is, unless we all want a situation like the one that exists in Greece).

The family home is, in most cases, the largest valued asset that is held by many retired people. It is not fully utilised and in reality most do not need the space it provides. If you can afford to live without any help then why not just continue to live where you have lived for most of your life and enjoy it? However, if you can’t afford to live in the dwelling without government help then rational economics would suggest it should be sold and you should move to a home which is more in accord with your financial position.

My statement is harsh but it is the reality and we would all do exactly as I have stated if Government wasn’t there to support us in our old age.

Notwithstanding the economic rationalism, socially and politically it is very difficult to make a change and remove something that has been previously allowed. For decades, people planned for retirement based on an assumption that they would never have to sell their home. They paid taxes, and accepted those taxes on the basis that in old age, the government would support them and never have regard for the value of the family home.

Yet the reality is that we can’t continue as we have. We have to find a solution. So for what it is worth, here is what I believe Government should do:

  • Include the value of the family home in the means test when identifying the right to any pension or part there of. The value of the family home included should be that amount which exceeds say $400,000;
  • Allow any person to contribute up to $2 million into their super fund where such funds are generated from the sale of the family home and the person is over the age of 60 years;
  • The ability to contribute to the super fund should be a once off entitlement and have no tests other than those in the above point. It should be allowed, even where the person is receiving a pension from their super fund.

There is a significant amount of discussion currently around the right of people to contribute more than is realistically needed into super simply for real estate planning. That discussion is soundly based given the large cost this potentially has on tax revenue when government is struggling to reduce debt and balance the budget. In reality, even if we retire at say, 60 years most of us don’t need to support ourselves for more than about another 30 years. So how much do we really need in our super fund?

If we assume inflation at a rate of say 2%, and today we are happy that we can comfortably live on $70,000 per year after tax, then we would need to have a fund today of approximately $2.06 million. This assumes our fund has a growth rate equal to the inflation rate only. Clearly, our fund should be able to do better than this.

On the above basis, it does appear reasonable that the government should limit the size of the tax free status retirement fund to something in the order of say $2.5 million.

Given all of the above it seems to me that a reasonable and acceptable solution is to encourage home downsizing and at the same time alter the super fund rules so funds have a limit of $2.5 million. At the same time, people downsizing should be allowed to make a contribution of up to $2 million to their fund.

The consequence for all is a win. For people downsizing:

  • They will still be able to live in a home they own;
  • They will no longer have a tax liability on earnings being generated off the sale proceeds of the family home;
  • They will not have to enter into reverse mortgages which have a high interest cost and have the potential to reduce the value of their asset by an unknown amount when it is sold; and
  • Their prior, non-income earning home will start to produce income, tax free and enhance their lifestyle.

For Government, the cost of the current Super Fund arrangements, and the amount spent on pensions, will be reduced. Those who contribute funds to their super as a consequence of the sale of the family home will, in all probability, require much lower levels of support.

Perhaps as an additional benefit, state governments across the nation might consider removing conveyancing duty where a person over the age of 60 sells their family home and buys a lower cost property and contributes surplus funds to their super fund.

Perhaps all of the above is wishful thinking but I hope for the sake of all it isn’t.

Wishing you all well and I trust all your property investments turn out to be, as mine have been, exceptional investments.

AT A GLANCE •Property management, Rental services. •	Individual solutions to fit our client's needs •	High performance property sales, specializing in sales of properties with tenants in place. •	Body corporate management •	Competitive Commission Rates •	LET FEE FOR REFERRALS, We are a business built on Referrals. •	NO Lease Renewal & Comparable Market Analysis’ Fees/Charges •	PHOTOS TAKEN ON ENTRY •	Hands on approach to all Property Investment Management and & Sales Matters. •	Tenants are shown about safety switches and water mains etc at handover at the property.  We meet all tenants on site for handover.

• Property management, Rental services.
• Individual solutions to fit our client’s needs
• High performance property sales, specializing in sales of properties with tenants in place.
• Body corporate management
• Competitive Commission Rates
• LET FEE FOR REFERRALS, We are a business built on Referrals.
• NO Lease Renewal & Comparable Market Analysis’ Fees/Charges
• Hands on approach to all Property Investment Management and & Sales Matters.
• Tenants are shown about safety switches and water mains etc at handover at the property. We meet all tenants on site for handover.

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To Syndicate or not to Syndicate?

To Syndicate or Not – This is The Question (What Would You Do?)

Syndicate or Not

Indeed – this is the question I need answered.  As you can imagine, I am leaning in one direction in this matter, but I need you to check my thorough process and offer an opinion.

My answer – an emphatic YES.The next deal that I do is going to be a syndicate.  My feeling on this stems from the success I’ve had creating equity and cash flow with small multiplex, and now I am ready to add a “0” or two to every number in the deal.

To clearly define the moving parts, allow me to update you as to the status of the Symphony 10-Unit.  I wrote about it in an article entitled How I Bought a 10-plex With 1.5% Down – Case Study.

Acquisition Numbers

Purchase Price:                                                            $373,500

1st Mortgage (commercial portfolio note):                  70%

2nd Mortgage (private note):                                        25%

Required Down-payment:                                          5% *

Monthly Gross Income:                                              $5,800

Monthly Operating Costs:                                          $2,400

Monthly NOI:                                                             $3,400

Cost of Money:                                                           $2,400

CASH FLOW:                                                          $1,000

CAPITALIZED VALUE                                         $408,000 **

EQUITY POSITION                                               $54,000 ***

Several points here:

  1. While the down-payment requirement was 5% ($18,675), after prorations and credits I ended up closing with about $5,300 out of pocket, and this was the first ever deal that I brought money to – bummer…I couldn’t sleep over it for days!
  2. A building such as what this is in the location it is in commands a 10 CAP.  Therefore, annual NOI of $40,800 ($3,400 x 12) justified a value for this building of $408,000 at 10 CAP.  Having paid $373,500 I received a bit of a discount against the capitalized value.
  3. The total outstanding debt on this building was, and still basically is about $354,000.  Juxtaposed against capitalized value of $408,000, my equity position at the outset was about $54,000.

Improved Numbers

I evicted bums, hiked rents, and lowered expenses.  Due to my efforts, the current monthly NOI is about $3,870.  My current Cash Flow on this building is roughly $1,500/month, and the annual NOI $46,500 justifies a value of a bit under $465,000 at the same 10 CAP.

Thus – I’ve managed to drive the Cash Flow up by 50%, and my current equity position is $111,000:

Equity Position = Capitalized Valuation – Outstanding Debt

Equity Position = $465,000 – $354,000 = $111,000

A Bit Of Perspective On Syndication

My desire and pretty much decision at this point, to syndicate comes from a simple mental exercise of adding a “0” to every number in this transaction.  Of course, in this case I’d be talking about buying 100-unit apartment community for $3,735,000 with initial Cash Flow of $10,000/month and improving that to $15,000/month, and in the process putting a million bucks on my balance sheet.

I am aware that the process, though more involved and expensive, is basically the same.  So, in lieu of playing with tens of thousands as we do in SFR, or hundreds of thousands as we do in small multi, I would much rather syndicate and play with millions – the game is the same…

What am I missing? Thoughts?Image

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