INVEST….NOT SPECULATE

As our property markets show signs of life again, many investors recognise that this cycle will be different to the last; it will be a cycle of more subdued growth.

In order to outperform the markets one of the most common questions is “where’s the next hotspot?”

People who ask my opinion are usually disappointed that firstly, I don’t know and secondly, I don’t really care.

I’m not in the business of speculating.

Instead, I make my investment decisions based on proven long-term performance, rather than short-term speculation.

The fact is hotspotting – seeking out the “next big boom” location – is speculation and not true property investment.

If you look at the track record of people chasing the next trend it’s been pretty poor.

On the other hand to “invest” in property requires the intention of generating long-term capital growth that tracks above average long-term price growth for the area.

Now, here’s what I find interesting: a lot of the hotspots predicted by some of Australia’s property analysts turned out correct.

Some of the regional areas and mining towns boomed, at least for a while as investors chased up prices but, unless they got the timing right, chasing the next hotspot has turned out disastrous for many investors.

Some are left with properties worth considerably less than they paid and with less rental income than they expected. Now, they are unable to sell their properties as buyers have abandoned these markets which have little depth from local demand.

If you’re into investing in short-term trends, being right isn’t what’s important, it’s being right at the right time that counts.

Very few can do that, so the history of investors trying to find the next boom town is littered with people who get the story right and the outcome wrong.

Instead I buy in areas that have a proven long-term history of outperforming the average capital growth and are likely to continue to outperform because of the demographics of the people living in the area.

And I like buying the property for the right price – below its intrinsic value.

Hotspotting is virtually the opposite of this sensible, not-so-sexy, tried and tested system for successfully building a property portfolio.

Let’s have a closer look at a few other reasons why I steer clear of looking for hotspots:

1. Hot spotting is about short-term speculation, not long term wealth creation.

Most property investors are trying to build their asset base so that one day it can replace their personal exertion income.

The key to building a substantial property portfolio is to use your first property to leverage into your next property and then use those two properties to leverage into more investments, and so on.

You will only have the ability to do this if you invest in locations that consistently provide long-term capital growth.

By definition, ‘hotspots’ are not these types of areas.

Just as quickly as they heat up, property values in these locations can come off the boil and cool very quickly.

Just look what happened to many mining towns and sea change locations, such as Mandurah.

2. Hot spotting often means following the crowd and more often than not, the crowd gets it wrong!

Many people trying to buy in the next hotspot get their advice from online reports or “get rich quick” seminars and in the short-term some of these predictions are self-fulfilling.

If you suddenly get a diverse group of investors buying up in a small town that has little market depth, this tends to push up prices “proving” this area really is a hotspot.

What’s really happening is that you’re seeing an over-inflated market that more often than not, is unsustainable in the long term.

Some of our mining towns, the Gold Cost and Sunshine Coast are great examples of this phenomenon.

On the other hand strategic investors buy counter cyclically, when others are afraid to get into the market.

3. Hotspotting requires accurate timing, yet most investors don’t have the necessary knowledge to know when it’s the best time to buy.

Some hotspots have excellent potential to generate long term capital growth, but these are rare.

For example, there’s the inner-city suburb that’s yet to take off because while it’s on the verge of gentrification, yet it still has an air of industrialisation.

Some investors can pick these areas before the market takes off, but timing markets like this is difficult.

The real problem is that by the time you find out about the next hotspot, it may be too late to benefit from that substantial early growth.

Or the opposite could be true. You might end up jumping in too early and not reaping the rewards for many years while in the meantime, your money has been tied up and you’ve missed out on real opportunities in proven areas.

A great example of this is the inner western Melbourne suburb of Footscray, which has been “going to improve” for the last 35 years but just hasn’t!

4. Hotspotting is usually based on opinions rather than facts.

When you read articles in the media or hear reports on TV that suggest an area is about to take off as the “next big thing”, in reality you’re simply just being given someone’s opinion.

Be careful, are they biased because they have properties to sell and it suits them to be spruiking a certain area?

You’re better off to rely on your own research and due diligence, rather than blindly accepting a so-called expert’s potentially biased advice.

5. Hotspotting can generate short-term inflation in suburbs that can’t sustain a high level of price growth over the long term.

Today’s hotspot could be tomorrow’s over heated market.

For example, when the resources boom hit Western Australia and far north Queensland, thousands of investors jumped on the bandwagon and bought into the mining towns that sprung up overnight and became a buzz of activity.

But now that the resources sector has cooled off, many of these towns have gone from boom to bust as the major industry supporting the local economy came crashing down.

I know of many investors who are still having trouble offloading their under performing properties in these mining towns and regional centres which recently were called hotspots.

My suggestion is avoid the excitement of hotspots.

This may make your investment boring, but it allows the rest of your life to be more exciting as you growth your wealth.

So what is the alternative?

To ensure I buy a property that will outperform the market averages in the long term; I use a Four Stranded Strategic Approach:

  1. I buy a property below its intrinsic value.
  2. I buy in an area that has a long history of strong capital growth and one that will continue to outperform average capital growth because of the demographics of the people living there. I look for affluent areas where people are prepared and can afford to pay a premium to live, or gentrifying areas where a wealthier demographic is moving in and pushing up prices as they improve the area.
  3. I look for a property with a twist – something unique, special, or a bit different or scarce about the property.
  4. And I look for a property where I can manufacture capital growth through refurbishment, renovations or redevelopment.

By following this approach I minimise my risks and maximise my upside.

Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.

If one strand lets me down, I have two or three others supporting my property’s performance.

By Michael Yardney
Director
Metropole Property Strategists
 
From http://matusikmissive.com.au
 
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Surry Hills property investors bleeding losses despite “bulletproof suburb” status

Buying in a so-called bulletproof suburb doesn’t guarantee that investors won’t be unscathed by property market fluctuations.

Despite the enthusiasm of property experts and analysts, Property Observer notes it’s still possible to lose money in suburbs which on paper seem faultless.

Many buyers in Surry Hills, touted by the latest Australian Property Investor magazine as one of Australia’s premier “bulletproof” suburbs, have lost money on their investments in the last few years.

According to Residex the suburb median has increased in value each calendar year for the past 10 years.

The median unit price is now $563,000, having grown an average of 5.2% each year for the past 10 years, according to Residex. The median rent is $615 a week and the gross rental yield is 5.6%.

But Property Observer has skimmed sales and found a selection of properties in Surry Hills where buyers made a loss on their supposedly bulletproof investment during the past decade.

In most cases it’s not that the properties were genuinely poor homes – as quite often the subsequent buyers made a healthy profit on the properties. But poor investment timing meant they perhaps chose the one period when the property went down in value.

Another common trait was people buying in new developments at an inflated price, especially if they bought in the Monument development on Oxford Street from Multiplex. There were multiple buyers reselling a year or two later at a significant loss.

And it’s not just limited to the upper end of the market, with some properties at the lower end losing their buyers money.

Though units were more likely to lose money, several classic Surry Hills terraces made it on the list as well.

The Pelican Street development, The Monument, is now a monument to lost dollars.  The 191-apartment building sold a number of units in the mid-2000s to late 2010s which have not resold well.

Unit 403 was sold for the first time at a hefty $1.175 million in 2005. But in September 2011 it resold for $975,000 – a loss of $200,000 for its vendor.

Unit 413 initially sold for $866,000 in 2005 and then resold in March 2008 for $755,000 – a loss of $111,000. But it did bounce back, it then sold again in September 2012 for $930,000.

Waiting until 2012 did seem to mitigate the loss for a few investors but they still lost money.

Unit 1513 first sold for $1.345 million in 2007 and then at $1.295 million in 2012 –a comparatively small loss of $50,000.

And unit 1313 first sold for $875,000 in 2007 and then at $870,000 in 2012 – a loss of just $5,000, the Monument loss list goes on.

Apartments in the St Margaret’s development on Bourke Street weren’t a guaranteed recipe of millions either.

Unit 39 in the 1930s former hospital building sold in 2007 for $1.25 million. In 2012 the same apartment sold for $1.21 million yielding a $40,000 loss.

Unit 309 in the same building first sold in 2005 for $615,000. Two years later in 2007 it sold for $577,000, a loss of $38,000. The next buyer did okay selling the property for $710,000 in 2012.

And unit 112 lost $20,000 from 2005 to 2009 after initially selling for $480,000.

The most dramatic in the complex was unit 1501, which first sold in 2006 for $3 million. It later traded at a profit for $4.01 million in 2011 – a profit of $1.01 million. But the bonanza didn’t last long with it later selling for $3.825 million in May this year – a loss of $85,000.

Several other prestige apartments in Surry Hills also lost their owners money.

Unit 401/148 Goulburn Street first sold for $1.5 million in 2002. In 2012 it sold again for $1.2 million – a loss of $300,000.

And unit 6/56 Foster Street sold for $2.53 million in 2009 – making the vendor a $400,000 profit on their one year investment. The buyer didn’t have the same fortune, selling in 2012 for $2.5 million, losing $30,000 over three years.

Though less likely to haemorrhage money, some Surry Hills terraces did prove to be poor investment choices.

The traditionally sought after terraces make up about 30% of the dwellings in Surry Hills, according to the Australian Bureau of Statistics.

The corner terrace at 17 Kendall Street was one of the most recent cases in our list. The charming two bedroom home sold for $1.012 million in 2010. But in March this year it sold at auction for just $950,000 yielding a loss of $62,000 for the hapless vendor.

It has been listed for rent at $825 per week suggesting the new owner picked it up at a yield of 4.52%.

Another terrace sale with unfortunate timing is the 1890s-built 115 Goodlet Street. In 2007 it sold for $809,000 but in 2009 in sold for just $740,000 – a loss of $69,000. One wonders if that vendor attended the recent May 25 auction where it sold for $901,000.

And the lovely corner terrace at 418 Riley Street lost money during the financial crisis. It sold in 2007 for $1.027 million but then sold for just $1 million two years later. It went back on the rise though, in 2011 it sold for $1.35 million.

And it wasn’t just limited to prestige homes. At the lower end of the market unit 58/397 Bourke Street proved to be a poor investment. In 2008 it sold for $250,000 but then four years later it sold for $210,000 – a loss of $40,000.

Although these sales just show cases where investments went backwards there are countless examples of properties which stayed stagnant – effectively not moving in price for many years.

The costs of paying off a mortgage, the costs of selling, the cost of outgoings and the cost of lost opportunity means buyers can be left hurting from stale investments.

Though certain suburbs might seem bulletproof buyers still need to do their research or risk a fatal investment.

 

From www.propertyobserver.com.au

Single woman Rebecca Willis is working hard to buy her first house – and she’s not alone

SINGLE women are proving to be the new breed of first home buyers (FHB), ably assisted by higher incomes in an evolving workplace and supportive families.

Gen Ys in particular are taking the plunge into the real estate market with the Australian Housing and Urban Research Institute’s (AHURI) 2010, Changing Patterns of Home Ownership, bulletin revealing home ownership rates for singles aged 25-44 improved by 8.1 per cent between 1996-2006.

Having saved for five years for her dream home and done plenty of research on the subject, little deters or daunts 26-year-old Rebecca Willis, including the fact that she’s single.

While Miss Willis deals with homes every day as part of her work as a real estate agent, she admits things are a little “hairier” for single FHBs.

“The accountants and financial planners I’ve talked to are all sure I can buy a home on my own but banks do seem to prefer couples over singles,” Miss Willis said.

“As a single, it’s not just about having a good deposit – you need to show banks you’ve got the goods and have what it takes.

“As a single FHB, I also know it’s important to have income protection and insurance and to think everything through very carefully before buying.

“It’s not enough just to save willy nilly – you need to have good advice from professionals and a supportive network.”

Place Annerley agent Tristan Rowland said 50-60 per cent of his FHB clientele were singles with the majority of these people being gen Y girls.

“This could be because boys don’t want to settle down as early as girls.

“There is also a lot more parental influence on girls to settle down.

“About 30 per cent of my female FHBs are bankrolled by mum and dad.”

Mr Rowland said the dramatic change in banks’ lending criteria during the past five to 10 years plus the changes to first-home buyer grants were just some of the challenges FHBs faced.

“Singles also have only one income stream to rely on so they are effectively putting all their eggs in one basket,” he said.

“They also have only one voice of reason to listen to when buying their first home.

“Talking to a good broker, doing research on preferred properties and the surrounding areas, and using good solicitors and building inspectors will help.”

With 40 per cent of her client database single, Brisbane-based Mortgage Choice broker Caroline Jean-Baptiste is well aware of the different challenges facing these people.

But it was a lack of confidence, rather than finances, that held most singles back from the real estate market.

“Most singles find it’s not too much of a stretch to actually buy a home but single women in particular lack confidence and most would prefer to wait for someone to buy a home with them,” Mrs Jean-Baptiste said.

“For single men, it’s the small sacrifices that all potential home buyers have to make that hurt the most, such as not going out with their mates for a drink.”

While there are plenty of pros and cons when buying a home as a single person, Mrs Jean-Baptiste said she had seen plenty of singles succeed in the real estate market.

“A positive for single FHBs is that they’re in full control of their decision and can buy something that suits their lifestyle,” she said.

“Plus if singles do find a partner, they can rent out their single home or sell it.

“And while singles will need good income protection insurance and can’t split mortgage repayments, they can always rent out one of their rooms.”

Mrs Jean-Baptiste said her single clients had varying degrees of confidence but she hated to see people waiting to make a firm decision on buying a home.

“I’m a great believer in getting into the market when you can,” she said.

“If you’re single and waiting around for a partner, you could miss out on a great opportunity in the marketplace.

“You don’t necessarily have to earn a lot of money to buy a house – make some small sacrifices, get a guarantor, chat to plenty of different people and stretch yourself a little.

“With a sensible approach, anyone can buy a home.”

Despite the challenges, Miss Willis is determined to plough on and achieve her dream of buying a home.

With her career including a new move to Agnes Water, between Bundaberg and Gladstone, her hopes for a small brick home with good bones and a view of the beach could also come true sooner than expected.

“The only thing that’s been holding me back is trying to decide where to buy but I think Agnes Water could be the right place,” she said.

“I’m not looking to get rich in property – I just want to set myself up so I’m not working like mad when I’m 65.

“And I prefer to buy a home myself so I can look after me, no matter what happens.”

“Girls are way ahead of boys when it comes to buying real estate,” Mr Rowland said.

From – The Sunday Mail (Qld)

Australian housing is not overvalued but “dire predictions” spooking new housing investors

“Hysteria” about Australian housing being overvalued is spooking institutional investors from investing in much needed new housing, says Rismark economist Christopher Joye.

Joye says contrary to what’s being said by some in the media, housing in Australia is not overvalued.

Delivering a presentation titled “Australia’s Broken Housing Model” at the recent HIA Housing Summit which highlighted a serious undersupply of new homes to meet population growth, he said current housing valuations could be explained by market fundamentals with “dire predictions never remotely coming to pass”.

Joye pointed out that  peak-to-trough fall in housing values during the GFC were less than 5% and provided the following graph to show historical valuations of property.

“Since 2003 house prices have tracked disposable incomes…as an asset-class, housing has been a very safe store of wealth,” said Joye.

He said the housing market had significantly outperformed equities and bonds and the current market cycle should be investment-friendly.

“We should be seeing a surge in new supply,” said Joye, but instead “institutional capital has certainly been ‘spooked’ by housing hysteria”.

Joye highlighted that Australia has a population planning crisis and equally a serious housing/infrastructure crisis.

“Australia needs to build seven million new homes in next 37 years to accommodate 13.7 million extra people by 2050.

“This equates to around 200,000 new homes per year, but since 2000 only 156,000 new dwellings have been approved on average per annum.”

To address this chronic undersupply of new homes, Joye focused on property taxes.

“Housing is one of the most heavily taxed sectors of the Australian economy, both in absolute and relative terms,” he said, contributing 12% of total govt tax revenue and 45% of total state/local govt revenue.

New housing, he said adds 1.2% of value to the economy; but accounts for 2.8% of total government tax revenues.

According to Joye, tax reform could drive a 30% to 40% affordability gain.

“We need to work out how to more equitably redistribute the national tax/infrastructure burden,” he says, pointing to guidance in the Henry Review including:

  • Reform (land) taxes that discourage institutional capital
  • Replace inefficient transaction taxes with immobile taxes
  • Relax zoning restrictions/allow higher densities
  • Speed up approval decisions through State govt direction
  • Overcomes NIMBY (not in my bank yard) conflicts that plague councils

Furthermore, he said an obvious savings would be to convert first-home owner grant into an interest-free loan due on sale, which would save  around $1 billion per annum.

From propertyobserver.com.au

Lessons from Christchurch: Property investors come unstuck

Over the past 2½ years, Christchurch’s business environment has challenged many assumptions and contracts. In a six-part series, Christchurch legal firm Malley & Co looks at some of the lessons all businesses can learn. Here, Carolyn Foss looks at how property investors were caught out by inadequate insurance.

While working through the extensive damage to residential and commercial properties in Christchurch, property investors and their legal advisors have uncovered several due diligence issues that lay dormant before the earthquakes.

Those issues highlight how crucial it is to get the right insurance cover, and why property investors nationwide should note some of the lessons from the Christchurch earthquakes.

A significant number of property owners were under-insured at the time of the earthquakes, particularly those with two-storey investments. These owners unknowingly had not recorded an accurate property floor area on their policies, which restricted cover to the recorded, not the actual, size of the property.

This may have happened for two reasons: they may have recorded an inaccurate floor area at the time of taking out their insurance; or they may have extended the property after the original policy was in place, but had not adjusted the policy.

Those owners whose properties had to be rebuilt have suffered financial loss because of the difference between the actual replacement costs and what they were covered for.

Some property investors have been unable to raise the necessary extra finance to replace their investment(s), others have reinvested in Christchurch, but with higher borrowings and others have taken the cash and invested in cheaper properties.

This issue is particularly relevant throughout the country, given the new sum insured requirement insurance companies are adopting. The worst scenario would be a property investor who has geared a property with 100 per cent finance but who has inadequate insurance cover. Not only could this place the investor at financial risk, it could also place the investor in breach of his or her banking covenants.

It is very important, therefore, that all property investors check their portfolio to ensure they have accurately calculated the correct floor area of each property, and if or when their insurer renews the insurance based on an agreed sum or agreed metreage that they have the appropriate sum insured.

This may mean getting an expert measurement, obtaining a valuation for the property that the insurer accepts as a basis for agreed value, or ensuring that the dollar per square metre cover noted in the policy is adequate.

You might also need to review the level of cover each calendar year because of increased construction costs or improvements or enhancements. If you are looking to increase your property portfolio, then it is important to include an expert measurement or insurance valuation of any prospective new property as part of the legal due diligence process, depending on the type of insurance being put in place.

Some other Christchurch property investors also suffered hardship because they had not informed their insurers they had tenants in place at the time of the earthquakes. Most competent insurance brokers will highlight the exclusions contained in a policy and point out some of the ongoing obligations of disclosure.

So, in summary, it is important to treat the insurance of any investment property very seriously. If in doubt, property investors nationwide should reflect on the hardship a number of fellow investors suffered in Christchurch, because they were not properly covered. For the sake of a few thousand dollars a year, are you prepared to take an unnecessary risk?

If you are unsure of the legal implications of an existing or proposed insurance policy then it is prudent to seek advice from a lawyer with the relevant expertise.

Carolyn Foss is a legal executive at Malley & Co, with more than 20 years’ experience in property law and conveyancing.

From the New Zealand Herald.