Between the bricks and a bad place
Wednesday, 19 March 2008
Simon Hoyle
When investors are spooked by or uncertain about the sharemarket, it is understandable that they look to property as a safe haven. Bricks and mortar have long held an honoured position in the Australian investment psyche. The combination of reliable capital gains and the tactile quality of the asset have made it a firm favourite.
Maurice Goldberg, the executive chairman of Pulse Property, says recent research published by ANZ suggests that since 1984 property has produced the best risk-adjusted return of any asset class.
But diversification across other asset classes is still considered sensible because it has the potential to produce even better risk-adjusted returns.
Jonathan Cohen, a director of the property investment group Proprius, swears by property as a long-term wealth creator. But he also invests in shares. The common thread in both asset classes for Cohen is quality.
"It's not that property is better than shares, or that shares are better than property," Cohen says. "If you buy good quality, and you do not have high debt, you don't have a requirement on you to sell when it's not ideal to sell. If you have a good quality asset, it does not matter [if the market dips], because it will come back - whether it's a share or property - and rubbish won't."
He says desirability underpins the definition of quality. "Desirability is the key. If people are looking for a property to buy or to rent - because both markets are important - are they looking to buy or rent the property you own as an investment?
"If you have a good property, you are more likely to find a buyer in a bad market, and you are more likely to get a higher premium in a good market."
Every property investor has to start sometime and somewhere, and the message from Cohen, and other professional property investors, is that if property forms part of your longer-term investment plans, now is a good time to put those plans into action. But it is crucial that property be part of a well thought-out, long-term plan, Cohen says.
"You have to decide for yourself, are you a short-term investor? Are you a trader? Or are you a medium- to long-term investor?
"You can make a mint quickly in property. You can go out and do a few speculative developments. But it's more difficult to trade, because your transaction costs are high. So you have to decide whether you're a medium- to long-term investor or a trader. We think the medium- to long-term is ideal."
Brett Johnson, the managing director of Quartile Property Network, says there has rarely been a better time to enter the residential property market in Sydney. Property is driven by supply and demand, Johnson says. Demand is increasing steadily as Sydney's population grows, but supply is not keeping pace - building approvals are at 30-year lows. Johnson says this imbalance on its own means the Sydney residential market is on the cusp of another buoyant period.
Cohen says the key to a quality property acquisition is to buy in the right place, at the right time and for the right price - in the long term, a good property bought for a fair price will produce a better result than even a great property you paid too much for.
Cohen's firm, Proprius, is focusing its attention on Sydney's eastern suburbs, and is buying residential properties to be held in a trust, into which investors may buy to get residential property returns, but without the hassle of sourcing the assets, borrowing to buy the assets, worrying about upkeep and getting tenants. He says the first aim of a property investment should be to preserve your capital in real terms (that is, adjusted for inflation) after costs - including interest on a loan or mortgage.
"People buy their house, they hold it for a few years, hopefully they pay off their mortgage, the property price goes up and they get a bit of growth. It's a very steady, foolproof way to beat inflation over time," Cohen says.
There are areas in Sydney that Proprius believes will consistently outperform others. These are places where people most want to live (where demand will always be strong) and where it is not easy to create large volumes of new dwellings (so supply will be subdued).
Johnson says there is no such thing as a two-tier or "two-speed" market, at least not in Sydney. Provided buyers are sensible (the property you buy must be habitable, for example, so that it can be let out, and it should not be in need of a huge capital outlay just to maintain its standard), now is as good a time as there has ever been to buy residential property, just about anywhere.
While supply and demand are so out of kilter right across Sydney - and not just in selected pockets - the only way for prices to move is up. Johnson says the only question is the timing. Prices may start to move next week, or in a year, or in three years.
He says the lag between a building approval and building completion can be three years, sometimes longer. In other words, even if enough approvals were granted today to bring supply and demand back into equilibrium, it would be several years before those properties were completed.
And in the intervening period, Sydney's population will grow further, creating more demand.
"There's simply no turn-around [in supply] in sight," Johnson says. "This housing shortage, which is rapidly becoming a housing crisis, is looking like becoming a housing disaster. The seeds have been planted [for price increases], and we're shovelling on the fertiliser."
He says there is no evidence to suggest the top end of the residential property market performs any better or worse than other sectors. There have been times when the high end of the market fared worse than the low end. In the late 1980s and early 1990s the residential property market in Sydney reached a peak; but then, the economy tipped into recession. It was a disaster for some - values halved in some cases, even for waterfront properties around the harbour.
This time the conditions are slightly different, Johnson says, because although the property market reached "a normal, natural peak" in late 2003 and early 2004, the economy remained strong, so the segment of the population that deals in very expensive property has not been forced to sell.
Investors do not need to focus on the big-ticket, high-priced end of the market to stand a chance of generating good returns.
"You can never isolate a market segment like that," Johnson says. "It just does not work that way. "Now is a great time to get into the market. It's only a question of how you get in."
Investors should consider that interest rates may rise further in the year ahead. If they are worried about this possibility, they could "consider buying something off the plan, which may not complete for 18 months or two years", by which time rates may be going down again.
Pulse Property's Goldberg says that "if you look from an historical perspective and you go back to when interest rates were 17, 17.5 per cent, they are still relatively cheap.
Goldberg says it is critical that every property investor has a "robust risk mitigation strategy". This means preparing for the worst, but hoping for the best.
"It just means that you think about everything that can go wrong," he says. "You have a plan for it going wrong, you have put in a system to manage it going wrong, and you hope it never goes wrong.
"It's not something that investors should ever leave to chance."
Goldberg says a critical part of such a strategy is access to emergency cash reserves set aside solely for that purpose, be it money in the bank, other liquid assets, excess credit card capacity, a line of credit with a lender or some other source of funds.
Pulse tells its clients the key to successful property investment is an accurate cashflow analysis, a sound risk mitigation strategy, and good research. Research in property used to be little more than location, location, location, but Goldberg says that is only one element of good research.
The others include population movement - where people are moving to and from; economics and employment - if people don't have jobs, they cannot service debt and cannot afford to buy and hold property.
Demographics also count - for example, as baby boomers retire, demand for "large, sprawling homes" may be replaced by demand for units or apartments. Then there is infrastructure - how easy it is to travel to, from and through a particular location and how well the location is serviced (schools, shopping centres, public transport, and so on).
Finally, there is yield - how much rent a property generates - annually expressed as a percentage of its value - tells you a lot about a property's value.
The "sweet spot" is 4.5 per cent to 5.5 per cent. Goldberg says if the figure is a lot lower than it either means "the property is ridiculously overpriced, or there's something fabulous about the property that you have yet to discover - probably the former".
"If you get your cashflow right, set up your risk mitigation plan, and you do your research right, very little can go wrong," he says. "An investment in property is a risk/return equation - how much risk should you take in relation to the return? There is always some risk. But what we love is helping people to learn how to manage risk, having the right research and understanding how their cashflow works, so we can bring their risk down to acceptable levels."
........................................
Sydney Morning Herald
When investors are spooked by or uncertain about the sharemarket, it is understandable that they look to property as a safe haven. Bricks and mortar have long held an honoured position in the Australian investment psyche. The combination of reliable capital gains and the tactile quality of the asset have made it a firm favourite.
Maurice Goldberg, the executive chairman of Pulse Property, says recent research published by ANZ suggests that since 1984 property has produced the best risk-adjusted return of any asset class.
But diversification across other asset classes is still considered sensible because it has the potential to produce even better risk-adjusted returns.
Jonathan Cohen, a director of the property investment group Proprius, swears by property as a long-term wealth creator. But he also invests in shares. The common thread in both asset classes for Cohen is quality.
"It's not that property is better than shares, or that shares are better than property," Cohen says. "If you buy good quality, and you do not have high debt, you don't have a requirement on you to sell when it's not ideal to sell. If you have a good quality asset, it does not matter [if the market dips], because it will come back - whether it's a share or property - and rubbish won't."
He says desirability underpins the definition of quality. "Desirability is the key. If people are looking for a property to buy or to rent - because both markets are important - are they looking to buy or rent the property you own as an investment?
"If you have a good property, you are more likely to find a buyer in a bad market, and you are more likely to get a higher premium in a good market."
Every property investor has to start sometime and somewhere, and the message from Cohen, and other professional property investors, is that if property forms part of your longer-term investment plans, now is a good time to put those plans into action. But it is crucial that property be part of a well thought-out, long-term plan, Cohen says.
"You have to decide for yourself, are you a short-term investor? Are you a trader? Or are you a medium- to long-term investor?
"You can make a mint quickly in property. You can go out and do a few speculative developments. But it's more difficult to trade, because your transaction costs are high. So you have to decide whether you're a medium- to long-term investor or a trader. We think the medium- to long-term is ideal."
Brett Johnson, the managing director of Quartile Property Network, says there has rarely been a better time to enter the residential property market in Sydney. Property is driven by supply and demand, Johnson says. Demand is increasing steadily as Sydney's population grows, but supply is not keeping pace - building approvals are at 30-year lows. Johnson says this imbalance on its own means the Sydney residential market is on the cusp of another buoyant period.
Cohen says the key to a quality property acquisition is to buy in the right place, at the right time and for the right price - in the long term, a good property bought for a fair price will produce a better result than even a great property you paid too much for.
Cohen's firm, Proprius, is focusing its attention on Sydney's eastern suburbs, and is buying residential properties to be held in a trust, into which investors may buy to get residential property returns, but without the hassle of sourcing the assets, borrowing to buy the assets, worrying about upkeep and getting tenants. He says the first aim of a property investment should be to preserve your capital in real terms (that is, adjusted for inflation) after costs - including interest on a loan or mortgage.
"People buy their house, they hold it for a few years, hopefully they pay off their mortgage, the property price goes up and they get a bit of growth. It's a very steady, foolproof way to beat inflation over time," Cohen says.
There are areas in Sydney that Proprius believes will consistently outperform others. These are places where people most want to live (where demand will always be strong) and where it is not easy to create large volumes of new dwellings (so supply will be subdued).
Johnson says there is no such thing as a two-tier or "two-speed" market, at least not in Sydney. Provided buyers are sensible (the property you buy must be habitable, for example, so that it can be let out, and it should not be in need of a huge capital outlay just to maintain its standard), now is as good a time as there has ever been to buy residential property, just about anywhere.
While supply and demand are so out of kilter right across Sydney - and not just in selected pockets - the only way for prices to move is up. Johnson says the only question is the timing. Prices may start to move next week, or in a year, or in three years.
He says the lag between a building approval and building completion can be three years, sometimes longer. In other words, even if enough approvals were granted today to bring supply and demand back into equilibrium, it would be several years before those properties were completed.
And in the intervening period, Sydney's population will grow further, creating more demand.
"There's simply no turn-around [in supply] in sight," Johnson says. "This housing shortage, which is rapidly becoming a housing crisis, is looking like becoming a housing disaster. The seeds have been planted [for price increases], and we're shovelling on the fertiliser."
He says there is no evidence to suggest the top end of the residential property market performs any better or worse than other sectors. There have been times when the high end of the market fared worse than the low end. In the late 1980s and early 1990s the residential property market in Sydney reached a peak; but then, the economy tipped into recession. It was a disaster for some - values halved in some cases, even for waterfront properties around the harbour.
This time the conditions are slightly different, Johnson says, because although the property market reached "a normal, natural peak" in late 2003 and early 2004, the economy remained strong, so the segment of the population that deals in very expensive property has not been forced to sell.
Investors do not need to focus on the big-ticket, high-priced end of the market to stand a chance of generating good returns.
"You can never isolate a market segment like that," Johnson says. "It just does not work that way. "Now is a great time to get into the market. It's only a question of how you get in."
Investors should consider that interest rates may rise further in the year ahead. If they are worried about this possibility, they could "consider buying something off the plan, which may not complete for 18 months or two years", by which time rates may be going down again.
Pulse Property's Goldberg says that "if you look from an historical perspective and you go back to when interest rates were 17, 17.5 per cent, they are still relatively cheap.
Goldberg says it is critical that every property investor has a "robust risk mitigation strategy". This means preparing for the worst, but hoping for the best.
"It just means that you think about everything that can go wrong," he says. "You have a plan for it going wrong, you have put in a system to manage it going wrong, and you hope it never goes wrong.
"It's not something that investors should ever leave to chance."
Goldberg says a critical part of such a strategy is access to emergency cash reserves set aside solely for that purpose, be it money in the bank, other liquid assets, excess credit card capacity, a line of credit with a lender or some other source of funds.
Pulse tells its clients the key to successful property investment is an accurate cashflow analysis, a sound risk mitigation strategy, and good research. Research in property used to be little more than location, location, location, but Goldberg says that is only one element of good research.
The others include population movement - where people are moving to and from; economics and employment - if people don't have jobs, they cannot service debt and cannot afford to buy and hold property.
Demographics also count - for example, as baby boomers retire, demand for "large, sprawling homes" may be replaced by demand for units or apartments. Then there is infrastructure - how easy it is to travel to, from and through a particular location and how well the location is serviced (schools, shopping centres, public transport, and so on).
Finally, there is yield - how much rent a property generates - annually expressed as a percentage of its value - tells you a lot about a property's value.
The "sweet spot" is 4.5 per cent to 5.5 per cent. Goldberg says if the figure is a lot lower than it either means "the property is ridiculously overpriced, or there's something fabulous about the property that you have yet to discover - probably the former".
"If you get your cashflow right, set up your risk mitigation plan, and you do your research right, very little can go wrong," he says. "An investment in property is a risk/return equation - how much risk should you take in relation to the return? There is always some risk. But what we love is helping people to learn how to manage risk, having the right research and understanding how their cashflow works, so we can bring their risk down to acceptable levels."
........................................
Sydney Morning Herald