Investor Opportunity

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GUEST OBSERVER
Investing in Sydney’s real estate market has been a tough call in recent years, with ever-increasing prices putting the squeeze on returns and meaning that investors need to do their due diligence more than ever before. 
According to CoreLogic, the median apartment price in Sydney has increased by a massive 106.2% since 2008 and is now at $750,000. 
With prices at this level, investors need to be savvy and on the look-out for ways to increase capital gains by identifying upcoming ‘hot spots’. There is huge potential in some pockets of metropolitan Sydney, set to benefit from significant future development and infrastructure projects. 
Sydney’s burgeoning North West in particular should be high on an investor’s radar. 
Nestled within the Hills Shire, Castle Hill is a suburb where future growth has been forecast. Key early indicators of growth lie within the current and future plans for commercial and residential developments within the region. 
In accordance with The Implementation Plan proposed by the New South Wales Government, some 33,000 new homes are to be developed in North West Sydney. Estimates by the Hills Shire Council predict the population in Castle Hill will grow by 49.53% by 2036. 
It is undeniable that Castle Hill is an area set for long-term growth and ticks all the boxes for investors. 
To cater for the growth in population infrastructure developments are also currently underway including the $900 million upgrade of Castle Towers and the $8.3 billion North West Rail link. 
Upon completion the Castle Towers redevelopment is set to generate 2,373 jobs and create an enhanced community hub. The North West Rail link is expected for completion in 2019 and will also increase the efficiency of transport connecting residents from Castle Hill Station to Martin Place Station in around 30 minutes. 
To combat rising property prices in Sydney investors are strongly encouraged to continue to seek out growth areas and identify “hot spots” to realise the future potential, rather than to try to buy into markets that have already hit their peak. 
Residential real estate remains the investment of choice with solid medium and long-term returns and those who are waiting in anticipation for market conditions to change may miss out on solid investment opportunities.
Ian Bennett is Director, Colliers International  
 
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jchancellor-FAypfDUnLy

Castle Hill tipped as next hot spot for property investing 

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Hi Margaret,
I am currently educating myself on property investing before buying my first investment property.
I am currently reading your book “Investing in the right property now!” in the third chapter you mention looking for an area which has low housing starts. My question is how to quantify “low”, I realise there is probably  no magic number but should I be looking for a region where housing start do not exceed population growth or should I simply assess the areas vacancy rates as an indicator of whether the new developments are creating an over supply.
As an example, one area which I am considering an investment has a population of ~50,000, an annual population growth of 1 percent and housing starts are as follows 2015-‘16=447; ‘14-‘15=340; ‘13-‘14=243; ‘12-‘13=227
Of course I am considering many other factors when analysing an area as mentioned in your books but this is just the one I am having troubles with at this point in time
Thank you kindly,
Sam
 
Hi Sam, 
Your question is a good one and it’s important to consider a range of factors when choosing an area where you would like to invest in property.
I would like to point out that, as mentioned in the book, you have to ensure that you don’t get caught up in just one statistic or factor, as that factor alone could be painting a different picture than the one you want to eventuate!
Let me explain.  There are many growth drivers, and they all work as only a small part of an overall puzzle, somewhat like a jigsaw puzzle. With too many pieces missing, the puzzle just does not work.  The more pieces you can fit into that puzzle, the better the picture becomes. 
Where property is concerned, the pieces are the growth drivers, but taken alone a single piece is not enough, or may not provide the right picture. Take the ‘housing starts’ you refer to. The idea behind ensuring that there is not too much development going on is to ensure that the area is not oversupplied with property.  Since the only thing which ultimately drives growth is demand, an oversupply of property will dilute that demand and lead to a sustained period of low, or no growth.
Now,  you may find an area with 50,000 population and low housing starts, but those low housing starts figures could be because no one is moving there, or there is little employment or anything else happening in the area.  And so the low housing start factor must be combined with a population growing faster than inflation, diversified employment, no new land for future development and a number of other factors for it to be a pointer to future property price growth.
There is no figure or calculation, but if the population is growing by, say, 1 percent per annum and housing starts are only growing by 0.5% per annum, and other drivers also exist, then it makes sense that a future increased demand for housing may ensue.
Always make sure that you examine all of the factors – it is the trend of those factors and their relationship to each other which becomes important, rather than the number itself.
Have a property question?  <a href="mailto:news@propertyobserver.com.au" target="_blank">Ask Margaret!</a>
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mlomas-KC9MUPZ6Ca

Low housing start insights for investors: Ask Margaret

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Perth represents both danger and opportunity for property investors at present. 
The city, which led the nation on price and rental growth in 2012 and early 2013, is three years into a cyclical downturn, exacerbated by the wind-down in the resources investment boom.
Sales activity has been falling steadily since 2013 and the decline has gathered pace since the start of 2016. Some Perth suburbs have sales volumes at a fraction of their former levels, indicating further price decline is likely. 
This situation has been further impacted by vacancies well above 3% in many areas, as workers have left the city in the wake of the resources downturn and the ripple effect that has had on business in Perth (creating CBD office vacancies above 20 percent).
The situation also represents opportunity for counter-cyclical investors to buy well while price are down and competition is weak. Perth historically has been a population growth leader and one of the strongest capital cities for long-term capital growth. Perth property markets will recover and now is a good time to be looking for bargains.
Investors, however, should continue to avoid the inner-city apartment markets which have very high vacancies and an oversupply situation that is likely to get worse before it gets better. Housing markets will recover before apartment markets do.
Hotspotting’s latest research on sales activity demonstrates that the downward trend in the Perth market has deepened recently. Growth markets have vanished and there are now multiple suburbs classified as “danger” markets, with more likely to be added to the warning list if current sales patterns continue in coming quarters. 
Perth’s decline has been happening since the peak in early 2013 and the downturn has worsened since the beginning of 2016.
The number of dwelling sales in the WA market was above 16,000 per quarter in early 2013. Sales dropped below 15,000 per quarter in 2014 and below 13,000 in 2015. The market has dropped further in 2016, with around 8,300 sales in the March Quarter and fewer than 7,000 in the June Quarter. Sales rates are now well under half those of two years ago.
The suburb of Mt Pleasant in the Melville LGA has the kind of sales trend that sellers don’t want: sales totaling 62, 50, 42, 25 and 15 in the past five quarters. 
The suburb of Nollamara in the Stirling LGA has dropped from well above 100 per quarter to 55 in the March Quarter and 35 in the June Quarter. In nearby Yokine, the sales pattern has been 103, 95, 75, 74, 79, 51 and 38 (with vacancies at 5.3% in that postcode).
In Fremantle, the sales pattern since early 2014 has been 85, 61, 66, 60, 59, 47, 49, 45, 27 and 25. In Rivervale in the Belmont LGA, the sales pattern has been 101, 84, 100, 69, 78, 55, 81, 71, 74, 32 and 24. With a vacancy rate around 8%, the immediate future looks bleak.
The malaise has spread to all market sectors. Upmarket Mosman Park’s quarterly sales record is 74, 72, 76, 62, 51, 62, 47, 41, 30 and 25. In downmarket Gosnells, quarterly sales since early 2014 have been 153, 158, 134, 123, 103, 118, 109, 82, 75 and 53, so current sales are a third of the peak levels.
So what should investors do? Avoid Perth altogether? Wait until they read about recovery? Or become counter-cyclical buyers?
Most investors are herd animals who never take advantage of down markets. They jump into markets when they read there’s a boom under way, as so many did in Sydney over the past few years.
The really smart investors, and there were some, saw what was coming, bought before 2013 and got full benefit from the capital growth that followed. 
The switched-on ones who think and act counter-cyclically will see opportunities to buy bargains in Perth. Prices are down right across the metropolitan area so there’s no shortage of good opportunities, as well as a lack of competition from other punters.
High vacancy rates would deter many, because of difficulties finding tenants at acceptable rentals, but not everywhere has 5-6 percent vacancy rates. 
Investors just need to believe Perth has a future. And obviously it does, although it may not feel much like it at present. WA has been a nation-leading growth economy many times and will be so again in the future. Perth has led on population growth and property price escalation, and has had two notable up-cycles in the past 10-12 years. It will recover.
 
 Terry Ryder is the founder of hotspotting.com.au
<a href="https://mailto:ryder@hotspotting.com.au">ryder@hotspotting.com.au</a>
twitter.com/hotspotting
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terryryder-YECXbqmri2

Perth represents both danger and opportunity for property investors: Terry Ryder

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GUEST OBSERVER
The Reserve Bank of Australia (RBA) released its Financial Aggregates figures for January 2017.
Although housing credit continued to chug along in notching growth of 0.5 per cent in the month, total credit growth sagged to just 0.2 per cent due to negative results for the business and personal sectors.
Housing credit for investors continued to rise to 6.6 percent across the year to January, suggesting that further hikes may be in the post for investor loans.
<a href="https://www.propertyobserver.com.au/images/2017/03/02/RBA1.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/02/RBA1.jpg" alt="">
Total credit growth was 6.4 percent, while broad money growth was 7 percent.
<a href="https://www.propertyobserver.com.au/images/2017/03/02/RBA2.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/02/RBA2.jpg" alt="">
Deposit growth has strengthened considerably as banks look to shore up their capital. 
Even term deposits, understandably out of favour for some time, are recording growth at a double digit pace, with some accounts set to offer bonus interest on larger balances. 
<a href="https://www.propertyobserver.com.au/images/2017/03/02/RBA3.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/02/RBA3.jpg" alt="">
Switcheroo
The total value of outstanding credit has doubled over the past decade to $1.64 trillion.
The exact split of loan purpose between owner-occupier and investor credit remains murky, with a net value of $49 billion having been switched away from investment loans since July 2015.
This reflects the interest rate differential between loan types, but note that the credit growth figures by loan type have been adjusted for the net value of switching. 
<a href="https://www.propertyobserver.com.au/images/2017/03/02/RBA4.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/02/RBA4.jpg" alt=""> 
The poor monthly result for business and personal credit sees housing resume its apparently inexorable rise in terms of market share. 
<a href="https://www.propertyobserver.com.au/images/2017/03/02/RBA5.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/02/RBA5.jpg" alt="">
The wrap
All regulatory eyes will be on the growth in investor loans, with more measures likely to be taken to cool this sector as 2017 progresses. 
PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.
His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank">Four Green Houses and a Red Hotel</a>.
 
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pwargent-M4siyDbqQY

Housing credit doubles in a decade: Pete Wargent

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EXPERT OBSERVATION
Mid-sized companies and international shares have out-performed ‘Mums and Dads’ stocks over the past five years.
It is useful for investors to understand how different asset classes are performing as it may highlight opportunities.
Smaller returns from major Australian companies
Many Australians got their start in the share market through privatisations and demutualisations. That is, companies like Telstra, AMP, Colonial, Commonwealth Bank, Suncorp, Qantas and state betting agencies like TAB (NSW). Some retail investors have held on to these stocks over time and perhaps added modestly to their holdings with positions in other domestic companies. For others, the initial investment may have sparked broader interest with investors adding to their portfolios with domestic and international investments and perhaps positions in options and futures.
In 1999, CommSec devised an index called the Mums and Dads index to highlight the performance of retail investors who got their start in the share market through demutualisations, privatisations or ‘household names’ like Woolworths. The current composition of the CommSec Mums and Dads index is Telstra, Commonwealth Bank, Woolworths, Qantas, AMP, Tabcorp, Suncorp, IAG and Wesfarmers.
Until around five years ago, total returns on the CommSec Mums &amp; Dads index (share prices and dividends included) closely tracked total returns on the broader index – the All Ordinaries accumulation index. But over the past five years, the All Ords accumulation index has lifted around 82% while the CommSec Mums and Dads index has lifted by just 35%.
Mid-sized companies gain favour
One of the out-performing areas over the past five years has been the mid-tier companies. Since mid-2013 the MidCap50 accumulation index has doubled in value. As noted above, over the same period the All Ords accumulation index lifted by around 82% while returns on the CommSec Mums and Dads index rose by just 35%.
The MidCap50 includes a number of ‘new wave’ stocks as well as ‘disruptors’ – companies challenging those with far bigger market size or capitalisation – that is, the ‘big cap’ companies. Notable mid-tier companies include A2 Milk, Dominos, Flight Centre, JB Hi-Fi and Resmed.
On a shorter-term comparison, since the start of 2018 the All Ordinaries accumulation index has lifted by 6% (ASX 200 accumulation +5.9%) while the MidCap50 accumulation index has lifted by 6.6%. By comparison the CommSec Mums and Dads index has risen by just 1.6%.
However just as investors constantly need to track the performance of their domestic portfolios – especially the influence of new themes or paradigms – there is also the need to take a broader perspective. Considerations include the differing performance of domestic industries or sectors to those abroad.
Global shares have certainly performed strongly over recent years. The US Dow Jones and S&amp;P 500 indexes have hit record highs in the past month. And the Japanese Nikkei 225 index hit 27-year highs yesterday.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%201.jpg" alt="">
Global shares
Five or 10 years ago it was more difficult for retail investors to invest in individual companies that were listed on overseas share markets. To gain overseas exposure, investors tended to favour managed funds.
Today, retail investors have much more flexibility to invest in individual companies on overseas exchanges, or via exchange traded funds (ETFs) and managed funds. Australia accounts for just 2% of world share market capitalisation, so there is a raft of opportunities outside our borders. One complication is the need to take into account currency fluctuations. Since the currency was floated, the Australian dollar has fluctuated on average by US14 cents a year against the greenback, although there has been less volatility in recent years
One way of measuring the performance of the ‘world share market’ is by reference to an index. And one of the best known indexes is that compiled by Morgan Stanley Capital International (MSCI).
The MSCI World Index, is described as: “A broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float- adjusted market capitalisation in each country and MSCI World Index does not offer exposure to emerging markets.” 
The world MSCI can be tracked through finance websites on a daily basis as well as wire services and adjustments can be made for dividends and currency fluctuations.
Over the past five years the world MSCI in US dollar terms has risen by 41% with total returns (measured by the accumulation index) up by 56%. By comparison, in Australian dollar terms the MSCI Australian index rose by 17% and 42% respectively over the period.
But when you adjust the world MSCI for currency changes – convert the index to Australian dollar terms – the out- performance is enhanced even further. Over the past five years the world MSCI has lifted by 83% in Australian dollar terms with total returns up 101%.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%202.jpg" alt="">
Shorter-run returns
As always the time comparison chosen may affect the results obtained. And with international shares, changes in the value of the US dollar can significantly impact the results.
Looking back since the index was constituted in May 2000, and assessing returns in Australian dollar terms, returns on the ASX 200 have risen four-fold whereas returns on the world MSCI have doubled. So on a long-term basis the Australian share market has out-performed global shares.
However, looking over the past decade, Australian dollar returns for both the ASX 200 and the world MSCI tracked closely, especially up to 2014. But in the past four years the world MSCI broke away, lifting by 68% while the ASX 200 has risen by only 39%.
Further, since the start of 2018, the world MSCI accumulation index in Australian dollar terms has lifted by around 14%, well ahead of returns of around 6% for the Australian market.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%203.jpg" alt="">
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%204.jpg" alt="">
The US out-performs
The Dow Jones index is probably the best known of the US equity indexes. Other indexes include the S&amp;P 500, Nasdaq Composite and Russell 2000. And while the price index – the Dow Jones Industrial average (DJIA) – is commonly quoted, there is also a total return index for the Dow.
Up until the end of September the DJIA rose by 7% and total returns (includes dividends) lifted by 10% while returns on the index in Australian dollar terms have lifted by around 18%.
By comparison, in local currency terms the ASX 200 rose by 2.3%, the All Ords lifted 2.6% and total returns on Australian shares have increased by around 6%.
Certainly the US economy has performed strongly with annual economic growth sitting at 4.2%, unemployment near 18-year lows and inflation sitting at just 2%. However the old adage applies for the share market – past performance is no guarantee of future returns.
The US Dow Jones has made solid returns – especially over the past two years, averaging annual growth near 22% and well out-performing the Australian market.
While the US economy is performing strongly, the budget deficit remains high, the Federal Reserve is still in the process or ‘normalising’ interest rates and the US is engaged in trade disputes with a raft of economies such as China and the European Union.
In addition some would cite relatively expensive valuations for US shares with prices around 17.8 times forward earnings, well above the longer-term average of around 14.5 times earnings.
 <img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%205.jpg" alt="">
What are the implications for investors?
Global share markets have made solid gains in recent years reflecting economic recoveries after the global financial crisis. In this respect, the US has had one of the stand-out economies and share markets.
Australian investors can now embrace a broader range of opportunities than in the past, whether they are domestic companies and sectors or opportunities across global economies. While there may have been good reasons in the past for investors to stick with blue-chip ‘Mums and Dads’ investments, better performing investments locally and globally argue for a fresh look at portfolios.
Investments in international shares and small and mid-sized Australian companies provide scope for greater diversification in investor portfolios.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/2/commsec%206.jpg" alt=""> 
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>. 
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cjames-5S2v74qSNK

'Mum and dad' stocks are underperforming: CommSec's Craig James

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Australian real estate fund manager EG announced the establishment of its new private wealth division.
The data-driven investment manager’s new division, headed by director Rodney Walt, will supply commercial property syndication opportunities for investors and family offices.
“We are pleased to officially offer this new service to sophisticated investors interested in commercial real estate, providing them with the opportunity for future growth in the current economy,” Walt said.
A proprietary risk management software, PRISMS, will be used to identify the opportunities, consider the risk and match the deal to investors.
Investors can expect to benefit from high income returns supported by a long-term lease, and to receive an average distribution of 8.5 per cent per annum based on a 7-year hold strategy.
The company, which is targeting a minimum $150 million in gross asset value over the next 12 months, also conducted an announcement to sophisticated investors for a specific opportunity today.
EG is targeting crash distributions of 8.5 per cent per annum in real estate.
Investors are asked to participate in commercial real estate opportunities offering high-yielding secure investments.
The company calculates an equity internal-rate-of-return forecast at 11 per cent, with opportunities of a 15-year lease term to a global tenant.
EG has over $3.2 billion in assets under management, with two decades experience in institutional mandates.
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j.ballantyne1990-6AQqhLzZaK

Funds manager EG announces new private wealth division 

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The fifth round of the National Rental Affordability Scheme (NRAS) will not proceed, following a 2014 budget announcement.
It was mooted in pre-budget leaks after the latest round of NRAS applications, round five, had been put on ice.
NRAS, which brings new rentals 20% below market into existence through incentives to developers and investors, has been under fire.
Property Observer has previously explored <a href="/expert-insights/29475-nras-should-it-be-scrapped" target="_blank">whether the scheme ought be scrapped</a>. <a href="https://www.urban.com.au/expert-insights/29475-nras-should-it-be-scrapped" target="_blank"> </a>
Sarah Toohey, the affordable housing advocate, tweeted the news of NRAS not proceeding to its fifth round, along with the Community Housing Federation of Australia.
<img src="/images/2014/05/14/tweet-may-14-one.jpg" alt="">
The budget papers suggest the saving by not proceeding with round five will be $235 million over three years.
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