Property Investing with IPS - June 2007
Welcome to the inaugural edition of Property Investing with IPS our brand new e-newsletter designed to keep you abreast of what is happening in the residential property investment world.
This newsletter will aim to bring you the latest in market developments, highlights on our properties, tips on choosing the right property, stories about our customers, helpful ancillary services and much more.
We hope you enjoy Property Investing with IPS, and if you have any suggestions for articles in future issues, please email us.
So why are investors returning to property?
Cycles are unstoppable and water always finds its own level.
Smart investors constantly pick the undervalued niche opportunities that unfold throughout the property cycles and there are clear signals emerging regarding today’s turning tides.
Both Sydney and Melbourne peaked around 2002 with some isolated pockets of significant price declines. Brisbane has quietly grown – with better results experienced in Far North Queensland (FNQ).
With no cause for demonstrable excitement on the East Coast, and a runaway sharemarket, property investment has been somewhat in the doldrums for the past 2-3 years.
In the meantime, both Perth and Darwin exceeded all market expectations with an extraordinary 200% maximum price growth over the past 6 years – an absolutely one-off cyclic pattern, following the record resources boom. But now that cycle has run its course with both cities entering their inevitable period of cyclic stagnation, and even mild short-term price decline.
Which brings us to today’s cyclic market opportunities.
Reading the cycles
The national property market is predictability cyclic, with cities regularly operating on different timeframes. The key is that ultimately, all markets of substance deliver around the same price growth percentage over time.
It’s interesting to read Johnson and Whiting’s excellent 1973 publication New Ways to Real Estate Wealth, and to note ”Even in the great depression of 1930 the real estate market suffered least of all. Whilst various paper investments were wiped out, real estate values dropped, but by 1936 they had recovered to 1930 levels and by 1938 were well ahead.”
So what are the key indicators of cyclic timing and a healthy market?
These are some really clear guidelines:
- A healthy economy
- Healthy population growth
- Healthy employment growth
- A diversified economic base
- Relatively underpriced housing
- Quality rental yields
- Demand exceeding supply
- A strongly emerging price growth pattern
This may sound like star gazing, but it exists today in the Queensland market – with the Far North still performing strongly, and the South East strongly reemerging.
And in price relativity terms, Brisbane (for example) is currently the third least expensive city in Australian behind Adelaide and Hobart – clearly an aberration in the long-term trend, presenting excellent short to medium-term value .
With its strong population growth, relative affordability, current undersupply, tight vacancy and high rental yields, it represents the classic incipient growth market.
Strong demand is emerging – from both local owner-occupiers and investors.
The key is in identifying the bullet proof properties for safe long-term investment – the topic of our next article. To read more about cycles see “Selection Criteria” [hyperlink] in this issue.
Happy hunting!
Property in Focus
Each month we will provide an update of one of our previously recommended properties.
The Village – Kelvin Grove
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Nestled on the edge of Brisbane’s CBD, The Urban Village in Kelvin Grove is the first inner-city community of its kind in Australia. Modeled on internationally renowned urban villages like Amsterdam Central, Oxford in the UK and Greenwich Village in New York, The Urban Village is quickly becoming embraced as Queensland’s premiere residential precinct. Combining the excitement of the city, with the charm of a small town, the new urban village is a community where residents enjoy a real sense of belonging. The Village comprises 4 individual towers with individual entry foyers and lifts, some 213 apartments from studios to penthouses and a podium level with private amenities and landscaped piazza. Kelvin Grove Village apartments are currently experiencing very strong rentability. We are very pleased to see the diversity of tenants that have already moved in, from doctors, nurses and university professors to pilots, hairdressers, IT professionals and international students, demonstrating the widespread appeal of the Village Centre. The recent completion of the Institute of Health & Biomedical Innovation Centre (IHBI Centre, employing 500 professionals), diagonally opposite the Village Centre continues to demonstrate the transition and evolution of professionals moving to Kelvin Grove. Furthermore, there are early signs that Kelvin Grove is attracting employees previously based in the CBD, which augurs extremely well for rentals at the Village Centre. The retail precinct is really starting to come alive, and is a truly amazing facility to have at your doorstep. The range and quality of retail outlets is as good as any we have seen in Australia. These include |
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A number of restaurants and cafés with outdoor seating next to Linear Park will be opening throughout 2007, as well as a Subway, Station 8 coffee lounge, Inn Season juice & salad bar, and La Galleria featuring coffee and art.
All of this is fantastic news for our customers that invested in the The Village.
Congratulations to those of you who purchased in The Village - the development has seen very strong growth and we’re sure it will continue to flourish. There are still a few excellent apartments left in The Village, so call IPS on 1800 098 908 if you would like to find out more.
Selection Criteria
Each issue we’ll look at a different aspect to choosing the correct property to invest in.
Cycles
Based on historical evidence, property generally tends to double in value every 7-10 years. During this time or "cycle" a property may increase in value, plateau or even fall – however, taking all of this into consideration it will generally grow at around 9% compounded per year.
The key is to identify those markets that are in the stage of their cycle where prices are just starting to rise once again and purchase before prices hit their peak. Why? By doing this you are more likely to make early capital gains – say in the first 2-3 years, rather than waiting up to 10 years to see any gain. With early capital gains you increase the equity you hold in the property, allowing you to use that equity to purchase further property.
Generally Sydney (NSW) is in a downward cycle, Melbourne (Victoria) is static, Perth (WA) peaked and Brisbane and Queensland is entering its growth cycle. Our market recommendation is currently Queensland. Of course, based on many other factors there may be pockets within Queensland that are experiencing faster growth than others - the key is not to speculate, but to identify areas of short to medium-term growth, and most importantly longer term growth performance, that is optimum return with minimum downside risk.
There are many factors that influence the size, nature and timing of cycles including:
- Population movement
- Economic growth
- Change in government (State and Federal)
- Employment growth
- Affordability
- Change in lifestyle choices
- Investment yields
| Price growth variables | NSW | VIC | QLD | WA | |
| Sydney | Melbourne | Brisbane | FNQ | Perth | |
| Property cycle | Falling | Flat | Rising | Rising & maturing | Top of cycle |
| Price position (1) | $515,000 | $375,000 | $330,000 | $320,000 | $490,000 |
| Value position | Over | Value | Under | Value/Under | Over |
| Gross rental yield | 2-3% | 3-4% | 4-5% | 3-3.5% | |
| Economic growth p.a. (2) | 0.8% | 2.1% | 8.1% | 7.0% | |
| Employment growth p.a. (3) | 1.6% | 1.7% | 5.9% | 4.5% | |
| Population growth p.a. (4) | 0.8% | 1.4% | 2% | 1.9% | |
| Population migration | Negative (strong) | Negative | Positive | Positive | |
| Net population increase p.a. (5) | 59,000 | 55,000 | 78,000 | 37,000 | |
| Investment priority |
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1. BIS Shrapnel & Australian Property Monitors.
2. Jones Lang La Salle, State in Review December 2006. ABS, RBA, Access Economic data, September 2006, Y-O-Y%.
3. See 2, as at November 2006, Y-O-Y%.
4. See 2, as at March 2006 Y-O-Y%.
5. BIS Shrapnel, Building Industry Prospects, September 2006.
It would be far too simplistic to think you can choose an investment property based only on where the market sits in its current cycle. There are in fact many other factors to take into consideration simultaneously and these will be discussed in turn, in coming issues. . . stay tuned!
RAMS Advice
100% Investment Lending
Got your eye on an investment property but don't have enough for the deposit? RAMS can help with our new 100% Home Loan option for investors! If you've been locked out of investment opportunities because you just couldn't put together enough for the deposit you can now start looking again! RAMS now lends up to 100% of the purchase price for investment properties.
Our 100% Home Loan option is available on all new RAMS full-doc home loans (excluding RAMS Line of Credit Home Loans). This means you choose the right home loan for your needs.
To qualify you either need to own your own home or have 20 per cent equity in other real estate, plus the funds to cover the transaction related costs – like legal fees, statutory charges, RAMS fees and a deposit bond if required. RAMS just makes sure you can afford the repayments, with a generous allowance for expected rental income.
Call RAMS today on 13 RAMS, that's 13 7267 to find out more. We're available to help you 7 days a week, and if it suits you better, we'll happily come to you.
Fees, conditions and lending criteria apply. Maximum loan limits apply and subject to Mortgage Insurer approval. Credit provider: RAMS Mortgage Corporation Limited, ABN 48 065 912 932. RAMS Home Loans Pty Ltd, ABN 67 053 725 741.
Feature IPS Staff
Hugh Frame has been with IPS since 2002 and is one of our longest serving employees.
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Name: Hugh Frame Age: 52 Role: Senior National Property Investment Consultant Coffee or tea? Coffee Seaside or treeside? Treeside – I've had a big treechange recently! Favourite pastime? Golf, gardening and travel What is it about your clients that you think makes them successful property investors? If you could give just one piece of advice about property investment, what would it be? Your life motto? |
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Recent Success Stories
Mark and Karen
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Who: Mark and Karen From: Sydney, New South Wales Age: Mark 41, Karen 36 Kids: 5 aged from 17 to 4 years Occupation: Mark is a full time high school teacher, and Karen works part-time in an admin role
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Mark and Karen's story
Mark and Karen are a testament to what can be achieved with some careful planning, long-term goals, a positive attitude and help from experts. Though Karen works part-time and the pair has five children to care for, they have managed to accumulate four investment properties in addition to the home they live in and own.
Mark started investing when he was a single man and working as a maintenance fitter 16 years ago. Being single, he was accumulating lots of overtime and therefore cashflow was not a problem. Having the good sense to realise that he should be putting the additional cashflow to use he set about starting his own ‘superannuation fund' by investing in his first property and did so in a market where interest rates were at 17%.
"It was tough because I had the old school mentality that when you had a debt you should pay it off as quickly as possible, so I was paying off the principle plus interest", says Mark.
Seven years later Mark invested in his second property, one he built himself and continued to pay off the principle and interest on both properties, which became increasingly difficult.
Mark recalls those early days; "I struggled and there were times I thought I would have to sell one of the properties, but I managed to hold on and then the Sydney boom happened, which was icing on the cake."
Mark and Karen married giving Mark an instant family. With the extra strain on the household income, they decided to try to reduce their debt and spoke to RAMS Home Loans about refinancing. RAMS introduced them to Paul from Investment Property Solutions (IPS), and it was decided that rather than reduce their debt, they were more likely to achieve their long-term goals by increasing their borrowings.
"Paul explained everything so clearly and simply, and if we didn't understand something the first time, he explained it a different way until we understood. It suddenly became clear to us that we hadn't been maximising our investments by paying principle and interest, and our accounts were all over the place. We could now see that our cashflow was better utilised by paying off as little as we could, buying more properties, and letting the capital do the work for us by building our equity. Paul also found us our next property and showed us the importance of choosing the right property, in the right market and made clear the benefits of buying new.
"Freeing up cashflow made our life so much easier and less hectic. Without IPS' help and ongoing advice we'd still be struggling," says Mark. Mark and Karen plan to maintain the relationship with IPS and further build their portfolio.
So how have they done it? Mark says the key is to get good quality advice and look at property investment as a process of patience, by taking a long-term view: "don't try and work things out for yourself, talk to an expert because if you don't, you might not be getting the maximum benefits out of your investments – using IPS made all the difference to us".
Mark and Karen work to a 5 year plan so that their goals don't seem too far off into the future. "Every 5 years we work out where our cash is going, and what our investments are doing. We also meet with IPS regularly, and together we decide if it is worth adding to our portfolio and if we can manage it with our cashflow".
Budgeting is also important according to Mark. "This means we don't miss out on anything, and we don't get any nasty surprises which would stop us from having a good quality of life, going on holidays and providing for the kids," he says.
We asked Mark, "why property"? His response was "because you're making money while you're asleep. We get satisfaction from knowing that we're generating wealth for our kids and ourselves while not working any harder, and best of all we are totally in control. If it gets too much we know we could sell a property and we'll still remain in control".
Mark's final words of advice? "Don't get greedy! How much gold do you need in your pockets before you cross a river and swim rather than drown?"
