Property Investor Tricks and Traps in Volatile Markets
By Nicky Dry
Property investor tricks and traps in volatile markets
Article in the Financial Review by Duncan Hughes
A 30 per cent rent reduction is failing to attract tenants for a luxury, furnished two-bedroom, two-bathroom apartment in West Perth, just a few minutes' walk from the central business district.
"It is the worst I've even seen it – and it's getting worse," says Fay Richards, senior leasing manager for Acton Central, a Perth-based real estate agency, about attempting to rent and sell property in the city and surrounding suburbs.
"Prices just keep going down and I fear it is going to get a lot worse," Richards says about growing numbers of property owners struggling to meet mortgage commitments, despite interest rates being at record lows.
Richards, who has managed and sold Perth properties for 30 years, says landlords are slashing rents and investors are selling at a "big loss" to get out of a market reeling from falling demand and oversupply of new buildings.
During the height of the mining boom back in 2013, wannabe tenants would have been queuing for the opportunity to be considered for a luxury apartment close to amenities and the city, she says.
In recent weeks she has slashed the rent from about $900 to $600 a week – and is under pressure to offer other incentives until she can find a tenant.
Perth's population growth has slowed from about 90,000 at the end of 2014 to 30,000 and new houses and apartments continue to flood onto the market, creating a massive imbalance between supply and demand.
No problem letting gilt-edged properties
On the other side of Australia, in Sydney's exclusive Double Bay, Nicky Dry claims she will have no problems renting out a five-bedroom, $5 million house with swimming pool for about $4000 a week.
The gilt-edged postcode's sumptuous rental prices slipped back just over 1 per cent last year, according to SQM Research, a company that analyses rental and property prices, but they are back on track.
"Demand tapered off a bit at the beginning of the year but it's picking up again," says the senior property manager of First City Real Estate about top-end demand for mansions with views of the water.
The "pricing is right" and is confident of finding a tenant quickly, she says.
The tale of two cities highlights the highs and lows, boom and bust character of the nation's property markets, where prices and rents are driven by location, local economies and type of accommodation.
"Australian real estate is a mix of the good, the bad and the ugly," SQM Research property analyst Louis Christopher says.
"It is important to remember the residential market is not homogenous," adds Adrian Harrington, head of funds management for Folkestone Funds Management, which has about $960 billion of property assets.
'Range of factors'
"There are a range of factors that drive markets, including location and whether it is an apartment or house," Harrington says.
In Melbourne, the mushrooming of cheap, high-rise apartments in the central business district and Docklands precinct is being blamed for oversupply and falling rents, property analysts say.
But Melbourne real estate agents claim that demand for rental property is strong in nearby Docklands.
Weekly rents in the city were flat and units rose about 4 per cent.
In Darwin, where weekly rents fell more than 11 per cent for units and 10 per cent for houses during the past 12 months, it is a combination of an economic slowdown and oversupply.
Darwin-based agent Robert Higgins, a project planning and marketing manager for LJ Hooker, says local conditions are mixed, with pockets of strong demand and other areas beginning to "kick into gear" after months of weak demand.
There is a red-flag – which is industry jargon for "buy at your own peril" – warning on Brisbane's central business district from SQM Research, because of oversupply.
Returns not compelling investments
Brisbane rents for houses were static and prices rose by about 2 per cent over the year, according to SQM.
In Sydney, the nation's property hotspot, house rents rose by 4 per cent and units were up by 5 per cent.
The returns are not compelling investments for investors seeking income, financial advisers warn.
For example, a landlord on a marginal tax rate of 37 per cent and earnings of 3 per cent on an investment property could get a better income return from an online savings account and not have to worry about tenants, stamp duty, agent's fees, rates, insurance and maintenance costs.
Alternatively, Australian Real Estate Investment Trusts, which are diversified across a range of property assets, are this year predicting total returns – that's a mix of capital growth and income – of about 10 per cent, down from 14 per cent in 2015.
ANZ Banking Group has published a confidential blacklist of about 80 suburbs, mainly mining towns in the backblocks of Queensland, Northern Territory, South Australia and Western Australia, where it will not offer lenders mortgage insurance, a one-off insurance payment that protects the mortgage lender against borrower default.
Problems could also arise if higher loan-to-value ratios result in buyers having to stump up bigger deposits to complete, potentially triggering a flood of rushed sales into a market where demand is already slowing and prices are expected to moderate.
'The industry's timebomb'
About 45,000 apartments are due for completion and settlement this year, with another 52,000 in 2017, according to industry estimates.
"It is the industry's timebomb," says a senior industry consultant who did not wish to be named.
Several reports published over recent days – from industry, economic and growth think tanks – have predicted a slowdown in housing investment over coming months.
That means investors need to be strategic about targeting assets, less reliant on overall market uplift and focused on total return, says Daren McDonald, a partner with ShineWing Australia, which advises property developers.
"You have got to do your due diligence," McDonald says about where and what investors buy.
For example, rental growth might have been flat, but Melbourne house prices rose by 11 per cent and Sydney by 10.5 per cent during the past 12 months, according to CoreLogic.
Justin Ganly, managing director of Deep End Services, a property economist and demographer, says high rise in the nation's capitals is "undeveloped" compared with major European cities such as London and Paris.
Some are diversifying
McDonald says some investors are diversifying the type and location of their properties to maximise capital growth and income.
For example, they are buying two-bedroom luxury apartments in prestigious suburbs for empty nesters aimed at long-term capital growth and smaller flats near universities for income.
In Perth, major developers are refunding apartment investors their deposits as they shelve plans for mixed-use, high-rise buildings around the CBD, blaming oversupply and the slow economy.
But in Hobart, where a housing shortage is driving up rents, apartments increased in value by more than 13 per cent and rents are rising.
Michael Yates, chairman of development company Michael L Yates & Co, says despite problems with oversupply in the central business district, there is strong demand for large apartments around inner Melbourne from empty-nesters moving in from the suburbs for the amenity of inner-city living.
Yates has recently sold the bulk of apartments in an 88-apartment complex in South Yarra, which is an inner-Melbourne suburb well-serviced by public transport and close to a fashionable shopping hub.
Gerri Keays, Ray White Real Estate principal and rental specialist, says well-presented, well-marketed and well-priced properties should usually find a tenant, even if the rental might be lower than expected.