The beginning of the year is a popular time to consider where to invest funds in the property market. Due to the unpredictable nature of the property market, it is hard to know the major risks and potential opportunities associated with each property. Doron Peleg, co-founder of RiskWise Property Review, shares his insights on the current and future market opportunities in Sydney, Melbourne, Brisbane and Perth. This is the first service to use a risk-return approach to identify individual properties which will have a solid capital growth in the next 5-10 years and the major risks which will have an impact on the property market. Doron also shares the factors to consider when assessing the property types to purchase this year, including which will deliver the highest returns and carries the least risk.
Sydney is well positioned to deliver a solid capital growth with houses, particularly in the Eastern Suburbs and North Shore. In particular, the Northern Beaches are projected to deliver strong growth, particularly with Manly and its surrounding suburbs. More affordable areas that are projected to deliver a solid medium and long term capital growth are Wollongong and Newcastle.
Completed unit blocks and units in the pipeline currently present a high risk, due to the potential lending restrictions by major lenders. Examples include Sydney CBD and Inner South, Ryde and Parramatta.
Melbourne has a strong economy and solid housing market which is expected to deliver a solid capital growth in the medium and long term. In south-east, Bentleigh has a median price of $1.34 million, offering good value for the quality and location of this suburb. In the north, Essendon has a medium price of $1.2 million. In the inner west, suburbs with accessibility to the CBD such as Yarraville have a median price of $870,000 and Footscray with $755,000. Buyers should be aware that the gentrification of these suburbs is a long process.
Overall the units market presents significant risks due to the potential oversupply of units in inner Melbourne with 35,560 units expected to be completed in the next few years which will affect capital growth in these areas. The riskiest suburbs in Melbourne right now are Melbourne, Southbank and Docklands as they contain nearly 50% of the 35,560 units that are in the pipeline in inner Melbourne for the next two years.
The capital growth for housing is expected to be moderate. This outcome of this investment is strongly dependent on the growth of the Queensland economy, improvement in business investment and reduction in unemployment. From a risk-return perspective, houses in established suburbs carry lower risk and a solid potential return in the medium and long term. Examples include Ashgrove with a median price of $857,000, The Gap ($628,000), Paddington ($947,000), Bardon ($875,000) and Indooroopilly ($850,000).
The Brisbane units market is weak for both new developments and existing properties. Overall 46,993 units are expected to be completed in the greater Brisbane area, being an increase of 24.3%, to the current number of existing units. It is highly likely that there will be a significant oversupply of units in inner Brisbane in the next few years which will affect capital growth. In 2017, an investment in a Brisbane unit carries high risk.
As the economy is still transitioning from a mining based economy to non-mining industries, this has had a very substantial impact on the property market in Perth. Both houses and units performed poorly in 2016, with a price reduction of 3.7% in the median house prices and 2.9% in the median unit prices.
The units market presents high risks for new developments and existing properties. Overall, 20,502 units are expected to be completed in the greater Perth area in the next two years. This is a significant increase of 9.4% to the current number of existing units in an already soft property market. Of those, 6,169 units are expected to be completed in inner-Perth alone. Until the economy improves, this market is unlikely to deliver a solid return in the next few years for houses and units.
Factors to consider in 2017 when assessing property types:
Property type: House/Semi/Townhouse/Unit
'Generally there is a preference for houses over units to deliver a solid capital growth. However, the risk associated with a unit or other property types depends on the specific suburb, which is why it should be assessed on a case-by-case basis."
High rise vs small unit blocks
'High rise buildings normally carry a higher risk than small unit blocks from both a capital growth and cash flow perspective. The risk that is associated with a high rise building depends on the specific suburb and other factors such as strata payment and specific property features, all of which should be assessed on a case-by-case basis."
Off the plan vs existing properties
'There is the possibility that the value of an off-the-plan property may decrease between the original contract date and settlement. This will result in a capital loss, as the equity in the home could be reduced. The risk is further increased if a pre-settlement valuation for a mortgage loan is less than the original value, as there could be a shortfall in funds to complete the sale. If these funds are unavailable, the buyer might lose the deposit paid for the property. An off the plan property also carries a cash flow risk as the actual rental may not meet the expectations."
Expensive or premium properties
'Expensive property price that is significantly higher than the median price for similar properties. This increases the risk of limited demand for this type of property as it only appeals to a smaller number of buyers. It also has a potential impact on the gross rental return. Higher weekly rent levels reduce rental demand for this property as well, resulting in longer vacancy periods and/or rental discounting."
Property configuration – number of bedrooms, bathrooms and parking
'In various areas, there are different configurations of properties that are desired by buyers and for investment properties, by tenants. A property which doesn't have the desired configuration (of bedrooms, bathrooms, parking) carries an increased risk of lower demand from home buyers and investors during normal market conditions."
For more information, visit www.riskwiseproperty.com.au
Question: Why do you suggest we invest our funds in the property market?
Doron Peleg: Property investment has been proven as a very effective way to build wealth, assuming that you buy the right property in the right place, and plan to hold it for at least 7-10 years.
Also, low interest rate on term deposit accounts and volatility and uncertainty in the financial markets make property investment a better alternative in the foreseeable future.
Question: What should a first-time investor be aware of?
Doron Peleg: The major mistake that property investors make is that they base their decisions on predictions and hypothetical returns, rather than looking at the facts when it comes to the risks and the potential returns of a specific property. For example, generally off-the-plan units, particularly in high rise buildings, carry a higher risk and deliver a lower return than established properties in small unit blocks. However, in many new developments we see very nice brochures with well-designed graphs about the very promising capital growth. The problem is that in many cases these brochures are based on very optimistic assumptions, the 'best case scenario', i.e. the projections are by far too optimistic, and then investors face the harsh reality.
Another mistake is to only think about the price of the property and ignoring other factors. This is particularly the case when your budget is low. For example, units in inner-Brisbane are very affordable and many investors think that this will drive the prices up, ignoring the fact the economy in Brisbane is not solid and that potentially there is a significant oversupply of units in the area.
First-time investors are also more likely to miss out on good properties due to lack of understanding of the market, particularly in Sydney and Melbourne. Often they are surprised again and again that the actual sold price in an auction is roughly 10% higher than the price guide. Experienced investors understand the market, see a good number of auctions, and treat the price guide as a meaningless number. They know the market and know what the real market value is. They offer the market value (in many cases 10% higher than the price guide) and buy the property.
The less experienced investors are in shock with the 'crazy market' and the insane cashed-up investor who thinks that money is out of the fashion. Six months later the first time investors increase their budget by 10%, but it's not enough now. That was the price six months ago.
Question: What are your thoughts on investing, interstate?
Doron Peleg: It depends on where you live. As a general rule, if you live in a capital city with solid economy and a good sustainable capital growth in property prices, there is no reason to invest interstate.
A classic mistake that we have seen during the last 5-6 years was that investors from Sydney, which was and still is, a very solid market, have decided to invest in Queensland, thinking that there would be better returns. Not only did the Sydney market perform extremely well, in some areas in Queensland, such as Gladstone and Mackay, interstate investors have seen 40% or more decline in their property value, leaving them with a negative equity and no buyers in the horizon.
It is by far easier to perform a proper research and to really understand the local market, to ask for friend/ family to come for the inspection, particularly if you are a first-time investor.
If like 45% of us, the Australians, you live in Sydney or Melbourne, then these markets offer many investment opportunities that carry low-medium risk and have the potential to deliver a very solid long term capital growth.
If you live in Brisbane, for example, then houses in established suburbs with good access to the CBD, will deliver a long term capital growth.
However, if you live in a place like Perth, where the economy is not performing well and the property market is soft, then you'll need to consider an investment interstate.
Question: What are the major risks that will impact the property market?
Doron Peleg: The major risks are around four areas: (1) poor economic growth and increased unemployment; (2) potential oversupply of units in the major capital cities; (3) major changes to government policy, taxation, etc; and (4) reduction in the interest rate.
From economic growth we can now see, as an example, the poor performance of the property market in Perth. Also, the economy in Queensland needs to recover faster in order to have stronger demand and market.
Regarding potential oversupply - there are currently record numbers of units in the pipeline, where even in Sydney there are high risk areas, such as Parramatta. If this trend continues, this will have a very significant impact on the property market.
Government intervention, particularly in NSW, which has a new Premier who put the housing affordability issue top on her agenda, could have a very significant impact on the property market. Changes might include significant rezoning and stamp duty changes. From a taxation perspective, it is unlikely that the current government will make any changes to the negative gearing.
For reduction in the interest rate - key economic measures are not at the required level to deliver a healthy growth. This includes a low GDP growth, higher unemployment and inflation rate that is below the required range. If the Reserve Bank cuts the interest rate, this is expected to significantly drive property prices up, particularly in Sydney and Melbourne. The reason is that the shortfall between the gross rental return to the mortgage repayment will be reduced.
Question: What are the top five things investors need to look at when inspecting property?
Doron Peleg: Our top 5 are:
1) Noise and disturbance factors - a property on a main road, next door (or above) a coffee shop, restaurant, on the rail line (when the noise can be heard), dirty areas or an overall unpleasant area where you just want to be elsewhere.
2) Property useability and functionality - for example, a 3 bedroom house should have 3 bedrooms that each should have enough space for a double bed, a desk and a build in. Even if one of the bedrooms cannot accommodate those, it is not a 3 bedroom house. This is a 2 bedroom house and a study and will appeal to a significantly small amount of buyers and renters. The same is applied to a car space - it should accommodate for a car which is the same size as an SUV. The same principle also applies for entertainment area, storage, etc.
3) Property condition - first, overall impression, e.g. above average, etc. and then specific issues such as cracks on the walls, water strains, etc. Obviously, this is not instead of a building inspection.
4) Aspect - light is very important to both buyers and tenants, and as we all know, aspect is not something that we can change.
5) For units – look at the building condition. This is on our top 5 as poorly maintained unit blocks carry a risk of very significant special strata levies to address unexpected major problems. The cost per unit could be thousands of dollars.
Question: How important is a garage in this current rental market?
Doron Peleg: While lock-up-garage is preferred, a parking space should also be included in this category. Cars are very popular in Australia and a parking space is very important, particularly in areas with parking issues, from both a capital growth and cash flow perspective. Without a parking space, your property will appeal to a significantly smaller number of buyers and tenants. In established areas where a large number of units do not have a parking space, this is even a bigger problem, as a lot of these landlords compete for a small number of tenants. Your personal preferences are irrelevant, whether you own a car or not, a parking space is very important.
Question: Is it better to build or buy established when investing?
Doron Peleg: Unless you are a builder or very experienced in that area, there is a strong preference for buying an established property. Regarding 'house and land' packages, they typically carry higher risk then established properties. Also, 'house and land' packages are usually common in areas that are not close to the CBD.
Interview by Brooke Hunter