Don't Get Burnt by The Property Market

Don't get burnt by the property market

How seriously should property investors take recent warnings that Australian property prices are 20 per cent to 30 per cent higher than they should be and that there is an impending apartment glut in 2017? 

Whatever the fundamental basis for these and similar warnings, existing and new property investors need to be aware of the potential downside.

The basic issue is to understand the risks involved with  investments already owned or being purchased. While less popular for purchases of listed assets including shares and property trusts as well as managed funds, large levels of borrowing are widely used to help acquire direct property holdings.

This high level of gearing helps to drive up property prices in good times such as the present and down when markets turn down, for example due to increased levels of vacancies and/or falling rents. Currently, strong foreign buying interest, low interest rates and a shortage of available stock is forcing and encouraging new investors to bid up prices.

While it may be some time off, a similar downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations. Compared with share market falls which can be brutal and swift, downward property price movements are generally protracted as sellers holding out for higher prices ultimately are forced to lower their expectations.

A special feature of the apartment market can, however, result in distressed forced sales. This is when a large number of off-the-plan sales negotiated before or during construction fall through. A recent example of this occurring is the setback in the Canberra apartment market due to over-supply and reduced public sector employment opportunities.

In this situation, a significant percentage of off-the-plan  buyers were either unable or unwilling to complete their purchases. The resulting forced sales depressed asset valuations and made it more difficult for heavily geared purchasers to obtain credit to meet their commitments.

The key message for individual investors is to be aware of these and other risks before entering into off-the-plan contracts. While one benefit of off-the-plan purchases is what can often be a lengthy time lag before money is required to complete the purchase, this can be a negative if personal circumstances change or property valuations fall before the settlement date..

The chances of both of these changes increase with the amount of time before completion. The risks are also greater in situations such as the present time when contracts are entered into in a buoyant market. So even if the warnings of problems ahead don't prove accurate, they are a timely reminder to avoid becoming over-committed to a future large heavily geared property purchase.

Property-Related Firms Rake in Revenue From Real Estate Boom Australia

Property exposed companies have reported "tremendously successful" and "best ever" results thanks to the booming housing market.

Developer Mirvac saw its full year profit spike 220 per cent to $447 million dollars.

Shareholders will receive a final dividend of 4.6 cents a share, taking the full year payout to 9 cents unfranked.

Strong residential sales lifted the result, with a total $1.2 billion of exchanged pre-sales contracts in hand and a slightly better than forecast 2,482 properties settled.

Chief executive Susan Lloyd-Hurwitz says the year has been "tremendously successful" and has set the company up for the future.

That future is very focused on building apartments to feed what it believes will continue to be high demand, particularly in Sydney and Melbourne.

Chief investment officer Brett Draffin says the strong sales and price momentum seen over the past financial year is set to continue, albeit at a "slightly more moderate level."




He is not concerned about the flood of units that is expected to come onto the market in the near term.

"Fundamentally increased stock levels are insufficient to overcome the national undersupply, there is a high level of activity from offshore buyers in select locations and product types," he told investors.

"We expect demand volumes to continue to grow driven by tight rental vacancy population growth and a strengthening of the economy."

Mirvac has spent $248 million on new sites, two-thirds of these acquisitions were in NSW, less than a fifth were in Victoria, and the remainder in Queensland and Western Australia.

Half of the lots to be released this year are in Sydney, and almost all of them are units.

Mirvac believes the major acquisitions it has made will see residential development drive earnings from two years time onwards.
Mortgage broker boosts earnings

Mortgage broker Mortgage Choice has also benefitted from the fever that has swept the residential property market over the past year-and-a-half, boasting a best ever full-year result.

Full-year net profit rose 6 per cent to $19.85 million, and cash profit jumped 19 per cent to $18.7 million.

The final dividend was boosted to 8 cents a share, fully-franked.

The company says it "managed to capitalise on the industry tailwinds and significantly grow its core business."

The business wrote $12.2 billion in loan approvals, which is almost 20 per cent higher on the prior year, and the loan book rose to $47.4 billion.

Chief executive Michael Russell says it is the best result so far for the company.

"We have embraced the opportunities that the strong market has presented us with and managed to deliver some of our best financial results to date," he said.

The company says it is well on its way to achieving its goal of becoming a recognised diversified financial services provider.

"We will continue to focus on our growth and diversification moving forward."

Sydney Inner-City Apartment Market Glut Predicted to Push Prices Down

Sydney Inner-City Apartment Market Glut Predicted to Push Prices Down

A leading economic forecaster is warning that oversupply will cut Sydney apartment prices by up to 10 per cent.

The report by BIS Shrapnel estimates that 5,800 apartments are being built in inner-Sydney right now, with almost as many again planned to be completed over the next few years.

The report says the peak annual output of 4,500 units in 2016-17 is comparable to the last boom in 1999-2000, but the average of 3,800 new inner-city apartments per year over three years will be a record.

BIS Shrapnel's senior manager of residential property Angie Zigomanis, who wrote the report, says developers have been playing catch-up after a decade of undersupply in Sydney, but they look like soon getting ahead of themselves.

"The population growth in Sydney still stays pretty strong, rental demand will still be fairly strong, but it's just that the level of apartment construction now is moving up to a level that's probably approaching a level that's too high and that's unsustainable in the long-term," he told ABC News Online.

Mr Zigomanis does not expect this to occur in the short-term, but warns that the wave of new developments over the next few years is likely to result in supply exceeding demand.

"Once the market starts getting into oversupply then rents either flatten out or start falling," he said.

"This has the potential to also coincide with the Reserve Bank looking to start tightening interest rate policy as well and that combination will see the investment equation change and investors start becoming less confident about the market and prepared to pay lower prices for dwellings.

"So any new apartments that come back onto the market are likely to experience some sort of loss two or three years out from now."

Mr Zigomanis says the losses are unlikely to be large, but may prove a serious setback for those buying off-the-plan now expecting capital gains.

"Depends on location, etc, but I wouldn't be surprised if from their current purchase price they don't experience losses of perhaps 5 per cent, and perhaps selected developments up to 10 per cent."

In results released last week, property developer Mirvac said it planned to focus heavily on increasing apartment developments in the Sydney market, expecting that segment to remain strong for the next five years.

Mr Zigomanis says a lack of pre-sales a couple of years hence may force a rethink of such optimistic strategies.

"They require a certain level of pre-sales before they go ahead with construction," he said.

"Over the next couple of years we expect pre-sales will be pretty strong so it should be able to sustain the number Mirvac are talking about, but if they were assuming that demand would stay at current levels over the next say five years we suspect that won't be the case.

Chinese Investor Frenzy Adds Fuel to Inner-City Sydney Apartment Boom

THOUSANDS of Chinese investors piled into a property expo in Sydney’s Town Hall on the weekend as analysts tip overseas buyers will keep the city’s inner city apartment market booming for the next two years.

Close to 50 companies jockeyed for the attention of the cashed up Chinese buyers, with apartment projects being spruiked by development giants Greenland Holding Group, MAB Corporation and Frasers Property Australia

About 50 companies jockeyed for the attention of the cashed-up Chinese buyers, with apartment projects being spruiked by development giants Greenland Holding Group, MAB Corporation and Frasers Property Australia.

The property frenzy came as Sydney and Melbourne kicked off the spring auction season with strong results, posting clearance rates of 83.4 per cent and 75.3 per cent respectively on total sales of $545.7 million, according to preliminary figures released by Australian Property Monitors.

“The (auction) results were extraordinarily strong,” said APM senior economist Andrew Wilson. “The Sydney market just keeps rising. Certainly there is no sign of a waning of activity.”

He said a lot of the buyer ­action was driven by investors rather than owner-occupiers.

At the Sydney property expo Maggie Wang bought a house in Bellevue Hill, in Sydney’s east, for about $6m.

Ms Wang, who migrated three years ago, ran an IT and property development company in China and had recently started a wedding planner business in Australia. She said Chinese interest in Australian property was about more than just making money.

“People like the lifestyle, the country and the environment, it’s not just about investment,” Ms Wang said.

Another buyer, 26-year-old Crystal, bought a home in one of Sydney’s wealthiest suburbs, Vaucluse, for more than $5m, with plans to buy more Australian investment properties.

The expo also featured agencies, such as ABC World, which give Chinese investors advice on migrating to Australia through avenues such as the Significant Investor Visa. The visa, implemented by the former federal Labor government, allows foreigners who invest more than $5m in Australia the potential for permanent residency.

Black Diamondz director Monika Tu, who represents wealthy Chinese looking to buy Australian homes, said the visa’s introduction had led to a surge in interest for local trophy homes worth more than $5m.

Ms Tu said inquires to her agency from Chinese property hunters had increased by about 50 per cent this year.

Also at the expo, one of China’s largest developers, Greenland Holding Group, held expressions of interest for its second local project, the $200m ­Lucent apartment tower in North Sydney, while Singaporean-backed Frasers Property Australia marketed apartments at its $2 billion Central Park project at Sydney’s inner-city Chippendale.

The high investor demand for off-the-plan apartments is ­expected to keep Sydney’s inner-city market in boom mode for the next two years, according to forecaster BIS Shrapnel.

BIS Shrapnel said about 5800 apartments were under construction in Sydney while about 11,500 new apartments would be completed over the next three years — the biggest number in the city’s history. CBRE managing director of residential projects David Milton said the uplift in interest from Chinese investors allowed local apartment developments to stack up financially.

Australian Capital Cities: Where's Hot, Where's Not

DARWIN was Australia's best-performing capital city for property values during the past quarter - up 5.2 per cent - and showing year-on-year growth of 4.2 per cent, according to the latest figures from RP Data.

The RP Data-Rismark August Hedonic index shows Adelaide is the weakest performing capital city, with the change in dwelling values sliding 2.2 per cent during the past three months.

The monthly figures were more optimistic though for Adelaide, showing 1.4 per cent growth for August.

Sydney and Melbourne both recorded only 0.1 per cent growth for the month, but are performing better for the quarter, at 2.4 per cent and 2.5 per cent respectively.

RP Data research director Tim Lawless, said the figures showed a flat winter season that could be the foundation of a strengthening Spring.

Combined with the lowest transaction levels since the late 1990s, prices could also soon be expected to drift upwards after years in the doldrums.

"Spring is going to be better than last year,” Mr Lawless said.

"This is the first time that we have seen total listings across the capital cities the same as they were last year.”

Mr Lawless said lower listing levels were good news for vendors because it meant there was not as much choice in the market which could improve prices.

"In November last year, the listings were 30 per cent higher than they are now,” Mr Lawless said.
"They are currently only 0.5 per cent higher than last year, which means that we have a good benchmark level."

From a supply perspective, it’s a sign that there aren’t as many homes on the market at the moment and that means homes are selling a bit faster and vendors discounting a little less but transaction numbers stabilising.”

Mr Lawless said transaction volumes were at their lowest since 1998 - and were currently lower than during the Global Financial Crisis.

"At the moment based on June data, transaction volumes are 7 per cent lower than the same time last year,” Mr Lawless said.

"We’re averaging 30,000 sales each month and that’s fairly steady across 2012.”

But the lack of stock was being treated calmly by potential buyers who are showing patience about finding exactly the right home.

"A lot more people are attending local houses and showing interest in the market place but there is still not a level of urgency that will push buyers into making a purchase decision rapidly,” Mr Lawless said.

“Purchase decisions won’t be rushed, buyers are playing vendors off against each other and are negotiating pretty hard.”

Figures from the data showed:

- Hobart prices grew 3.9 per cent for the year to date
- Sydney prices grew 1.9 per cent for the year to date
- Darwin prices grew 8.4 per cent for the year to date
- Brisbane prices grew 0.6 per cent for the quarter
- Perth prices lifted just 0.2 per cent for the quarter

House Prices Flat in August

AUSTRALIAN house prices were flat in August, although Adelaide and Canberra experienced some growth.

House prices in Perth and Hobart fell more than one per cent in the month and there was little price movement in Sydney, Melbourne and Brisbane, the RP Data-Rismark August Index showed.
Adelaide and Canberra prices increased more than one per cent, while Darwin home values fell half a per cent.

The index posted a 1.6 per cent increase in Australian home values over the past three months but a fall of 2.4 per cent over the year to August.
During the quarter to August, Darwin was the best performing capital city, registering 5.2 per cent growth.

This was followed by Melbourne at 2.5 per cent, and Sydney at 2.4 per cent.
Perth and Brisbane recorded marginal growth of 0.2 per cent and 0.6 per cent respectively over the three-month period.

RP Data research director Tim Lawless said Sydney dwelling values increased in five of the past eight months, helping to provide a cumulative capital gain of 1.9 per cent over the year to date.
"Sydney is proving to be one of the most consistent performing capitals this year," he said.

A rebound in Melbourne was also encouraging, given more worrying signals earlier in the year.
"Improved affordability since June has helped dwelling values rise across every capital city over the three months ending August 2012, apart from Adelaide," Mr Lawless said.

"The big question is, can this growth be sustained?"

Mr Lawless said the spring selling season would be a good litmus test.

The highest rental yields for houses in the quarter were in Darwin at 5.8 per cent and the lowest yield were in Melbourne at 3.6 per cent.

Legacy of the Sydney Metro Line Land Grab

THE defunct Sydney Metro is still sitting on a $100 million property empire, with at least two office towers about to be demolished more than two years after the former Labor government pulled the pin on the project.
 
In late 2009 the department behind the short-lived Rozelle-to-city Metro line snapped up $124 million worth of property along the proposed route, including several CBD office blocks, and spent hundreds of thousands of dollars more to turf tenants out of some of the buildings.

In February the following year premier Kristina Keneally killed off the project, which by that stage had already cost the taxpayers $356 million.

However, instead of selling off the property portfolio - or at least releasing the properties to earn some much-needed income - the department has held on to the buildings, and two of them are about to be demolished.

Property records reveal Sydney Metro still owns at least seven buildings it bought during the spending spree; some of those are just standing empty.

The biggest single purchase, the $45 million building at 8 Castlereagh St, has since been relet. Two adjacent 11-storey office blocks in Clarence St, above Wynyard Station in the city - which cost taxpayers a whopping $39 million - have sat almost entirely vacant for the past 2 1/2 years.

At 30 Clarence St, just the ground floor retail space remains occupied after the former government spent more than $500,000 in compensation to tenants to end their leases.

Next door at No. 36 the last of the tenants moved out in July after the 10 other floors sat empty for months.

Both buildings are now set to be demolished to make way for the Wynyard Walk, an underground passage linking the station to Barangaroo.

In late 2010 Ms Keneally announced the $300 million Walk as an alternative link to Barangaroo after the Metro axing left the $6 billion redevelopment with limited public transport.

CBRE leasing agent Tim Molchanoff said similar B- and C-grade buildings rented for upwards of $520 a square metre, meaning the government had also missed out on $3.4 million in rent.
A spokesman for Transport for NSW said all the other buildings were leased.

"These seven properties were acquired by Sydney Metro and all are now owned and managed by Transport for NSW,"