CoreLogic has released its latest Pain and Gain Property Report which measures the profits and losses of property sellers and while some have made losses, there have been some spectacular gains and Tim Lawless tells us where that has happened.
Some win, some lose in Australia’s big apartment crunch and we identify a big winner as being Wooloongabba. We catch up with one of Australasia’s most successful property developers to find out why he is so impressed with this Brisbane suburb.
Investors and foreign buyers of Australian residential property are being hit hard by two forces, with the apartment market already feeling the heat. While money is cheap, getting access to funds is getting more difficult for local investors and foreign buyers. Foreign buyers are also being hit by additional taxes that are now being implemented in Victoria, New South Wales and Queensland. Given that these groups account for well over 50% of all new apartment purchases, restrictions to finance and new taxes are going to hit the apartment market harder than other forms of housing, such as established dwellings and house and land packages. It’s likely that most apartment markets will continue to see demand; however, there are three criteria that put a suburb at risk, and these are detailed by Nerida Conisbee.
With today’s low interest rates and cheap debt, many investors are finding themselves in a favourable cashflow position. But as the banks tighten their purse strings, investors need to think outside the square when it comes to gearing into further properties. So we give you eight strategies to make sure an invisible serviceability ceiling doesn’t stop you from growing your property portfolio. Michael Yardney helps with that advice.
An abandoned house, a missing owner, a mysterious squatter could add up to a young banker taking ownership of a million-dollar home without paying a cent. We catch up with a prominent property lawyer who says it could happen.
I am joined by buyer’s agent Rich Harvey and Chief Economist Dr Andrew Wilson to discuss how many properties you need in your portfolio to retire. Rich has a simple formula.
Transcripts:
How many properties do you need to retire? – Rich Harvey and Dr Andrew Wilson
Kevin: First up, welcoming into the show, buyer’s agent Rich Harvey from Property Buyer. He’s done some study on just how many properties you need to have in your portfolio that would allow you to retire.
Rich, I know that you’ve looked at this, but is there a formula or a magic number if you’re determining how many properties you need to retire?
Rich: There are some pretty simple calculations you can do, and I’ll make the math pretty simple, but I always like to start with the end in mind. Stephen Covey is one of my great mentors, and he’s written that book Seven Habits of Highly Effective People.
For property investors out there who want to retire someday, a really simple goal is to go “Well, what sort of income do I want to earn from my passive assets, my passive property portfolio?”
If you want to earn, say, $100,000 in income, the simplest way is to go “On average, across Australia, you should be able to achieve around a 5% gross rental yield.” Divide that 5% into $100,000, and you come up with $2 million. So you’re going to need roughly $2 million of unencumbered property assets.
The next question, Kevin, is how many properties do you need to get to $2 million worth of assets? It’s a bit of a scary number, but effectively, my strategy would be to buy around $4 million worth of property over a period of time, hold those properties for one to two property cycles, and then sell down half your portfolio to pay off the debt on the properties. That should leave you with roughly $2 million to give you your $100,000 income.
Kevin: So it has to be $2 million unencumbered.
Rich: Correct, that’s right. And I haven’t allowed for a lot of expenses, and there are taxes and a few other things there, so it’s a very simplistic equation. You do need to get financial advice and some good number-crunching on those, as well.
Kevin: If you’re looking at building a healthy portfolio, what sort of gearing should you have, loan to value ratio?
Rich: When you’re starting out – it depends what age and stage you’re at – if you’re in your 20s, I always advocate going and putting in the minimum deposit possible, because you’re in the accumulation phase. You have plenty of years of work ahead. Starting at 80% loan-to-value ratio is fine. I even started at 90% and paid lender’s mortgage insurance just to get going at some points in my portfolio. But as you get towards your 50s and your 60s, you don’t want to be going that high. Gearing that high can be a dangerous scenario.
It depends on your age and stage, but my general advice is in the earlier stages of your career when you have a long work life ahead of you, gear it more strongly, but putting in 20% is always a rough rule of thumb.
Kevin: It’s very easy now to get into investment with the interest rates the way they are, but I was reflecting back on property back in 1975 just yesterday, and interest rates then were almost around 10%. What sort of a buffer would you put above the current interest rate to allow for increased rates?
Rich: The banks are basically adding at least 3% buffer.
Kevin: 3%, yes.
Rich: Yes, even 3.5% some of the lenders.
Kevin: Almost doubling it.
Rich: Yes. Look, it’s a bit of overkill. I don’t believe interest rates are going to go that high ever again. It’s interesting to see, what’s actually happened is because interest rates have been so low, people have been able to gear quite heavily and just the volume of debt out there is quite remarkable. So when the Reserve Bank changes rates, there’s a lot more sensitivity to those rates on the upward cycle.
Definitely have a buffer in place, and usually I allow around at least 2% above the current rate. Another tip is if you’re paying off an owner-occupier loan, pay it off with that extra percent in mind and pay down your non-deductible a little bit faster.
Kevin: I want to bring Dr. Andrew Wilson into this discussion, as well, because we were talking – just before we started chatting to you – about the number of investors who are coming back into the market, particularly in Sydney and Melbourne. Are you noticing that as well, Rich?
Rich: Yes, there are. I think with this election now being called, hopefully it’s going to bring a bit more confidence and certainty back into the market. I thought that if Labor had got in, there would have actually been a little mini boom in people chasing after established properties, because they were going to abolish negative gearing. But we’re seeing a little bit more confidence starting to return, like we’re starting to get a little bit more enquiries than we have been the last few months for our buyer’s agency service.
I think the wobbles in the share market and around the world, like the Brexit, that tends to send a bit of a ripple effect through, so we’re starting to see investors still wanting to get into the market.
Andrew: I think, Rich, another driver of that is that the lower interest rates go, the more attractive residential property investment does become. I think there’s almost an intuition there that the flattening of interest rates really reflects that the upside risks to higher interest rates are lower, particularly in a low-yield economy.
Deposit rates are under 2% now, as you said, the share market is all over the shop, plus there are concerns about where the international economy is going, and I think in those circumstances, you get more demand for residential property, notwithstanding what is happening in the cycles.
I think that even the prospect of a change to negative gearing had investors up and about, and we’re certainly tracking a spike in the Sydney market over the last two months. My spies down in Melbourne tell me that there has also been an investor spike down there in the northern and western suburbs. So you don’t really need to incentivize investors much in the current climate to get them back into bricks and mortar investment.
Kevin: Rich, we’ve received a text in from Michelle. She is in her 20s, and she wants to know whether her strategy should be any different from someone who’s, say, in their late 40s. In other words, the properties she’d be looking at, should they be different from someone near on double her age?
Rich: Again, it depends on Michelle’s income, as well. When you’re starting off, if you’re on an income of, say, $50,000 and you have got kids and a lot of expenses, you really have to watch your cash flow. So getting a property that really looks after itself, that’s more positively geared, that’s a really good strategy.
But when you’re in your younger years, if you can afford to buy a property with a really good growth bias, that’s going to help you accelerate your equity a bit faster, because you can then redraw the capital gain, redraw the equity, and then use that as a deposit to go again for your second property.
Kevin: You’re based in Sydney. Let me ask you the question about Sydney investors. What sort of properties are they looking at right now, Rich?
Rich: Quite a mixture. We have some clients with a budget of $500,000 up to $2 million. They’re generally looking for properties in good quality suburbs, close to schools, shops, and transport, particularly areas around Sydney that are benefiting from all the infrastructure development going on.
There’s a host of things happening in Sydney. You have the North West Rail Link, South West Rail Link, light rail going through, NorthConnex; there’s a lot of transport infrastructure. In the Beaches, you have a hospital going in, so a lot of investors are trying to capitalize on where that reduced travel time or improved amenity is happening. And then, of course, traditional investors will just buy in the blue-chip suburbs and just try to get a foothold.
Kevin: Are there any areas around Australia where you’re concerned about an oversupply of stock, particularly with units?
Rich: Starting with Sydney, absolutely. Places like Zetland, Mascot, Parramatta, some pockets of Homebush, you definitely have a very significant number of apartments going in there, which I wouldn’t be buying at all.
Brisbane, certainly around West End, Fortitude Valley. I wouldn’t be putting my money into Perth or Darwin at this point. I just find that the Darwin market is too volatile, and I think Perth has got a little bit further to fall. In Melbourne, as always, some of those city and inner and city fringe areas – again Docklands and some of the apartment areas around there – I’d be avoiding, as well.
Kevin: Rich, I want to thank you for your time, it’s been great talking to you. Rich from Property Buyer, thanks.
Rich: Thank, Kevin, have a great day.
Get the banks wanting your business – Michael Yardney
Kevin: We’ve all heard that APRA’s restrictions have caused the banks to tighten the screws and make it even harder for many investors to get their new loan or refinance their existing loan. I did an interview that we ran on the show recently with Andrew Mirams from Intuitive Finance where he looked at the difference between serviceability and affordability.
Michael Yardney from Metropole Property Strategists joins me.
Michael, I’m just keen to know from you, what are the strategies you would suggest someone put in place to make themselves more attractive to the banks?
Michael: Kevin, I heard that interview with Andrew, and the issue was that there was somebody who’d written in who had strong cash flow, had a large amount of equity, but yet the banks despite today’s low interest rates weren’t prepared to lend him more.
And that’s happened, as you said, partly related to APRA’s restrictions. They measure your serviceability not on today’s prevailing interest rates of, say, 4.5% but can you repay the debt at 7.5% or 8% and principal and interest?
You’re right, Kevin. There are some tricks you can use to make your figures look better to the bank.
Kevin: What are they, Michael?
Michael: I think one of the first ones you should look at is your credit cards, because the banks take into account your credit limits. Even if you’ve never borrowed to the limit, they figure that you can go out and buy something expensive tomorrow.
If you have multiple credit cards, maybe you get rid of them and stick to one, and if you have a credit limit of $10,000 that you’ve never used that much, cut it back to a much lower amount and then all of a sudden, they will see your serviceability as higher, Kevin.
Kevin: That’s a great tip. What else, mate?
Michael: The other thing is consolidate your unsecured debts, because what they’re going to do is actually ask you to do a balance sheet of all your income, your assets, your outgoings, your liabilities, including other debts. Sometimes people have high-interest credit card facilities or other loans and it’s often good to try to consolidate them onto maybe a lower interest rate facility and make yourself more attractive to the banks.
Kevin: Another thing, too, Michael, I guess we think of ourselves as individuals but the bank really looks at us as a business. I guess we therefore have to act and put forward a business front when it comes to things like our paperwork.
Michael: Well, Kevin, if you can’t provide the last few pay slips, if you don’t have all the details of any bonuses that you’ve had, it makes it really hard to do an accurate serviceability picture. Therefore get all your paperwork in order. If you have a proficient finance broker, they’re going to make sure that you have that before they even submit your loan to the bank. It makes you look more effective and efficient, Kevin.
Kevin: Michael, what about shopping around? Are you raising your head then if you’re looking around at the different loan products and you make applications? Is that a bad thing?
Michael: That’s a bad thing by making applications, but you should definitely be shopping around and looking for the right loan product. But Kevin, that doesn’t mean the cheapest interest rate, because I’d rather have a bank that will lend me another $300,000 or $400,000 and spend another quarter of a percent interest to get that than to get the lowest interest rate and not be able to get another investment property.
That’s where a proficient mortgage broker will help you identify the loan products most suited to your needs with features that potentially work to increase your financial capacity. Different banks will look at your serviceability differently.
But no, don’t go to different banks and apply, because if you do, that shows up on your credit score and then they’ll wonder, “Hey, why are they doing that?”
Kevin: Yes. I remember when we started borrowing money to invest in property, albeit it was a principle place of residence, but the banks in those days didn’t take into account Carolyn’s wage or Carolyn’s income. That’s all changed, hasn’t it?
Michael: Very much so. If you’re going to be buying a property with your life partner, your spouse, a family member, if you can show that there are two people who are going to carry the burden of the serviceability, it suddenly increases your ability to get loans, Kevin.
Kevin: What about cross-collateralization?
Michael: Well, Kevin, we’ve spoken about that often in the past, and what we’ve said is in general, we’d like to avoid it. But sometimes it is unavoidable, and by offering additional security to the banks, it can occasionally allow you to borrow a higher LVR. So if it’s the last resort and that’s what you need to get into the market and take advantage of the opportunities, then yes, sometimes you just have to do that, Kevin.
Kevin: Do the banks like me taking loans over a longer period, Michael?
Michael: Kevin, often we think about 20- or 25-year loans, but there is a small group of lenders who let you borrow for up to 30 years, and I think there are one or two that offer even 40 years for the right candidate. Probably not for you or me, Kevin, at our age, but that extra 10 years saves hundreds off your monthly repayments.
Over the long term, of course, you’re paying a lot more because you’re paying interest for longer. But I wouldn’t be suggesting you keep that loan for 30 years. Maybe in three or four years’ time, you’d revisit it, you’d refinance it, you’d see how things are going on. But it’s definitely a way of making it more serviceable by actually having longer loan terms.
And, Kevin, there’s another one. There’s the concept of locking in on interest rates today. As I said a moment ago, the banks are looking at your serviceability based not on the current 4.5% or 5% interest rates but what if interest rates go up? If you lock in a portion of your interest rates – and I’d be suggesting you get good advice to see if that’s appropriate for you – then the banks can’t say, “Hey, you have to be able to service it at 7% or 8%.” It makes it more serviceable because a portion of your loan is already locked in as a rate that’s fixed for the next three to five years.
Kevin: Michael, this is all about making yourself look as attractive as you possibly can to the bank, isn’t it? Therefore showing that you’re a good saver, is that important?
Michael: There are two elements to that, Kevin. First of all, showing a good savings record makes you attractive. But the other is giving yourself more deposit, more equity to get going works.
I believe you should be spending less than you earn, saving that, and maybe if you’re starting off, putting it in an offset account against your home loan if you have one or into an interest bearing account if you don’t have any other loans that you can take advantage of – and get a good track record, a good savings record, but also it’s a great discipline moving forward as a property investor, Kevin.
Kevin: Michael, we’re out of time but great talking to you, as always. Thank you very much, and we’ll look forward to catching you again soon.
Michael Yardney has been my guest from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure, Kevin.
It is not all bad news for the unit market – Nerida Conisbee
Kevin: Investors and foreign buyers of Australian residential property are being hit hard by two forces, with the apartment market already feeling the heat, but it’s simplistic to assume that all apartment developments are at risk. While money is cheap, getting access to funds is getting more difficult for local investors and foreign buyers. Foreign buyers are also being hit by additional taxes that are now being implemented in Victoria, New South Wales and Queensland. This is from an article within The Australian, written by Nerida Conisbee.
Given that these groups account for well over 50% of all new apartment purchases, restrictions to finance and new taxes are going to hit the apartment market harder than other forms of housing, such as established dwellings and house and land packages. It’s likely that most apartment markets will continue to see demand; however, there are three criteria that put a suburb at risk, and these are detailed in the article within The Australian written by Nerida Conisbee who joins me.
Nerida, thank you very much for your time.
Nerida: Thanks, Kevin. Thanks for having me on.
Kevin: What are the three criteria?
Nerida: The first one is the amount of supply. Areas where we’re seeing very elevated levels of supply compared to population growth will be the most hit. The second is the number of offshore buyers. Given that this group is the most affected by financing restrictions and additional taxes, those areas that attract high levels of offshore buyers will also be impacted.
And thirdly, the cost of apartments is the third criteria that puts a suburb at risk. What we’ve found is that buyers of lower-priced apartments are going to be hit harder than those buying more expensive apartments.
Kevin: These areas that are going to be hit in this way, how will we see that? What will we see in the market, Nerida?
Nerida: We’ll start to see rental levels drop as they struggle to get tenants for those apartments. Already, in markets such as Melbourne’s CBD, we’ve started to see rental levels flatten out. We’ll also start to see prices drop, as well. Again, the resale values will probably be reduced, as well, because remember that with offshore buyers that can only buy new apartments, so that secondary market becomes a little bit problematic.
Kevin: Is purchaser default another area that we should be concerned about?
Nerida: Definitely, because if you have a look at a lot of these apartment developments, the purchasers have put down deposits on the apartments but they haven’t completely paid for the apartments. So as these projects complete, we do expect to see a higher risk of default. We’re not seeing it at the moment, but I think there are quite a few concerns – particularly by the banks – that we will see a higher level of defaults.
Kevin: I’d love to get your feedback on this, do it on the website. There is an opportunity for you to make some comment just below the text version of this interview with Nerida Conisbee. Give us your thoughts: what are you thinking about the apartment market?
Nerida Conisbee is chief economist at the REA Group, owner of RealEstate.com.au, and has written an article in The Australian. Nerida, thanks for your time.
Nerida: Thanks, Kevin. Thanks for having me on.
Getting a million dollar property for a song – George Vlahakis
Kevin: A really interesting story I came across the other day about an abandoned house in Redfern in Sydney. The owner has been missing for some time and there is an archaic law that says that if you take occupation, you could actually take ownership. Well that’s actually what’s happening. A young banker is trying to do that. He’s currently living there as a squatter. It’ll be interesting to watch what happens here.
Let’s get a bit of background on this, and also the law around this. George Vlahakis is a solicitor with Kydon Segal Lawyers and also Click Conveyancing.
George, thanks for your time.
George: Thank you.
Kevin: I know this law is not strange to you because you had a similar situation recently, didn’t you? But let’s firstly talk about this one and then we’ll reflect back on what you learned from your previous experience. What do you know about this one in Redfern?
George: Well, this is quite a unique and rare occurrence, which for the person in question who is squatting, is potentially a bit of a windfall. Under the Real Property Act there is a provision that allows someone who takes possession of a property to become registered as the owner of that property if they’ve been in continuous possession for a period of 12 years. My understanding is that this chap has been there for about eight or nine years now, so he’s getting close to that threshold.
Kevin: He probably should have just kept his head down really, shouldn’t he, and maybe waited for the full 12 years you have to be in occupation.
George: That’s right. You have to be in possession for 12 years. Once that period of time has elapsed, you make an application to the Land Titles Office or Land Property Information in New South Wales as it’s known here, for the property to be registered in your name.
In order for that to be processed, you need to provide them with evidence that satisfies them that you have been in possession of the property for 12 years and you also need to satisfy them that the rightful owner – if you want to call him that – is AWOL, and to support your application you need to provide evidence from third parties in the form of statutory declarations or affidavits that they have known you and are aware that you’ve been in possession of the property for that period of time.
Kevin: That could be difficult, couldn’t it? In this particular case, the rightful owner is a Chinese-born man. His name is Paul Fu. He bought the house in the middle of 1991. He hasn’t been heard from for the past nine years, but I believe that the council also had to do some rectification work on this property. Is that right?
George: That’s right. My understanding from the media articles that have been circulated is that there are some outstanding orders in relation to rectification of some hazardous defects in that property. The person who is in possession of the property would probably be well served to take care of those repairs, which is further evidence that he is in possession of the property and is saying to the world “This is my property.”
One of the requirements under the legislation is that your possession is open and not a secret, so you can’t be seen to have snuck your way in there and hidden from the real owner for that 12 years.
Kevin: So you have to get to know the neighbors really, don’t you?
George: That’s right. So you do things like pay council rates, connect electricity, and get bills in your name. You can’t sneak in and out of there; it has to be open.
Kevin: It’s a big gamble, too. You could do that for 11 or 12 years and then find that the owner turns up at the last minute and claims it back.
George: That’s right. The other risk that he’s running, which is always a risk in these situations, is that he is in reality trespassing. The property does belong to this Chinese chap who is presumably overseas. The rightful owner has all rights to exclusive occupation and possession of the property. This guy here, according to reports, has allegedly broken into the property effectively, through the front door and is in there without the permission of the rightful owner, which is, at law, trespass. If you’re sued for trespass, you can be sued for damages, which could result in substantial penalties and fines and legal costs.
Kevin: Who would have to bring that action? Does that have to be the owner pressing those charges, or can the police do that without him?
George: Just to give you an example, a scenario that may happen is that the original owner, this Chinese guy, has moved overseas, has suffered some unfortunate accident and passed away. The beneficiaries under his estate are now entitled to ownership of this property through a probate process or otherwise. They then might bring a claim for trespass against the person who is occupying the property, and part of their damages might be the fact that they’ve been denied rental income from the property for the period of time that he’s been in there.
You can imagine if he’s been there for seven years, the rental on a terrace in Surry Hills or Redfern might be $1000 a week, $50,000 a year, multiplied by seven plus legal costs. You could be looking at a half a million dollar bill before too long.
Kevin: Yes, I mentioned at the outset, too, George that you had a similar situation recently. Is that right?
George: That’s right. I can’t obviously go into specifics or addresses or names, but I did represent a client who came across a property that was abandoned and started going down this road of claiming adverse possession. Thankfully, the beneficiaries or heirs of the rightful owner were found and the property is back in their hands, I understand.
Kevin: Was he in occupation?
George: He took possession of the property, but the property was extremely run down, so he wasn’t living there. He took possession by changing the locks and making the property secure. It was open to the elements and in an extremely dilapidated state in the inner city. He changed the locks and put a sign up and said, “I’m the owner. If anyone needs anything, you can contact me.”
Kevin: Okay, yes. That’s an outward statement, isn’t it? He’s making claim to it. Would he have also paid back rates or anything like that?
George: He was in the process of arranging to do that. There was a substantial levy outstanding for council rates, which he didn’t get the opportunity to pay, thankfully.
Kevin: If he had paid that and the owner then came forward, could he claim that back?
George: The person who paid the rates, not being entitled to the property, would have a very difficult time getting them back from the owner.
Kevin: It’s a gamble, isn’t it?
George: That’s right, yes.
Kevin: Yes, it certainly is. We’ll watch this one with interest. It could be a long, drawn-out process. Where would he stand now if this person doesn’t come forward, and assume no one makes claim to it? Could there be a dispute? Could someone else move in, as well, or because of the period of time he’s been there, is he pretty safe in that case?
George: He does have some legal rights to the property because he’s in possession of the property. You can’t move him out by force, short of getting an order of the court and having the courts intervene on your behalf. So he does have some protection being in possession of the property now.
Kevin: He’s probably done the right thing by coming out and making it known. It’s a bit like your guy putting a sign on there saying “Hey, I’m in ownership.” He’s just got to hold his breath now and hope that nothing happens in the next few years.
George: That’s right. Paul Fu, the Chinese-born rightful owner, and his relatives if they’ve come across now or this has been brought to their attention, should be making moves fairly quickly to take possession of the property back.
Kevin: I’ve been talking to George Vlahakis who is a solicitor from Kydon Segal Lawyers about this very interesting case. We’ll continue to watch it.
George, thanks for your time, too.
George: Thank you very much.
Pellicano is bullish about Brisbane – Nando Pellicano
Kevin: Woolloongabba is thought to be Brisbane’s most affordable inner-city apartment market and was voted as one of Australia’s best investment suburbs two years running – in 2014 and 2015 – by Your Investment Property magazine.
That’s why we are excited to tell you about South City Square, right in the heart of Woolloongabba – a mixed use, multi-stage, neighborhood development offering apartments, a hotel, supermarket, boutique cafes , restaurants, and cinema, all surrounding a 5000-square-meter open recreational space.
South City Square has attracted plenty of local interest, in fact stages one and two are sold out and are under construction while stage three is due to be released to the public later this month.
Joining me now to talk about this exciting development and the family business behind the development is Nando Pellicano of the well-known and highly respected Pellicano Group.
Nando, thanks for your time.
Nando: No problem, Kevin. Good to be here.
Kevin: Nando, building and development, of course, has been in your family for generations. Tell me a bit about the history of how the family business was founded in Australia and how it’s developed since then.
Nando: Back in 1967, my father and my uncle started the business as bricklayers, just as teenagers. They originally started out just building some homes and some three-story units for external clients and contractors. From there, they developed a business and moved into developing their own projects, firstly in residential projects.
The business continued to grow, and in the early/mid 1980s they expanded into commercial, industrial, and retail. And from there, developing our own business parks and then a lot of the projects we developed, we then started to retain long-term ongoing ownership of. From that, we started to build up a property portfolio in the early 1990s.
Fast forward to today, we’re a builder, a developer, a long-term property investor with a lot of the projects that we create across Melbourne and Brisbane.
Kevin: There is no doubt that the brothers could never have seen what’s happening today. It is unique also in that it is privately owned. It’s a family business. How is the business structured now, Nando?
Nando: My father has two boys, being myself and my other brother Antonio, who are in the business, and my Uncle Nunz also had two sons who are also in the business. The four of us of the next generation are all managing directors now, so we deal with all the day-to-day running of the business, and we’re evenly spread across construction, property, and finance.
Kevin: Nando, what words would you use to describe the company?
Nando: Being a family business, values, integrity, and reputation are very important for us and are always at the forefront of our minds. Obviously, the name of the company is our surname. We’re very proud of what my father and my uncle have been able to create and achieve.
They always remind us that a reputation takes years to build but it can be gone in a matter of minutes or hours. So we’re always very conscious of making sure our last development is the best it can be. Because we are vertically integrated with construction and development and also long-term property ownership, we really do look at each part of the process.
The design phase: we’re spending the extra time and attention to detail to make sure we’re putting in the right plant and equipment, the right materials that are going to last the test of time.
Obviously, as the builder, if things do go wrong you have to go back and fix them anyway. So rather than trying to save a bit of money up front but then have potential issues, we’d rather spend a bit more money up front and then reduce the ongoing issues down the track.
Really, those family values and morals are very important to us, and that filters through in how we approach the business.
Kevin: I’m going to mention in a moment, too, about how you can have the opportunity to meet Nando at a special function we’re going to put on in Brisbane, but I’ll tell you about that in just a moment.
What are the challenges you see facing development companies now, and what are the plans for Pellicano in the future?
Nando: There are always challenges in any business – daily, weekly, monthly. Probably at the moment, people who are reading the newspapers, there’s probably a bit of a pull back from the banks on funding and who they are going to fund and what they’re going to fund.
Fortunately for us, the fact that we have been in business for 49 years – it’s our 50-year anniversary next year – we do have longstanding relationships with all the major banks and we are very well supported by them. That should hold us in good stead. Bu that’s probably one of the biggest challenges I would think at the moment.
Kevin: I know that’s causing a lot of concern with consumers, too, and I’m so glad you mentioned that point because that’s probably one of the key reasons I would think that someone would be very confident about buying into the product we’re talking about in Woolloongabba.
Just in closing, I’ll talk to you about Woolloongabba because that’s the reason we are holding that function on the 4th of August. I’ll give you the details on that in just a moment. I’m really keen to hear from you about why you chose South East Queensland and in particular, why you chose the Woolloongabba market.
Nando: The wider South East Queensland market: we have been developing and building in Brisbane for over 10 years, and we’ve had an office up in Brisbane since 2007. We’ve always liked Brisbane and what it has to offer, and also South East Queensland. If you look at the long-term trends, population growth, employment growth, infrastructure spending, it has a lot of things going for it. And it’s also affordable in many areas when you compare it to where Sydney and Melbourne currently are.
Brisbane more specifically has always had a big tick from us. And then I suppose looking at opportunities and where to invest our money, it’s no different to whether an investor is looking to buy one apartment, it’s the same approach we take as developers on where do we buy development sites? It’s where we can find value for money in areas where there’s good employment growth, good population growth, some infrastructure spending, and good infrastructure already in place.
Woolloongabba ticks all those boxes. It already has great transport. It has got some great employment generators with some major hospitals nearby as well as the CBD. The rental market from a residential point of view is strong. There’s always good demand. And it’s affordable. To be two kilometers from the CBD and where the price points are in Woolloongabba we found very attractive.
We’re very confident on Woolloongabba. We’re Woolloongabba’s largest developer. South City Square is actually our fourth project within Woolloongabba, so we’re tried and tested in the area.
Our first project was Eastwood, which was 84 apartments, which we finished a few years ago. We then completed a Quest Hotel – it has 132 rooms – which is also on Logan Road in Woolloongabba. We retain ownership of that asset still in one line, and the reason we have retained ownership of it is because we still see some really good capital growth over the next five to ten years.
Then a project we just recently completed, Trafalgar Lane, was 150 apartments and 2000 meters of commercial retail. Again, we’ve retained ownership of the commercial and retail component of that building in our long-term property portfolio.
Kevin: I’m going to give you the opportunity now to get up close and personal with Nando at a special Real Estate Talk event that we’ll be holding on Thursday the 4th of August. You can hear me talk to Nando once again live on stage, and we’ll also be joined by Malcolm Aikman who is a director of property consultancy firm Urbis who specialize in property planning and design.
I plan to discuss with both gentlemen the Brisbane market fundamentals – which areas are going to perform well, what to look for in apartment development, and lots more. That’s going to be a great opportunity for you to learn a lot more about this very vibrant Brisbane market. You can book your seat now by visiting RealEstateTalk.com.au.
Nando, I’m really looking forward to catching up with you. There are so many more questions I want to ask you about the Brisbane market, about developing generally, but it’s been great spending some time with you today, and I appreciate that. Thank you very much.
Nando: Looking forward to it, Kevin. Thank you.
The property market big winners and losers – Tim Lawless
Kevin: This week saw the release of CoreLogic’s Pain & Gain Property Report, which I love because it measures the profits and losses of sellers by comparing the most recent sale price to the previous sale price. It tells you a lot about where the market is headed. It shows where profits are earned and losses are made.
A key highlight emanating from the report is that around one third of homes resell for more than double their previous purchase price, but it’s not all good news, as you’re going to hear. Joining me now is Tim Lawless from CoreLogic RP Data.
Tim, thanks for your time.
Tim: Good day, Kevin. Good to be on the show again, mate.
Kevin: Thank you, mate. Tell me where roughly some of these gains… We’ll look at the gains first and then we’ll look at the losses and how big they were. Where, roughly, were they made?
Tim: If you look geographically, we’re still seeing Sydney absolutely heads and tails above most of the capital cities for the proportion of properties that are selling at a profit. What we’re seeing in Sydney is only about 2% of homes are selling at a loss, so 98% of all homes that resold in the March quarter have done so at a gross profit. So clearly, the very strong capital gains we’ve seen in Sydney since 2012 have created a great deal of equity in that housing market for those existing property owners.
Kevin: When I mentioned at the opening there that around a third of homes resold at more than double their previous purchase price, would it be fair to say that the vast majority of those would be in Sydney?
Tim: Absolutely, the majority are in Sydney, and then secondly in Melbourne. So we’re seeing those two cities – no surprise – that’s where the strongest capital gains have been, but we are seeing profit-making sales across all regions, even some of the weakest markets like Perth or Darwin, or Hobart for that matter, which has historically been quite a weak city since 2008 but is now starting to improve.
There are people still making a lot of profit from property, but generally, you’ll find that hold periods in those areas tend to be much longer. So people have ridden over a few cycles, and they’ve seen the benefit of that long tenure of owning their property resulting in some decent capital gains.
Kevin: Looking at each state market, South Australia and WA both really struggling to find their way?
Tim: Yes, if you look at South Australia, for example, if you look at just Adelaide houses, we saw just over 5% of all resales in March were lossmaking. When you look at units, a little bit higher at 5.7%. But if you look at regional South Australia, it does get up substantially higher, so we’re getting up towards 7% for lossmaking sales across regional South Australia.
We are seeing some big differences between the capital cities and the regional markets, not only in South Australia but across every region. We are seeing the capital cities typically outperforming the regional areas.
Kevin: What were the value of the losses? Have you been able to work that out? Is there a total value, and what is the average?
Tim: We have, and if you look at the gross level of capital gain that we’ve seen derived from the housing market, on average we’ve seen those people who made a profit on their properties made about $240,000 on average on each resale.
Kevin: Goodness.
Tim: If you look at the gross value of sales across the housing market, about $12.9 billion of profit was made just over one quarter. So a lot of money being made from housing, and of course, going back to the taxation debate, a lot of capital gains tax being paid here, as well.
Kevin: Yes, I suppose we have to bear that in mind, too. What was the average loss? Have you been able to work that out, and how big was that?
Tim: Across all those properties that sold at a loss, the average level of loss was $66,000. Compare that to an average profit of $240,000, and the level of loss being made out of property is substantially smaller.
Kevin: How does it compare historically?
Tim: We have seen an ongoing trend towards fewer lossmaking sales across the country, but in the March quarter, we’ve actually seen a slight uptick there, so potentially we’re seeing a little bit of a turning point here.
Throughout the entire growth cycle, we’ve been seeing the proportion of lossmaking sales getting smaller of smaller, and that reached a low point in December last year. In the March quarter, we saw 9.2% of properties selling nationally at a loss. That’s slightly higher than what we saw in the December quarter, so I wouldn’t be surprised if this does mark a subtle turning point in the housing market that we are seeing a larger number of loss-making sales as we start to see the growth cycle winding down.
Kevin: Were you able to have a look at those properties that actually did lose money? Were they held for a shorter period of time than those that created a profit?
Tim: Yes, absolutely. One of the really interesting things here is analyzing the hold periods or the length of tenure across typical property types and also across profit- and loss-making sales. For those properties that were selling at a loss, we’re generally seeing them sold within, say, five or six years, whereas those properties that are being sold for profit are generally held for about ten years.
You do find that time does tend to heal all wounds – that the longer you hold a property, the higher propensity you have of making a profit out of it. Those people who doubled their money were typically a hold period of 15+ years, so that old magic rule of thumb that every ten years, you should double the value of your property doesn’t really hold a great deal of water anymore. The typical hold period for doubling your property was just over 15 years.
Kevin: Okay, so we’ve seen that blow out, as well.
Just looking at some of these individual results, looking through the report now, the unit market, particularly in regional WA and also regional Northern Territory, you’re almost looking at a 50-50 split between those who made a profit and those who made a loss, really.
Tim: That’s right, and we’re really seeing this trend across the mining states. Some of the mining regions around WA – think of the Pilbara, Port Hedland, Karratha, Newman, those sort of markets – we’re seeing a very high proportion of loss-making sales. The same sort of trend also in the areas west of Mackay, for example, which are more coal mining. Just look at areas like Fitzroy, the Moranbah, Emerald, those sort of markets also getting close to 50% of all resales were loss-making.
One positive thing to say about those markets is we are now starting to see the trend of loss-making sales moving a little bit lower. Previously, loss-making sales were a little bit higher than what we’re seeing over the March quarter, so we might be seeing these regional mining towns potentially moving through the worst of conditions, as we see these areas hit rock bottom and hopefully start to show some upwards pressure over a long period of time. But there’s no sign of any upwards pressure in those markets just yet.
Kevin: And if you look nationally, of course, what are we looking at there? Around about 8% of all houses showed a loss, which means that 92% actually had a gain, which is a pretty healthy market, really, isn’t it?
Tim: Yes, absolutely. It still shows that the vast majority of people selling a home in Australia are making a profit out of it, keeping in mind these are gross profits reporting here, so we’re not taking into account purchasing or selling costs or interest payments or anything like that. These are gross figures, so if you work it out as a net figure, obviously it’s going to be lower than that for the proportion of profit-making sales.
But pointing out those figures, there’s such a big difference between houses in units. About 8% nationally sold at a loss for houses; nearly 12.5% for units were loss-making.
Kevin: Yes. It makes the point about property ownership, whether it’s for an investment or whether it’s owner-occupied, you’ve really now got to start looking at it as a long term investment, especially if those hold periods are blowing out to 15 years I think you said, for a property to double in value?
Tim: That’s exactly right, and we do split the numbers out by owner-occupiers versus investors, and it does show that investors are more likely to show a loss on their resale nationally. It was 8% owner-occupied properties sold at a loss compared to nearly 12% for investment, which probably comes back to the tax effectiveness of writing off a poorly performing property. You can write off that loss against future capital gains, which you obviously can’t do as an owner-occupied property.
Kevin: And of course, that Sydney market, every time we talk, it continually astounds me. It just doesn’t seem to be slowing down at all, does it?
Tim: It has slowed down a little bit, but we were seeing values growing in July last year at nearly 19% per annum, and that growth rate for a while was tracking at around 8% per annum, so it more than halved. But just recently, we’ve been seeing some very strong indicators across the Sydney market showing a bit of a rebound.
We’ve seen a few months now where growth is going back above the 1% mark month on month, we’ve been seeing auction clearance rates getting closer to the 80% mark again week on week, as well, so still very strong conditions across Sydney, which incidentally is also the most unaffordable market. We just released some affordability figures showing the average house price-to-income ratio, and Sydney is getting close to ten times now.
Kevin: Yes. Isn’t it amazing that we talk about the Sydney market and we say “Oh, it’s slowing down a little bit; the growth in there now is only around 8%, 9%, or even 10%.” A lot of markets would kill for that kind of growth.
Tim: Absolutely. If you compare Sydney, say, back to Brisbane, where Brisbane’s values are growing at about 6% per annum, and Brisbane doesn’t get anywhere near the level of attention that Sydney does, even at 6%, Brisbane’s annual rate of growth is very strong. It’s substantially higher than what household income growth is, and at a 6% rate per annum, it’s much more sustainable than what Sydney’s has been and suggests that Brisbane probably still has some way to go before we start to see the cycle peaking out.
Kevin: Always great talking to you. Tim Lawless from CoreLogic RP Data. Thank you very much for your valuable time, Tim.
Tim: Thanks, Kevin.