By Michael Yardney
It’s been another interesting year in property, hasn’t it?
While some properties investors have done very well, many have not fared as well as they would have liked.
So, what lessons can we learn (or relearn) from 2017 to make our investment journey smoother in 2018.
That’s the question I posed to 7 property experts – here are their answers:
The only certainty is change
Kate Forbes, National Director of Property Strategy at Metropole points out that
the only certainty we have is that the rules will keep changing.
“Your long term property investment strategy should always remain capital growth focussed. But within that long term strategy you need to roll with the punches and tweak things to adjust and/or take advantage of changes in the market” says Forbes.
“Changes to finance continued in 2017 and where it was always important to make sure that every last dollar of your borrowing capacity was working for you as hard as it possibly could, in 2017 it became crucial.
“In the past we have often recommended selling underperforming properties but this year as a result of not being able to replace the exposure to the market, we have sometimes had to change those recommendations to holding the “dud” until the credit extension wheel turns.
“Changes to allowable depreciation deductions have also been pivotal in terms of the need to roll with the punches strategy.
“An investment needs to stand on it’s own feet and tax breaks shouldn’t be the overriding reason for the investment, but all else being equal a property with greater allowable depreciation deduction will make more sense than one with lower.
“Adding value through renovations will now be even more important, and in some circumstances, and given all the other boxes are ticked and there isn’t a significant overpayment it will make sense to buy new.
“In the past it has often made sense for those just starting out to “rentvest”, but because of changes to stamp duty for eligible first home buyers and the first home owners grant (plus other tax benefits) as well as obtaining finance for PPOR purchases being easier, it now may make more sense to live in the property for at least a year.
“Of course, there are a myriad of factors that need to be considered before implementing any of the above, and that’s why you need an experienced strategist to guide you and help you adjust to the prevailing rules of the game.”
‘This is not a time for hot-spotting’
Ahmad Imam, senior property strategist at Metropole Properties in Sydney emphasises the importance of adhering to a proven investment strategy over the next few years.
“In 2017 we experienced changes in the finance climate with tighter lending conditions and affordability constraints that have no doubt softened the market.
“As a result, over the next few years we will experience slower price growth in some locations and stable prices in other markets.
“While it may be tempting to look for the next hot spot, 2018 will not a time for speculation or gambling.
“Instead 2018 will be a time to be selective in your asset selection and a time to make boring investment decisions.
“Focus on proven locations that have shown historical evidence of stable and long term growth and that have multiple local growth drivers such as jobs growth, population growth and the correct demographics and socio-economics to suggest future long term growth.
You’ll find these locations will be in select residential suburbs in the inner middle rings of our capital cities.
“Once you find the right location, then select an “investment grade” property within that location.
Remember to focus on the big picture, on capital growth and the future value of an asset to ensure your investment is the highest and best use of your funds.
In other words, it’s time to throw away the crystal ball.”
Review the performance of your property portfolio
Brett Warren, senior property strategist at Metropole Properties in Brisbane highlighted the importance of monitoring the performance of your investments.
“They are either emotionally tied to their property or have a belief, which actually a “hope”, that the property will perform better into the future.
“In many cases it is clearly evident that the properties will not outperform over the longer term, as they are located in secondary locations where there is unlikely to be significant jobs or economic growth.
“In these locations there is rarely a strong demand for housing as there are either few jobs being created or there are no superior school catchments or there is a lack of public transport, infrastructure or amenities.
Recent research from Corelogic has shown Brisbane has had a low and slow 12 months, with property values only rising 2.7% on average.
However, it shows many of the areas we have been buying in have easily outperformed that number 5 or 6 times over, with one suburb in particular growing at a whopping 15.2%
If you were holding a $600,000 asset and it performed at 1.7%, your asset base would have only grown by $10,200.
If you had of purchased an asset in a superior location it may have made you up to $91,200 or an extra $80,000 more and given you many more options to widen your asset base faster.
Some investors make the mistake of thinking it is not costing them anything, when clearly it is.
Property investment is a game of finance
Rita Thomas, senior property strategist at Metropole Properties in Melbourne believes obtaining finance will be a big stumbling block for many investors in 2018.
“My 30 years in commercial banking has taught me that property investment is a game of finance with some real estate thrown in the middle.
“This was confirmed in 2017 has been the continual changes in the lending environment after APRA’s tightening on credit extension.
“These changes have impacted local and foreign investors plus home owners looking to upgrade into their next family home.
“The rules of the game changed significantly, making it increasingly difficult to obtain finance even with strong serviceability and significant.
“It is unlikely for the RBA to change interest rates over the next year and APRA has done it’s job having stifled the Sydney and Melbourne property booms.
“This means it is unlikely that APRA will need to tighten the screws further, but on the other hand it is too early for APRA to relax its guidelines.
“All this highlights the significant opportunity cost in having underperforming assets in your portfolio.
‘If you can only afford to own 2 or 3 properties, make sure they are all “investment grade” properties that are working hard for you.
Local factors drive property market performance
Bryce Yardney, department head at Metropole Projects was reminded the importance of local market factors in supporting a property’s performance.
“Despite all Australians enjoying the same low interest rate environment, the same tax system and the same government, some property market significantly outperformed others in 2017.
“Looking at overall capital growth for the last 5 years it really has been a two horse race with the Sydney and Melbourne property markets strongly outperforming all other markets, underpinned by their robust economies and strong population growth.
“It’s a fact that 57% of our population lives in NSW (32 %) and Victoria (25%) and these two states accounts for 54% of Australia’s economic activity.
“Currently Melbourne’s population is growing at 2.7% per annum meaning our population will increase by 10% in the next 5 years. All these people need to rent or buy a home.
“My tip for 2018 is to invest where economic growth and jobs growth will lead to demand for properties by an increasing population of people who can afford to pay higher prices.
“Forecasts suggest that two thirds of new jobs creation will again occur in Sydney and Melbourne next few years so it’s likely these property markets will continue to perform well.”
Our property markets are fragmented
Shannon Davis, director of Metropole Properties in Brisbane was again reminded how fragmented our property markets are.
“A lot has been made of the strength of Sydney and Melbourne over the last few years and the underperformance of other markets, however it must be remembered that in each State there are multiple property markets, defined by geography, price point and type of property, each at their own stage of the property cycles.
“Yet most reports generalize about “the Melbourne property market” or “the Brisbane market”, but not all properties are the same and one can’t count on the rising tide to lift all ships.
“Careful property selection is critical for investment success.
“For example in Brisbane while well located houses have grown in value, the value of many apartments have faltered as Brisbane struggles with an oversupply of new and off the plan CDB and near city apartments.
“My 2018 tip is not to wait for the market to do the heavy lifting, but to “manufacture” your own capital growth by adding value to your properties through renovations or development.”
Minimise your risks to maximize your returns
Ken Raiss C.P.A. – Director of Metropole Wealth Advisory suggests that strategic investing is about reducing risk to maximise returns.
“The lesson this year is nothing new – while strategic investors structure their purchases to protect their assets and maximize their cash flow, most investors put little thought into which entity should own their properties.
“As real estate is a long term affair, the name in which you buy your property investment can have significant ramifications when it comes to managing future cash flow or when it’s time to sell up.
“The correct use of an appropriate trust to own your property could give you flexibility, improved your taxation outcomes and allow you to effectively manage changes in your personal circumstances.
“As your life situation changes, from say a junior employee to being a business owner, you inherently move into a more litigious path, so it makes sense to set up the correct structures to minimise your risks right at the very start.
“My tip for 2018 is to review your affairs with the view to minimising your risks. For example:-
- Do you have sufficient financial buffers in place?
- Do you have a will or a power of attorney?
- Do you have sufficient life and income protection insurance?
- Are your assets owned in the right name? Did you know that equity in assets owned in your own name can be protected against personal litigation without the need to transfer the property which would incur both a capital gains tax and stamp duty imposts? These strategies do not require changes in title or refinancing and are relatively simple and cost effective.
WHAT’S YOUR BIGGEST LEARNING FROM 2017?
I see every year as a time for learning and personal development – that’s one of the best parts of being involved in the property markets.
What lessons did you learn in 2017?
Please leave your comments below.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
- Dividend yield. Wesfarmers has a 100% franked dividend yield of 5.1% compared to a market average of 3.8% and a sector average of 4.4%. Competitor Woolworths Limited(ASX: WOW)has a lower dividend yield of 3.1%.
- Dividend payout ratio. Wesfarmers has a dividend payout ratio of 85% i.e. 85% of its FY 2017 profits were paid out as a dividend. This suggests that its dividend amount is fairly sustainable and can be maintained should earnings drop slightly.
- Dividend growth rate. Wesfarmers has an average 5-year dividend growth rate of 6% and a 10-year average dividend growth rate of 1.7% which is good for long-term investors.
- Dividend stability. Wesfarmers has a dividend stability of 96.6% which is consistent with the sector average. Its earnings stability rate of 63.6% is slightly higher than the sector average of 52.1%.
- Wesfarmers has a conservative debt-to-equity ratio of 22.6% compared to Woolworths’ gearing ratio of 30.7%.
- Valuation. Wesfarmers has a lower PE ratio of 17 that is consistent with the market average. Its price to book ratio of 2.07 however is higher that the market average of 1.56.
- Future prospects are the main challenge for Wesfarmers. Efforts to replicate the success of Bunnings in the UK have not yet been successful to date and the threat of Aldiand perhaps Amazon Fresh in the future could hurt its Coles business.