Patchy outlook for investors

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 Investors have been driving property prices higher on the back of record-low interest rates.

Property prices have risen by about 50 per cent in Sydney and Melbourne since the start of 2009, says researcher RP Data.

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In the apartment market, which is favoured by investors, prices have risen by about 11.5 per cent in Sydney over the past year to September 30. In Melbourne, which is still suffering the effects of oversupply of inner city apartments, prices have risen by about 5 per cent.

Baby boomers investing with an eye to retirement and home owners upgrading to a bigger or better house have sidelined first-time buyers. Investor housing loan approvals account for almost 40 per cent of the total value of housing loan approvals, the highest share in 10 years.

However, property analysts expect price rises in Sydney and Melbourne to rise in-line with, or a little in excess of inflation over the next several years as interest rates start to rise.

Rate rise tipped

A major reason for the strong rise in prices is interest rates at historic lows.

But analysts are expecting the cash rate and, therefore, mortgage rates, to start rising within the next 12 months.

Robert Mellor, the managing director of BIS Shrapnel, is expecting a rise in the cash rate of about 1 percentage point by the end of 2016.

Due to competition in the mortgage market, mortgage interest rates will probably not rise by the full one percentage point, he says. “We think that the headline (or advertised) variable mortgage rate may rise from 5.95 per cent now to about 6.8 per cent”, Mellor says.

That is not much of a rise by historical standards. However, because of the large size of the typical mortgage even a modest rise in interest rates will affect affordability, Mellor says.

Forecasts contained in QBE’s Housing Outlook for 2014, conducted by BIS Shrapnel, shows Sydney dwelling prices are expected to rise only by a cumulative 9 per cent over the next three years, or only marginally above inflation.

“Momentum” in the Sydney market could see stronger price growth this financial year with even less growth in prices in the two subsequent years, Mellor says.

He is “less positive” on Melbourne with a forecast of only 5 per cent cumulative growth in prices over the next three years. And, after strong price rises during the winter months, it looks as if property markets are already starting to cool. RP Data says that prices were almost flat across the five largest capital cities over September.

The levelling in price growth over September is largely attributed to slowing of growth in Melbourne and Perth, with both of these capitals recording a slightly negative result over the month of September.

“It remains to be seen whether these softer conditions will persist throughout the rest of spring,” says Tim Lawless, RP Data research director.

John Edwards, the founder of researcher Residex, expects price rises to slow and consolidate through 2015; rising in line with inflation.  He says, for would-be investors there is “no rush as there will be good opportunity in 2015, once the market moves into a consolidation phase”.

Segmented markets

Mellor says Melbourne is a particularly segmented market. There is continuing oversupply of apartments in Melbourne’s central business district, Docklands and Southbank, Mellor says.

There is even a risk that prices of inner Melbourne apartments could fall by 5 to 10 per cent over the next three years, he says.

Louis Christopher, managing director of specialist property researcher SQM Research, agrees that investors should be wary of Melbourne inner city apartments. He favours apartments in South Yarra and St Kilda as likely to provide good capital growth over the long term.

He is positive on Sydney apartments overall. However, investors need to be careful not to overpay, he says. “Some developers in Sydney are pricing [their apartments] at top dollar and getting it,” he says.

“Some are charging in excess of $14,000 per square metre for off-the-plan, which is full on,” Christopher says. Richard Wakelin, Director and founder of Wakelin Property Advisory in Melbourne, says it is land values that drive capital growth.

Wakelin says the best bets are apartments in small blocks – 10 to 20 unit blocks that are within two to 10 kilometres of the Melbourne central business district. He favours older apartments (and “character” houses) in areas where no more apartments are being constructed.

“Fads” should be avoided, whether it is Gold Coast units, time share or opportunities in booming mining towns, Wakelin says. He is wary of off-the-plan property.

“In Melbourne, we can count the number of multi-unit high rise blocks that have actually worked for investors,” he says.

“All the enticements, rental guarantees and all of the glossy stuff can be thrown out the window if the asset is not sound,” Wakelin says.  John Edwards says it is “easy to overpay for a property at this point in time and over payment will not be covered by increasing property values over the balance of this growth cycle”.

Novices on notice

First-time landlords need to consider the tax and financing issues of owning a property at the outset.

“Many of these issues need to be considered before purchase, such as ownership structure,” says Peter Bembrick, tax partner with accountants and advisers HLN Mann Judd Sydney. Other issues include how the property is to be financed.

Many investors take advantage of “negative gearing”.

This where is where the costs of making the investment, such as interest on the mortgage are greater than the rent from the property, the shortfall can be used to reduce income tax paid on the investor’s other income.

Bembrick says a loss is a loss, even if there is some tax benefit and positive gearing is preferable.

Investors who negatively gear are hoping to be able to eventually sell the property for a price that more than makes up for the losses incurred along the way. Bembrick says it is very important for would-be investors to be able to cover any shortfalls in cash flow.

“For example, the impact of inevitable periods when the property does not have a tenant, as outgoings still continue even if the residence is empty,” Bembrick says.

Consideration should be given to whether some, or all, of the mortgage should be at a fixed interest rate in order to help reduce the impact of future interest rate rises, he says.Beware of spruikers

Property spruikers and mortgage brokers are tapping into the booming self managed superannuation funds sector.

Their pitch is that investors can hold investment property inside a SMSF and enjoy superannuation’s confessional tax rates.

Some are showing disregard for investors’ individual circumstances, says John Hewison, managing director of Hewison Private Wealth, which has many SMSF clients.

Those who do not have the money in their super fund to buy an investment property outright are being advised to take out a mortgage. Hewison says borrowing to invest inside super can be an appropriate strategy for high net worth individuals.

However, younger investors with minimal account balances are encouraged to borrow large amounts of money in order to buy properties in their super funds, Hewison says.

Older people, who should be risk adverse and who will need to draw an income stream in retirement, are also being led down the path of gearing property, Hewison says.

Richard Wakelin is also concerned. Super is a nest egg that most of us are relying upon for a comfortable retirement, he says. “Unfortunately, there are companies that are using the growing interest in SMSFs to market sub-investment grade property developments to the public,” he says.

“We’re worried that many of these investors will suffer losses that could compromise the investor’s retirement lifestyle,” Wakelin says. Anyone thinking of going down this path should engage a reputable, independent accountant or financial adviser to look at their specific circumstances, Wakelin says.

They should advise you on the merits of establishing an SMSF and using it to invest in residential property, he says. The Australian Securities and Investments Commission and the prudential regulator of SMSFs, the Tax Office, have issued repeated warnings to the public about property spruikers targeting the  trustees of self managed funds.Real estate giant moves into advice

News that one of the biggest real estate agencies, Ray White, intends to establish a financial advice arm has sparked concerns it would be used to help facilitate the sale of real estate and mortgages  to people with self managed superannuation funds.

The White family owns a string of real estate agencies across Australia, and also owns a mortgage broking business and an insurance business. These are commission-based businesses.

The new advice business, Wealth Market, which is expected to open before Christmas, will be part of the mortgage broking business, Loan Market.

Sam White, the chairman of Loan Market, has said that, initially at least,  Wealth Market will focus on providing “insurance opportunities” as well financial products from an “approved product list” to clients.

“Our advisers will not be recommending properties to our clients,” he said.Action planDon’t invest for the tax breaksBeware of spruikers recommending property inside DIY super fundsUnits in smaller blocks can offer a higher land value component.Lower-priced properties will often have higher rental yields, but may have lower capital growth.Factor-in higher interest rates from the current record lows.Consider fixing whole or part of the mortgage, though there may be costs if the loan is terminated early.Make sure there is sufficient cash flow to cover temporary loss of rent

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Changes to real estate laws will make things more strict for vendors and agents

Vendors and real estate agents will have to provide a “due diligence checklist” at open-for-inspections under new regulations governing the sale of property in Victoria.

As part of the changes, an up-to-date Section 32 document has to be provided at the start of a property’s marketing campaign, including a registered title search document, but it will no longer be attached to the contract of sale.

Other changes include the mandatory disclosure of planning overlays affecting property, any notices or orders and the connection of services.

Phillip Leaman, the principal at law firm Tisher Liner FC Law, said people who put their properties on the market in the past week would need to provide the new information.

“If you have already put your property on the market you can operate under the old regulations, but if it was in the past six daysyou must have the updated Section 32,” Mr Leaman said.

Overseen by Consumer Affairs Victoria, the new checklist will not form part of the Section 32. It asks purchasers to consider and investigate potential problems with a property, including noisy entertainment if buying in the inner suburbs, noisy and smelly farm activities in the country, and potential mining activities.

“To some degree it’s a cosmetic change to make it more user-friendly,” Mr Leaman said.

While any failure to provide a checklist will result in a fine to the real estate agent, a purchaser has no right to rescind a contract if the checklist is not provided.

The Victorian Farmers Federation believes the removal of warnings about noisy farming activities from the Section 32 document constitutes a weakening of sale regulations.

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Dollar boost for agricultural sales

Interest in Victorian farms was more likely to come from a family business. Photo: Glenn HuntRecord Victorian agricultural exports and a lower Australian dollar are likely to boost rural farm values – but not immediately, according to Colliers International.

Food and fibre exports in Victoria were $11.4 billion in 2013-14, a rise of $1.2 billion, or 12 per cent, on the previous year, reflecting the general good health of the rural sector.

Meat exports rose to be the state’s highest-value export, up 36 per cent to $2.34 billion, while dairy increased by 23 per cent to $2.29 billion, and horticulture experts were up 48 per cent to $894 million due to demand for almonds, table grapes and citrus.

Colliers associate director, valuation in rural and agribusiness, Nick Cranna, said the buoyancy of the agricultural sector would have a flow-on effect on land values. “But you’re looking at six to 12 months for that to come through,” he said.

From being well above 90 cents to the US dollar, the Australian dollar has now fallen to about 87 US cents. “The lower Aussie dollar is fantastic for agriculture,” Mr Cranna said.

Despite the good agricultural outlook, hobby farms continue to be a driver of rural sales. Landmark Harcourts figures show that in the 12 months to the end of June, there was $2.72 billion worth of agricultural property sales in Victoria, with 68.2 per cent of sales on less than 40 hectares of land.

In the category up to 40hectares, there were more than 5400 sales valued at more than $1.8 billion. The median price ranged from $155,000 in the north-west to $490,000 around Geelong.

In the 40ha-100ha category, there were 879 sales valued at $376 million, with a median price ranging from $200,000 in the north-west to $623,000 around Geelong.

There were 672 sales of farms bigger than 400 hectares, totalling $456 million. The median price was the largest around Warrnambool in the south-west ($2.08 million) in the 400ha-2000ha category. The lowest median price in the 100ha-400ha category was $366,000 in the north-west.

Victoria’s Landmark Harcourts chief, Jason Hellyer, said in the past 12 months, there had been far more transactions than the previous year. However, now it had slowed.

Mr Hellyer attributed this to fears about where commodity prices were heading, and the weather. The mood was not to sell, but more “we will stay put for a year”.

Mr Hellyer said big corporate players and international companies were less attracted to Victoria because the farms in general were too small. “The scale does not trigger interest,” he said. “They want scale and processing or packing nearby.”

Interest in Victorian farms was more likely to come from a family business with a business plan that was about sustain ability and growth.

To succeed, Mr Hellyer said farmers had to be better skilled and knowledgeable, from agronomy skills to familiarity with international commodity prices.

Real estate agents had to become consultants as well as salesmen to make them aware of the complexity of issues that would affect the value of their property.

“Farmers will then garner more interest in their property and a better price,” he said.

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Owner-occupiers fuel demand for suburban office property

Hot property: The suburban office in Burwood East that sold for $870,000.Intense competition for a suburban office property in Melbourne’s east pushed the final sale price 45 per cent over its reserve price.

Four bidders – all owner-occupiers, rather than investors – made a play for the 300-square-metre building at 1-3 Ruby Street in Burwood East which was purchased by an accountant for $870,000.

Teska Carson agent Anthony Choi, who handled the auction, said the vendor was a private investor and all three under-bidders were also owner-occupiers with plans to renovate and refit the office space.

Prevailing low interest rates and a rush to acquire assets for self-managed superannuation funds (SMSF) are driving the new trend away from renting workspaces from private investors.

Small offices, shops and industrial premises are the most popular purchases for super funds. While businesses lease from their own funds experts warn they must ensure they are paying market rents or risk the ire of regulators if they get into trouble with mortgage repayments.

Philip La Greca, head of technical services at Multiport, the SMSF arm of AMP, said: “you have to treat it as if you are not going to be the tenant. If you pay above or below market rents or fall behind in rent then the super fund trustee becomes liable.”

Teska Carson agent Matt Feld said “a lot of buyers are telling us it’s more affordable to own their own building than rent. They can make improvements and put the rent into their funds rather than the landlord’s.”

Mr Feld said he spent six months trying to lease a 410-square-metre office building at 47 Stephenson Street in Cremorne, which later sold at auction for $1.615 million.

“Two people came looking through it. We put it on the market and it had four bidders. Inquiries for small suburban office spaces are stronger for sales than leasing,” he said.

Other recent transactions with owner-occupiers include an office-showroom at 427 Church Street which fetched $2.9 million; an office building at 141 Cecil Street, South Melbourne, which sold for $1.85 million; a 55-square-metre shop at 1/457-459 Chapel Street was bought for $1.3 million; and an 800-square-metre showroom at 556 Swan Street sold for about $4 million.

The low interest rate environment is even providing encouragement for some corporates to dip their toes back into owning property.

Last week, car parts manufacturer ARB Corp bought back its factory-headquarters in Kilsyth for $19 million. ARB sold the 25,887-square-metre building to a fund manager, SAITeysMcMahon in 2005 for $16 million.

At the time, ARB said it was not a property investor and used the money to fund the business’ expansion. Nine years later, it is planning to reconfigure the site and significantly reduce its operating costs.

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Instagram puts advertising in the picture

One of many Instagram photographs collected by Tourism Queensland for use in an overseas marketing campaign.Harnessing Instagram pictures for marketing campaigns is part of the social media platform’s attraction for corporations such as Tourism Queensland that have now signed up for the launch of paid advertising.

Advertisements will start appearing in the feeds of Instagram accounts in Australia from Wednesday. We are the third country, after the US and Britain, to have paid content on the Facebook-owned photo-sharing app.

Tourism Queensland also plans to use Instagram holiday and happy snaps in an overseas marketing campaign with Qantas.

“Pretty soon we will be partnering with Qantas … and using some of the content in the North America market as part of a retail campaign with that airline partner,” Tourism Queensland’s digital marketing director Chris Chambers said. “For us it’s all about that content which has the tick of authenticity of a visit to Queensland that we can use to sell the destination.”

Mr Chambers said the images were from “InstaMeets”, which invited people to post pictures with the hash tag “thisisQueensland”.

He said all participants had given their permission for the pictures to be used for marketing purposes and Tourism Queensland also planned to display about 50 of the InstaMeets pictures in an art gallery in London.

“Instagram has been a great opportunity to tap into a significant global audience and gain some additional exposure for the state,” he said. “It is very cost-effective platform.”

Instagram head of business operations Amy Cole said the InstaMeets were separate to the platform’s paid advertising.

Brands including Vegemite, Philadelphia Cream Cheese and Ben & Jerry’s ice-cream will begin advertising on Instagram.

Ms Cole said photographs taken by Instagram users would not be used in those paid advertisements. Instead, advertising agencies and professional photographers have developed the content, which has been designed to blend in with the happy snap nature of Instagram.

“We want this to be a natural experience,” she said.

She said the company would introduce advertisements slowly, with users initially noticing one a day appearing in their feeds.

The advertisements will be tailored to individual users, targeting age, gender and interests. But no other personal information will be shared.

Ms Cole said opening Instagram to advertising would help create a “sustainable business” for the platform in Australia. But she declined to reveal how much the company hoped the advertisements would eventually account for Facebook’s total revenue, which was $US7.87 billion ($9 billion) last year.

She also declined to say how many of Instagram’s 200 million users were Australians. A spokeswoman said the company did not break down figures for geographic locations.

Ben & Jerry’s Australian brand manager Kalli Swaik said the company had embraced Instagram and had about 4000 followers.

“People love taking photos of their food, as we know, it’s a big trend. And they really love ice-cream. So you combine those two together, it’s a natural place for us to be,” she said.

Other brands to advertise on Instagram in Australia are Flight Centre, Lenovo, Toyota, Audi and McDonald’s.

Share your photographs in the Kings Cross Instagram Competition

There are few more interesting times to point a camera at the streets of Kings Cross than right now: the area – it’s not technically a suburb – is one of the city’s most changing, with the forces of gentrification and the state government’s lock-out laws moulding a new kind of Cross from what was once the city’s centre of seedy.

For this weekend’s Kings X Festival, organisers invited people to share their photographs of Kings Cross on Instagram, uploaded with the hashtag #kingscrosscolour, and the images will be projected onto the walls of the Australian Institute of Architects; you can still upload a picture and the best image will nab the snapper who took it $500.

The festival runs Saturday and Sunday and will also feature pop-up food events involving local restaurants, live music, art exhibitions and other performances.

Joel Meares

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