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Retreat to bricks and mortar

Date: 9th August 2008

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Property or shares? Shares or property? The pair have been slugging it out for the investment crown ever since Adam Smith was a boy.

But today, with market conditions in Sydney, there's an increasingly loud chorus proclaiming property investment the king of the ring, with many more happy returns.

"We see the returns from residential property being above pretty well all other asset classes, in risk-adjusted terms," says economist Dr Alex Joiner, of ANZ Economics and Markets Research, who explains that risk-adjusted means the nominal yield is adjusted for the volatility of the asset class.

"We see the next six to 12 months as a period of softness in Sydney - and nationally - but the overall fundamentals will continue to tighten."


Intrinsic to the debate are the recent sharemarket falls. Australian shares lost 13.4 per cent of their value in the year to June 30, even after dividends were included in the market's performance. Listed property trusts fell by a collective 36 per cent.

At the same time, a record low in new housing construction, combined with vigorous population growth, mostly through migration, smaller household sizes and a dozen rises in interest rates since 2002, have created a critical lack of homes.

"The gap between supply [of residential property] and demand will support the market," says Joiner, who puts the shortage for next year at about 200,000 homes nationally. He also compares the returns from equities and property in the graph (see right).

"This gap is set to get bigger over the coming years as pent-up demand becomes more acute and the population continues to expand."

The most obvious result of this is the sharp rise in rents and fall in vacancy levels. In Sydney, vacancy rates are 1 per cent or lower and rents, now at a weekly median of $420, are rising at 6 per cent a year, and "could rise by up to 40 per cent over the next four years", says property commentator Michael McNamara.

There are similar predictions from BIS Shrapnel, which says rents in Sydney will rise by 11 per cent a year over the next three years. In addition, there are opportunities to use superannuation savings to buy property (see right).

This is all music to the ears of investors but there's a welcome encore: we won't be seeing substantial property price falls either. "We don't believe Australian property prices will fall particularly and certainly not on a sustained basis as we've seen in the US," Joiner says.


Property expert Margaret Lomas says the key to success is to ask the right questions when hunting the perfect investment house: What's the cash flow? What's the population growth? What are the rent trends? Is the property for sale at its true market value?

"Rental yields are increasing incredibly, which makes being in property now a good opportunity," says Lomas, the founder of Destiny Financial Solutions, who's just released a new book, 20 Must Ask Questions For Every Property Investor.* "It also means that when things do take off, you are already there; you aren't competing with hundreds of others."

But it's vital, no matter which property is chosen, that the investor be in for the long haul, says valuer Gareth Woodham, the NSW manager of the WBP Property Group. "I'm biased towards property as an investment but it's more important than ever to look at it as a long-term investment," he says.

"There are no quick bucks to be made - and anyone who tells you otherwise has an ulterior motive. But with super and shares savaged, now is a good time to secure property for a rental income."

His top tips include property in Kensington in the east, because of its variety of housing stock and its proximity to the university with lots of students wanting rental accommodation; Newtown in the inner west because of its proximity to the city, good public transport and lifestyle facilities; and Hurstville, where there's recently been plenty of money poured into infrastructure.

"I also really like Bankstown," Woodham says. "Rents are around $320 a week for a bashed-up two-bedroom house, so yields are great, plus there's a lot of migrant population growth and good infrastructure."

Rental properties are in such strong demand, he says, that some people are even dividing up houses to have more sleeping spaces, so they can share the rent with others, by turning two bedrooms into five - illegal and dangerous.

Colliers International's Murray Wood favours areas with good transport links, around stations or on good bus routes, within a maximum 90-minute drive to the inner city. They should also be well served with shops, cafes, hospitals and medical centres.

He likes Coogee, Malabar and Matraville in the east, Pymble and Killara to the north, and Ermington, Rydalmere and Newington to the west. "It's a good time to invest as you can take a long time to do your research and consider every opportunity on its merits, as there's not too much competition," Wood says. "With a 5 per cent [rental] return, the costs of ownership can be minimal."

Closer in, RP Data's Tim Lawless favours Surry Hills, Haymarket, Pyrmont and The Rocks. Purchase prices are a little higher but "the rental yields are very good because the demand for them is very high. Because there aren't many buyers around, you can make some cheeky offers and have a lot of room to manoeuvre."

Parramatta also has promise, with strong growth and its position as a good employment centre. "Plus interest rates are almost guaranteed not to go up during 2008 and, with the latest retail spending figures so low, they might even come down in the future."

* 20 Must Ask Questions For Every Property Investor is published by Wiley, $29.95.


Paul Fallon and his wife, Sharon, manage their own super fund. As with many people, they say that with the fall in share prices it's probably worth a lot less than it was at the beginning of the year.

"But bricks and mortar feel like a much sounder investment," says Paul, 48, who runs his own business, Fallon Plumbing.

"Everyone needs a roof over their heads."

As a result, the couple just paid $470,000 for an investment property, a one-bedroom inner-city terrace house built in 1840, with approved plans for an extension.

They bought it through their super, as a result of changes to the legislation.

"We thought this would be a good investment for the long term," says Sharon, 44.

"It's a gorgeous-looking house and there's always lots of demand in this area for rentals."

The house is rented for $450 a week, providing a gross yield of almost 5 per cent.


With the superannuation information agency SuperRatings predicting super funds to return their biggest losses since records began, it's little surprise that there's been a flood of people taking advantage of new super rules to invest in property as an alternative.

"Before, you had to buy a property outright for the super fund," says Peter Kelaher, managing director of PK Property Search & Negotiators. "But now a self-managed super fund can borrow to purchase an asset, anywhere from 60 per cent to 75 per cent of the value of the property."

The change was brought in by the Federal Government in September last year and banks, accountants and financial advisers have taken a while to come to grips with all the implications. Now, however, with PK Property running a series of accountants' seminars around Australia on the new rules, there's been a rush of people buying property through their super funds.

Accountant Doug Cheetham says he thinks it's such a wise move, he's done it, too. "I think it's a very good scheme for certain people," he says.

The advantages are that contributions to super are taxed at only 15 per cent, leaving 85 cents in each dollar to go towards a property, capital gains tax is potentially nil if the property is sold in the pension phase and it can be leased back to a business being operated by the buyer.

A person may also effectively receive a tax deduction, via salary sacrifice, for loan repayments on the principal, which can't normally be done.

But anyone considering buying an investment property with their super should talk to an accountant or financial adviser before they start the process, says accountant Peter Johnson, who advises on the tax implications of the scheme. "You can do comparisons from a financial point of view," he says. "But you have to be careful. A financial planner might be loath to tell you to go into property because they mightn't get commission on the purchase in the same way they might for shares."

Kelaher says he's had a lot of buyers wanting to take advantage of the new legislation.

"A lot of people have been burnt by the sharemarket and see property as a much more reliable safety net," he says.

"People are now looking at building property portfolios as a nest egg, rather than shares."

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