Rental as anything

Peak performance: Queenstown in New Zealand is popular with investors

Residential property investors have been rewarded for staying at home over the past decade. According to an Institute of Actuaries of Australia (IAA) report published in April, the local residential property market delivered real (after inflation) annual returns of 5.9 per cent in the first 10 years of this century – more than three-times the real average annual housing price growth rate of the preceding four decades.

But the IAA paper, titled A house or a home? Finding value in Australian residential property, holds some disturbing news for investors expecting the trend to continue, and should prompt a look overseas.

“Analysis of the housing market from an investor’s perspective suggests that very optimistic assumptions of future house price growth and/or future rental growth are being factored into current market pricing,” the IAA study says.

The IAA analysis shows that with current gross yields of 4.5 per cent, residential property investors would require annual capital growth of 4 to 5 per cent (1 per cent higher for geared investors) over the next 10 years along with assumed rental increases simply to earn a return similar to a 6 per cent term deposit.

Alternatively, to achieve the same result, gross rental yields would have to reach 6 to 7 per cent to give investors reasonable investment returns “without requiring unrealistic house price appreciation or rental growth rate”.

“From current levels, property prices would need to fall around 30 per cent for gross yields to move back into the 6 to 7 per cent range,” the IAA paper concludes.

While some observers picked Australian property would slide by 30 per cent after the global financial crisis, the market – propped up to an extent by the first-home buyer subsidy – held up well.

Capital city residential property values grew an astonishing 20 per cent in the year to March 2010, According to the Australian Bureau of Statistics. But house values have since come off the boil, with the latest ABS survey indicating a decline of 2.2 per cent in the 12 months to the end of September 2011.

But with low rental yields and the prospect of capital growth in the local market looking shaky, some residential property investors are looking overseas for opportunities.

For instance, interest in the New Zealand property market, while perennially high, is on the rise again.

The marketing manager of the Realestate.co.nz website, Paul McKenzie, says Australian-based investors represent 10 per cent of all traffic, or 35 per cent of total offshore visitors to its site.

“There’s been consistent demand from Australians in the last 12 months but that’s picked up [in November 2011],” he says.

The Realestate figures don’t strip out residential-only investors (NZ farm properties are popular with Australians) but interest is high in capital cities as well as in “lifestyle” regions such as Central Otago, an area that includes Queenstown, on NZ’s South Island.

New Zealand does have several attractive features for Australian investors. With no stamp duty and a loose capital gains tax regime (although Australians must pay the appropriate tax on all global income and capital gains) New Zealand is an administratively simple property market.

New Zealand prices, while still high by world standards, have also come back, with yields well above the Australian average.

The Global Property Guide website lists the average “premier” city centre apartment prices at $US3748 per square metre in New Zealand compared with $US6990 in Australia.

As well, Global Property Guide reports average residential property gross yields in New Zealand at 5.84 per cent versus 4.11 per cent in Australia.

McKenzie says the average rental yields in New Zealand are creeping up to 6 per cent, with up to 9 per cent returns available on some city apartments.

“Australians see the New Zealand property market as a close and safe investment,” he says.

But a more distant and riskier housing market has lured investors over the past few years. Encouraged by the high dollar and rock-bottom asset prices, Australians have been among the most enthusiastic buyers of US housing stock.

Stories abound of Australians buying up US houses sight-unseen over the internet, or going unconditional at the side of the tour bus in Palookaville, Idaho.

A February 2011 article in US property publication Inman News cited Memphis as being inundated by Australasian buyers, quoting real estate agent Craig Jennings as saying, “I had to hire night time salespeople to deal with the folks from New Zealand and Australia.”

But with a growing coterie of spruikers and “educators” spreading the US property gospel, some observers are urging caution.

The head of Metropole Property Strategists, Michael Yardney, is one such non-believer. Yardney, wholeheartedly bullish on the Australian economy and property market, says US prospects have been dangerously overcooked by self-interested promoters.

He says the apparent cheap prices of US property may have blinded Australian investors to risks that include unlivable houses in economic dead zones, high maintenance and property management costs, continuing capital value declines and extra compliance burdens.

And even if there are bargains in the US property market, Yardney says it’s likely locals will snap them up before Australians.

“I believe you can do it better in your home territory,” Yardney says.

The head of research for fund researchers van Eyk, John O’Brien, echoes some of these concerns. O’Brien, a native US citizen, says the huge and disparate American property market contains many traps for ill-informed Australian investors.

“How would you know, say, if Des Moines is better than Charlottesville,” he says. “You can’t just look at the statistics.”

Despite advising caution, O’Brien says currency and price fundamentals may create opportunities for savvy investors.

“Maybe you could focus on university towns where there’s always tenant demand,” he says. “You need a niche strategy.”

The chief operating officer of US Invest, Lachlan McPherson, says his group is targeting a narrow range of properties primarily in Florida, Atlanta and Kansas City. “And not everywhere in those regions but only one or two neighbourhoods in each area,” McPherson says.

US Invest charges a $1000 upfront fee to help Australian investors set up in the US.

McPherson says ideally, each of US Invest’s Australian clients would establish a portfolio of at least four or five US properties, generating net yields of 9 per cent minimum, plus the potential for capital gain.

The tax director of USTaxCentral.com, James Simango , says Australians buying US property should carefully consider what legal structure is appropriate.

“Investors can buy US [property] directly without structuring but if they are high-income earners here in Australia, they will end up paying tax on their Australian marginal tax rate and they won’t have asset protection,” Simango says.

“So a lot of Australian investors are using trusts which buy the investment properties through limited liability companies.”

He says investors should also be aware that owning property in the US requires Australians to file tax returns there, sometimes at a state as well as federal level. Other compliance obligations include the requirement for foreigners to register US property purchases with the Bureau of Economic Analysis.

“Failure to report a purchase carries a $25,000 fine or jail time and there is a high level of non-compliance because even some companies selling properties to foreigners aren’t aware of these rules,” Simango says.

While US Invest and its many rivals offer Australians help to varying degrees in securing direct ownership of US property, financial planning firm Dixon Advisory has taken a unique approach.

Since launching its US Masters Residential Property Fund in May 2011, Dixon Advisory has raised almost $100 million, mainly from its self-managed superannuation fund client base.

The managing director, Alan Dixon, says the fund structure offers investors economies of scale, diversification benefits, and administrative simplicity, as well as more regulatory certainty than direct ownership of US property.

He says the fund, which focuses on housing within 30 minutes’ commuting time of Manhattan, has already settled on 75 properties in its target region of Hunter County, New Jersey, with agreements signed on a further 100.

The firm has established relationships with trustworthy local property experts, which Dixon says is essential if Australian investors hope to succeed in the US market.

“Some direct investors will do well,” he says. “A couple of the [Australian direct promoters] will turn out to be gems. But a whole bunch of Aussies investing in US property will turn out to be the dumb money.”

BRW

Comments (0)