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Published 26 July 2012 05:02, Updated 26 July 2012 05:03
IS IT A GOOD TIME FOR INVESTORS TO ENTER THE PROPERTY MARKET?
ASHLEY WILLIAMS: If you stand back from the day-to-day commentary, it would appear that residential property is at a cyclical low, with the prospect of some low growth while things settle down. Historically, Australia has enjoyed steady economic and population growth and as this trend emerges again, property prices will revert to longer-term growth rates. Buy a well-located property with a steady rental stream with an investment horizon of five or more years.
JONATHAN HALLINAN: I’ve always said the risk of being out of the market is far greater than the risk of being in it. Property can grow far faster than the ability to earn. Therefore properties in preferred locations are becoming unaffordable. While it is very difficult to pick the top or the bottom of the real estate cycle, history proves that the trend goes up despite the ebbs and flows. In saying that, every purchase must still be approached with caution, but if you buy good property, with a long-term view in mind and don’t over-extend financially, you’ll do well.
MARK ETHERINGTON: There are numerous opportunities available presently – the cost of funding has reduced, yet yields are still relatively high. Assess each deal on its merits, it is not a good idea to think that all property sectors are good investments. Present the deal to your current bank and request feedback on how that meets their current lending policy and appetite.
CAPITAL GROWTH OR POSITIVE CASH FLOW? WHICH IS MORE IMPORTANT WHEN IT COMES TO A PROPERTY INVESTMENT?
WILLIAMS: Income is important to particular investors but income-producing properties such as commercial, industrial or retail properties tend to have a higher purchase price, depreciate in value and are subject to longer periods of vacancy when tenants move on. Capital growth of an asset is the fundamental requirement for a property investor and as such the typical blend of cash flow certainty and capital value growth … offers the best medium- to long-term opportunity for an investor to build their wealth.
HALLINAN: Capital growth is definitely the most important aspect of property investment. In the long term, the capital long-term growth achieved will far exceed the short-term’s cash flow benefits.
ETHERINGTON: Depending on your investment strategy, both are equally important. You need to demonstrate servicing via cash flow to meet compliance, which will differ considerably depending on your loan and lender’s underlying covenants. Equally, you want to ensure you have an exit that will yield capital growth. If both are achievable during the investment cycle, it will allow amortisation of the core debt. Plus, if it is a longer-term investment strategy, you will be able to preserve the asset itself via preventative maintenance and/or refurbishment. This creates further uplift and equity for the next acquisition, all while enjoying depreciation benefits.
WHAT’S THE BIGGEST TRAP PEOPLE CAN FALL INTO IN THE CURRENT PROPERTY MARKET AND HOW WOULD YOU ADVISE INVESTORS TO AVOID THIS?
WILLIAMS: Prospective tenants will often be constrained to a particular weekly rental and not necessarily afford to pay a higher rent for a larger property, or they will pay higher rent to be closer to shops or public transport because this allows them to save on motor vehicle expenses. Investors need to understand the location attributes and market dynamics and select properties accordingly.
HALLINAN: Ensure your advisers are independent and knowledgeable. There are many legal issues that can make what appears to be a good property less attractive if you don’t do your due diligence. The biggest trap people fall into is buying off-the-plan sales through third-party marketers, financial advisers and accountants. These providers often charge an exorbitant fee of about $10,000, increasing the sale price to the investor. To avoid this trap, I recommend the purchaser obtain advice from professionals but then deal directly with the developer so as to get the best possible wholesale price.
ETHERINGTON: Over-exposure in every sense of the phrase. Whether borrowing too much on an asset class that may not retain value, through to poor judgement on financier and terms of that debt. Conduct your due diligence on the asset, on the underlying income – whether tenant, business or end-target buyer – and importantly, conduct due diligence on the bank.