ACT Pop Stats

Have funds for property, will travel
Date: March 27 2004

Investors are looking far and wide in search of a bargain, reports Simon Hoyle.

Property investors who believe they can no longer afford to buy in Sydney are increasingly looking to regional Australia for opportunities. And in some cases they’re willing to go as far afield as New Zealand or Fiji to get what they’re looking for.

Maurice Goldberg, managing director of Pulse Property, says it’s becoming difficult to find good quality, well-located investment properties in Sydney on a yield of more than 4 per cent.

“Once you’ve deducted all your expenses, it’s often less than 3 per cent,” Goldberg says.

“Yields in Sydney are less than other western cities in the US, Europe, Britain.”

Goldberg says Australian tax laws help make lower yields easier to deal with. The interest cost on an investment loan is generally tax deductible. In the US, for example, the interest cost of a home mortgage is deductible, but the interest cost of an investment loan isn’t. Property investors tend to demand higher rental income to compensate.

Sam White, a director of Ray White Real Estate, says the low yield is one of two factors driving investors out of the city and into regional Australia.

“They’re probably looking at [yields in regional areas] of 4 to 6 per cent and in some cases even more,” White says. “A yield of 2 per cent to 3 per cent in Sydney on a net basis is pretty tight.

“The second thing is the perception that because these places are cheaper, there’s more room for appreciation in value.”

Their thinking may be sound. Lisa Montgomery, head of consumer information and advocacy for Wizard Home Loans, says investors took this view of Tasmania a few years ago. The influx of investment dollars soon led to sizeable capital gains.

“A lot of interstate buyers saw Tasmania as the low-hanging fruit,” Montgomery says.

“They got into the market well before Tasmanians realised the value was there.

“The Tasmanian market was the fastest growing market, in terms of property price growth. It had climbed so quickly, over such a short period of time, and that was [due to] buyers from interstate coupled with people in Tasmania realising that if they didn’t get in, it was going to go.”

Montgomery says it’s common for Sydneysiders to notice big disparities in property prices when they go on holiday. It seems holidaymakers from this part of the world can’t help themselves – they have to go and have a look in the windows of the local real estate agents.

“We have seen a lot of people going down there on holidays,” Montgomery says. “When people are on holidays, they relax and they are in the mood to look around at property. And they see the prices outside the major capitals are low.”

One reason often cited by investors for choosing property as an investment over, say, shares is that a “bricks and mortar” investment lets them drive past it, see it, touch it and derive some comfort from the fact that it’s a physical asset. It’s also easier to get a feel for what’s going on in a property market with which they are familiar.

That’s why investors most often buy property in an area close to, or within reasonable driving distance from, where they live, even if it’s not the best thing to do financially.

Goldberg says that apart from price, five things ultimately drive the performance of a property investment, and at the moment investors can find properties outside Sydney with stronger desirable characteristics than properties within it.

In no particular order, the five factors are:

Population

Infrastructure

Economic indicators

Demographics

Yield

“If they are all strong, then we like it,” Goldberg says.

Goldberg says Pulse particularly likes Brisbane and the south-east Queensland region, Perth and Darwin.

He says New Zealand property has attractive yields, but there are potentially complicated tax implications for Australian investors when and if they repatriate profits.

And he says Fiji has recently announced tax concessions for companies involved in the information technology and entertainment industries. The development of supporting infrastructure and residential property may be attractive to investors.

White says there are attractive regional centres dotted throughout NSW, including Tamworth, Dubbo, Wagga, Bathurst, Parkes and Goulburn. Coastal towns also remain popular.

He says that for a centre to be attractive, it needs to be in demand from three groups of buyers: investors, owner-occupiers who have downsized and moved out of a capital city, and locals.

“We’re starting to see more people in the metropolitan areas, particularly elderly people, who have a lot of equity in their homes, selling in Sydney and moving to a regional area, like Parkes or Bathurst, which they like anyway.

“They sell in Sydney and take $300,000 or $400,000 and use that [to fund] their lifestyle in retirement.

“I think that in any property cycle you are going to get ups and downs, but the fundamental thing is supply and demand going forward.

“If the owner-occupiers are coming into the market, and the phenomenon of retirees cashing in their [Sydney] homes continues, that will support capital growth.”

Goldberg says there’s a significant underlying demographic trend supporting the idea that property outside of Sydney may perform strongly.

“Sydney’s population growth isn’t everything that people seem to believe it is,” he says.

The proportion of migrants who choose to settle in Sydney has declined from about 46 per cent in the mid-1990s to about 38 per cent, or about 45,000 people a year, according to recent figures. Net interstate migration – people moving out of NSW to other states – has risen to about 32,000 a year.

“The way things are going, NSW is likely to see, in the next 10 to 12 years, a net reduction in population,” Goldberg says.

Meanwhile, other cities such as Brisbane and Darwin are experiencing rapid growth.

“According to the Australian Bureau of Statistics, from 1998 to 2051 Brisbane will have approximately 84 per cent [population] growth,” he says.

“Perth will have approximately 67 per cent growth. Sydney will be less than 20 per cent, and Melbourne less than 10 per cent. Adelaide will have negative growth, of nearly 20 per cent.

“What that means is that Brisbane will become the second-largest city in Australia.

“Darwin has seen phenomenal change. Infrastructure is probably one of the biggest things. The new railway line is one that everyone is talking about, and it will certainly bring some people in, but it is by no means the biggest thing.”

Goldberg says infrastructure supporting oil and gas exploration and production in the Timor Sea is a much greater influence on the development of Darwin.

“The amount of money spent there is getting close to the amount spent [in Sydney] for the Olympics,” he says.

“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….”