Six emerging trends for new property investors: Cameron McEvoy

Six emerging trends for new property investors: Cameron McEvoy
Six emerging trends for new property investors: Cameron McEvoy

Starting out with your first investment property always has been, and probably always will be, a daunting process for most people.

No matter what the economic, political, and housing industry climate is at the time, there will always be multiple challenges that new investors face.

So what trends are emerging in the current Australian market, and what are the things to be cautious of?

I have compiled a list of six things I’d argue should be major considerations for any investor who is freshly starting out on the property ladder.

1) From a mortgage-repayment perspective, I would treat the next two years of your first investment ownership as a honeymoon and be ready for a sobering awakening in the years that follow. Interest rates are indeed near-bottom of market and though there are market slow-downs occurring and rising unemployment, interest rates will trend up in the coming years. 

Like most would-be problems for property investors, the safest way to avoid finding yourself in a stress-laiden situation in two-three years’ time is to do you due diligence. In this case, due diligence comes in the form of forecasting. Either your mortgage broker, lender, or yourself (with a little bit of Mircosoft Excel elbow grease) can create forecasted repayment scenarios, charting a variety of interest-rate increase situations.

My recommendation is run a modest increase, and another one that is more extreme (for example, what if interest rates hit 10% in three years time?) and assess your serviceability in line with these increases.

Remember also to forecast rental income increases annually that would be consummate with the average rental increases year-on-year, in the target suburb you are buying in. Doing this assessment will tell you in advance how easily you could (or couldn’t) hold the property during tougher times.

2) If your strategy is to purchase off-the-plan or purchase newly constructed stock, you’ll most likely be playing in the unit market. With units, one of the many golden rules is location and proximity to services, infrastructure, transport, and lifestyle.

Oftentimes the highest demand markets are inner to middle ring suburbs of major cities. One of the current trends in new developments going up in several cities, including Brisbane, Melbourne, and Perth, are ‘vertical villages’

Vertical villages are worth considering in light of many councils around Australia recently introducing development restrictions that prevent medium to high rise apartment blocks being built in highly-sought-after suburbs. This type of living combines many desirable features that renters would seek out in such suburbs: location, mod cons, services, and most critically, the rising trend of avoiding living in high-rise hell.

3) Consider your gearing comfortability in light of recent instability in the Australian economic climate. What is trending upward in the last year or two is investor strategies migrating more towards neutrally or slightly positively geared investment properties, versus heavily negatively geared properties.

You need to ask yourself how comfortable you would be in feeding money into a ‘loss-making investment’, moving forward. This is somewhat tied to the first trend of avoiding the romance of honeymoon interest rate lows, because hikes in interest rates will usually find some otherwise netural or buoyant investors struggling to stay afloat.

Whether it is your first investment property or an addition to a growing portfolio; you need to assesss how comfortable you are with debt, in relation to your goals. If solid capital growth is your objective, you may find yourself holding negatively geared property. But what happens when rates go up, and your slightly negatively geared asset becomes hugely negatively geared?  

Negative gearing is a strategy that, in my experience, really only works over a prolonged or sustained period, for the very high-income earners (say the $250+ earning households). It can be effective for those of us earning more modest or national-average salaries, but really only in the initial growth phase of your property investing career.

It is wise to be cautious on this front; after all, there is good reason why investors are trending away from negative gearing strategies at the moment.

 


4) The impact that foreign investor-driven buyouts is having on some locations. In some desired suburbs of capital cities and regional/rural towns, foreign investors make up a significant portion of the overall buying group. Recently it was reported that the growth of the Chinese middle-class in China is resulting in increased Chinese buyers in the Australian property market.

I have also recently investigated the nature and culture of the Chinese investor in the Australian property market. The biggest concern for local investors, when foreign investors play heavily in a market or suburb, is that prices can sometimes be artificially inflated beyond the true value of a property.

To document and follow this trend precisely is a challenge, as there is no finite way of knowing the nature of every investment property purchase in relation to country-origin of the investor making the purchase. By that I mean that some foreign investors may potentially invest via an Australian-citizen relative, which would skew any data that just singles out foreign-born/based investors.

What can be more ascertainable though, is data obtained from sources such as RP Data, which does record the proportion of foreign-investment within a suburb. When considering a suburb for investment, it is worth seeking an assessment of the levels of foreign investment in that suburb.

5) The other trend emerging is relating to schools and education facilities. Though Australia is famously an ageing population, there is a demographic trend highlighting a mini baby-boom occurring in many pockets of Australia.

This means that the demand for quality schools will be on the rise, as these babies grow up to school-entry age groups. So, it makes sense to consider investment locales that have highly desirable and reputable schools in them, or locations where the construction of quality schools is in the process. 

The problem is that this trend is nothing new. The desire of many parents to send their children to quality schools is so fierce that some families are willing to move entire suburbs, and pay a higher premium to live in that suburb, if it means being within the catchment zone of a well-regarded school.

Areas such as Sydney’s Burwood for instance, are by no means glamorous or luxurious locations by their own right, but these kinds of suburbs do come within catchment zones of excellent schooling. This in turn bumps up not only capital growth prices, but also rental return too (particularly for family style houses versus 1 or 2 bedroom units).

It would be smart for any would-be investor to seek out locations where quality new schooling is emerging.

6) Just as some foreign investors are investing in Australian property, so too are Australians investing overseas. The United States was arguably the most popular and well-reported Australian foreign investment property hotspot trending for Australian investors.

Due to mostly the US economic recovery, also in part to the weakening AU dollar and a variety of other contributing factors, Aussies have moved away from US property markets significantly.

So what markets are emerging overseas, for the more high-risk-profile investors out there?

Well, accoring to a Price Waterhouse Coopers ‘Emerging Trends in Asia Pacific 2013’ report, Indonesia, specifically Jakarta, ranks highest as the city recommended for investors to buy, hold, and sell in, within the region. Sydney comes in at position #4, beaten by Tokyo and secondary Chinese markets.

Yet it is Indonesia where many Aussies are finding opportunity. Like the US was a few years ago, Indonesia offers buy-in rates that are a fraction of those found in Australia (and for this reason Aussies will likely avoid Tokyo due to the enormous buy-in costs).

Well-positioned property in developing neighbourhoods of the urban sprawl city that is Jakarta, is certainly trending up for Australians. Rental returns are typicall almost always in the double digits.


Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

 


Cameron McEvoy

Cameron McEvoy

Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

Community Discussion

Be the first one to comment on this article
What would you like to say about this project?