Property Investment Around Australia - 2011
by John Hopkins, Executive Chairman
The prospects for Sydney are great, Brisbane will be a positive surprise package and Melbourne is the steady rock with personality, strength and strong underlying appeal.
It is essential to first define what investment means and who the investors are before we could sensibly discuss the Australian property investment markets for 2011.
For the sake of this discussion, we are discussing what the government enquiries into property investment have referred to as ‘Retail Property Investors’. Their definition of this category of investors is, ‘those individuals or family businesses who own property with tenants’.
Their intentions or activities, as investor’s, need to be defined further because there are many interpretations about what ‘investment’ actually is. In fact, if you care to look up the Macquarie or the Oxford Dictionaries, you will find there is no real synonym for the word ‘investment’; which means there are, in fact, wide and varied opinions and beliefs about this practice.
The John Hopkins Group has three criteria in defining investment;
- The investment must be long term, which is considered in two ways; firstly, ‘long term’ depends on the investors circumstances. For example, for a person in their twenties, long term could be 40 or 50 years, however for someone like me; it would be a significantly less period of perhaps 20 years. Secondly, it must be considered long term in relation to the investment class to be invested in. There are three fundamental investment classes; cash, equities and property. Cash for flexibility and reserve purposes, and equities and property for growth. A long term investment strategy for equities could be 5 to 10 years, whilst for property it should ideally be 10, 20, or 30 years; sometimes more.
- The investment must be secure. In other words, the investment class and the specific investment must have an appropriate underlying supply and demand circumstance of both tenancy and sale, such that the particular investment will not lose value rapidly.
- The investor must not have to attend to the investment. If an investor wakes up every morning to read the financial review to determine if they will buy or sell their investment that day, then they are not actually investors, they are either traders or speculators. If they are thinking of substantially renovating their property ‘investment,’ or doing a property development on the land sometime in the future, then again they are not investors, they are property renovators or property developers.
What investors want from their property is Returns, which includes capital growth, confidence of income and income growth. However what investors need from their investment is Returns, Security and Flexibility.
Where Property Investors will find those factors is in a property that has Continuing Strong Demand of both tenancy and sale for now and the foreseeable future.
The category of property we encourage individuals to invest in is ‘medium to high density residential property (small houses, townhouses and apartments), generally priced between $400,000 to $850,000, in the best inner areas of a major metropolis’.
Investors also need property that is most appropriate to their particular circumstances; most often that is to do with tax, financial or portfolio balance factors.
Now, to all the Australian property investment options.
Firstly, I will cover the categories of property investors could invest in, and then the various markets around Australia.
The broad options in regard to categories of property would include Commercial, Resort, Rural, Regional, Capital City Residential, Major Metropolis Residential.
Commercial Property Investment
To purchase quality commercial property anywhere in Australia, in my committed view, you would have to spend between $1.5 and $2 million. For most individuals, this would be well and truly out of their price range and even for those who could afford a commercial property at that price, it would mean they had purchased only one property and therefore their portfolio would be out of balance. Also, the yield on that property would be between about 2.5% and 4%, and would therefore be problematic for many in regard to their ability to afford a negative cash flow. And remember, if the yield is higher than say 6 to 8%, then the property will most definitely not be ‘prime’.
You may find these views in regard to commercial property provocative, however I am adamant that I am correct and by all means give us a call to talk about these views with you.
In summary, commercial property is not appropriate for nearly all ‘retail property investors’.
Resort, Rural and Regional Property Investment.
One of the foundation stones of the John Hopkins Group rigid qualifications for its ‘Recommended Property’ investment category is for it to be in the best inner urban areas of a major metropolis.
Our strict definition of when a market place is not considered to be a major metropolis is:
"Where there is a change in one, two or three factors in a market place that impact the supply and demand of a particular class of property to such a degree that it causes an increase or decrease in capital values and/or rental levels".
For example, let’s say we had a Federal election, and a change of Government was to come in. The incoming government then determines to either increase or decrease the public service by five per cent. This would ultimately change the supply and demand ratios of that particular market place, which would most definitely change capital values and income levels. Therefore, by our definition, that market place is not a major metropolis. It does not offer the security we deem appropriate for property investors, and therefore it would not receive our recommendation.
Let’s think for a moment of an individual who owns an apartment in Surfers Paradise, which is leased to the local market (not a holiday lease). This Landlord may likely state ‘I receive rent, therefore I am an investor’. Now if we have another GFC, a recession, a hiccup in the economy or a downturn in the property cycle; what happens to that apartment in Surfers Paradise whose economy is based on tourism? Well, the first thing that happens is that many resort property owners decide to sell their secondary assets, and all of a sudden the Surfers Paradise property market is flooded with apartments for sale.
The other relevant consequence to any of these types of events happening is that people stop going on holidays, so that economy which is meant to be supporting our property investment has turned diabolical. Again, this type of property is not an investment; it’s a speculation.
The same principal applies to properties in rural areas and regional property markets. It could be a drought for the Riverina, a frost that kills off the season’s fruit in Shepparton or an airline strike that lays bare the property markets from Cairns to Cape Tribulation. Or it could be for Wonthaggi in Gippsland if the Victoria the Government was to ever reverse their commitment to the Desalination Plant.
Wherever a property market, or the economy that a particular property market exists in, can be impacted by one, two or three factors, then it is not a major metropolis, and you should never invest there.
By this John Hopkins Group definition, it puts out resort, rural and regional property in Australia, as in our firm view, it’s too dangerous to be an ‘investment’.
State Capital City Residential
Over the years, I have noted there is a belief that purchasing property investment in the state capital cities of Australia, and other countries, is generally a safe and favourable option; this is simply not correct. There are many other factors investors must consider when purchasing property, not just the location. At the core of achieving Flexibility, Security and Returns in your investment property, we advise to invest in ‘the best inner urban areas of a Major Metropolis,’ and, as I explain in this article, just because a city is the capital of the state or country, doesn’t necessarily mean it’s a ‘Major Metropolis’ by our criterion.
Darwin, Hobart and Canberra
Darwin is not a major metropolis, nor is Hobart; they are country towns in regard to their property markets. Although no doubt they are all beautiful; Hobart with Battery Point, Sandy Bay, the Docks and Salamanca; Darwin with its harbour and markets and Cullen Bay.
Canberra is obviously not a country town, because of its purpose and the fact that the city is primarily filled with politicians and public servants. However, it is still the size of a country town in regard to its property market, as this market can be substantially impacted by politics.
It’s important to note that just because we have determined these cities are not major metropolises, does not take away from them in terms of their attractiveness, liveability or destination for travel. They just aren’t really big enough to satisfy our strict criteria in regard to what is or what isn’t a major metropolis. And we are adamant successful long term investment will be best served in a major metropolis.
There are two factors that indicate a major metropolis in regard to property markets; population size and a strong and independent economy.
Darwin’s population is about 124,000, Hobart about 212,000 people and Canberra’s population is about 352,000 people; just too small to provide the security and flexibility of a real major metropolis in our considered opinion.
Adelaide
Adelaide has 1.2 million people and it is supported by general commerce, manufacturing, the beautiful Barossa Valley, a strong rural economy and a state economy with an important base in natural resources. However, in our considered opinion, and in relation to other options, Adelaide’s economy cannot be considered strong and independent.
Perth
Brisbane and Perth have similar populations; Brisbane about 2 million (and growing at a rapid rate), and Perth about 1.66 million. By our judgements, in respect to their property markets, Brisbane is a major metropolis and Perth is not.
The crux of this judgement is that Brisbane is the recipient of a varied and strong state economy, a substantial and well established rural sector, natural resources, tourism and a burgeoning financial services sector in Brisbane itself.
On the other hand, whilst Perth could be considered to have a strong economy, it is mostly because of natural resources and that makes its economy, and therefore its property market, vulnerable to one economic sector and not independent. Of course, one could say ‘look at the success of natural resources, its boom time,’ but just one issue is extremely relevant to this activity and that is global warming. We will not have our clients investing in markets where its economic activity could be vulnerable to one issue like that.
Major Metropolis Residential - Sydney, Melbourne and Brisbane
By any world standards, these metropolises could be considered strong and independent. Sydney’s population is about 4.5 million and Melbourne’s ticked over the 4 million in 2009.
And as I mentioned above, Brisbane ticked the boxes as a major metropolis about a decade ago and we have been recommending our clients purchase its’ property for about six years.
World circumstances prove the amenity of being ‘inner-urban’ creates demand of both tenancy and sale, and that far outweighs middle urban and outer urban.
Paris, London, Tokyo, New York, Rome and many other international cities prove this philosophy. Just look to the markets you know in Australia; inner urban residential property in Sydney has the highest square metre rate, compared to middle or outer urban, and it’s the same for Brisbane and Melbourne. This is what we call the ‘Wave Theory,’ which we define as:
“Property increases in value at the greatest rate closest to the centre of a major metropolis, and the rate of increase decreases in a wave-like motion as you move away from the centre of that metropolis.”
Don’t think of another theory. Why defy gravity?
It is important to stay in lower price ranges for the strongest demand and optimum yields. It’s also important to purchase property that is in good condition so you can own that property for a long term investment strategy, which should ideally be 10, 20 or 30 years.
THE FUTURE
Melbourne
What a great performer.
Melbourne was recently named as the second most liveable city in the world for 2011 in the annual Economist Intelligence Unit report; and has been in the top five for a long time now which, undoubtedly, it deserves.
Demand for occupation is the most important of all the issues in regard to property value and future value. The best inner-urban areas of Melbourne are great. Access to any amount of beautiful parklands, a mature and well functioning public transport system and road network, retail shopping facilities second to nowhere in the world, entertainment, the best food, beaches and much more.
Its culture, its commitment to sport and the arts, its proven success with event activities and its beauty are all pertinent to its property values.
An established and substantial economic base with support from varying sectors that is underpinned by the well performing national economy, and there is good reason for confidence in Victoria’s and Melbourne’s economies for the foreseeable future.
Add to all the above that Melbourne’s population is increasing by about 85,000 people per year, and what can I say?
Just make certain you buy in the correct locations and the right property because for the categories of properties I described above, these property markets have a solid future.
You can be very confident about Continuing Strong Demand of both tenancy and sale where both the general supply and the specific supply just aren’t keeping up with demand.
For Melbourne, in my very carefully considered opinion, you can be confident about continuing growth of both capital and income.
Sydney
Economically and politically, New South Wales has been the very poor cousin for at least a decade.
There is no question with business associates and friends of mine that those circumstances have had major detrimental impacts on the Sydney property markets.
Even those best inner urban areas that we speak of, areas around that magnificent harbor, the northern beaches, lower north shore, inner west and eastern suburbs, have all been slow and impacted over the last ten years or so.
But we must not forget Sydney is really the economic powerhouse of Australia, and the NSW economy is substantial.
There seems no doubt that a change in Government is imminent in Sydney; Kenneally may or may not be good, but a change may be important to have that new start.
For the first time in my career, there is basically price-price parity between Brisbane, Melbourne and Sydney. It would be a brave person who said Sydney prices would increase to 10 to 15% ahead of Melbourne and Brisbane again, however there is a pent up demand. The fact that the Sydney market has been flat for so long, it seems there is only one way for it to go; up.
In the category of the property defined above, Sydney property is happening now and in my view, it will be a strong market for the next two or three years.
Add to that general pent up demand in Sydney, and coming out of a decade of sluggishness, are two other factors:
- Sydney has an annual population increase of about 65,000 people per year. This creates that same lack of supply and strong demand experienced by both Melbourne and Brisbane.
- Sydney has not provided appropriate infrastructure works, in particular with regard to public transport and road works.
Both of these factors create huge underlying demand pressure on those best inner urban areas we speak of.
Brisbane
The underlying supply/demand factors for Brisbane’s residential property market have been consistent and strong for a number of years.
Queensland has averaged a population increase of about 75,000 people per annum for many years now. The Queensland government also expects its population to grow from the 4 million mark of 2006 to 5.6 million by 2026.
Unlike Western Australia and Perth, which are quite driven by natural resources, Queensland and Brisbane are supported by various important areas of economic activity which, in regard to our criteria, means Brisbane is a strong and independent economy. Natural resources, a huge rural sector, tourism, individuals retiring to the sun and a burgeoning financial resources sector all come together to create this healthy and independent economic circumstance.
We must add to the above, in considering Brisbane’s economic health, its ability to capitalise on its attractiveness and consequential population growth, the fact that it’s leaders have all stops out to keep abreast with essential infrastructure. There is presently approximately $14 billion with another $10 billion planned for.
However, you may ask why I say ‘Brisbane will be a positive surprise package.’
This is because many people felt the floods could flatten Queensland economically and, in particular, it could detrimentally impact its property markets in some quarters. My intuition has been the opposite; and, after investigation and conversations with many people, I am firmly of the view that Brisbane’s inner urban quality property will be solid for the foreseeable future.
There is about $6 billion to be spent in Queensland to make good after the floods. There has been a reduction of accommodation, and there will be a huge influx of people in Brisbane who are working towards restoring those affected areas. This will sure up an already steady property market.
It is important to remember that, although devastating, the recent floods only physically impacted a very small area of Brisbane in terms of a percentage. With these types of events being covered in the media, it’s easy to assume a much greater area was impacted.
If we think back to the 1974 floods, by the same time a year later in 1975, values for property impacted by the floods were back to previous levels.
Now, our advice to all clients is not to buy property in Brisbane under the Q100 level (which is higher than the 1974 flood level). In reality, that leaves most of the great inner urban areas safe from the prospect of flooding.
Many of Brisbane’s best inner urban areas have been improved and some rejuvenated and others regenerated; Fortitude Valley, Bowen Hill or Kelvin Grove. Then there’s the river from the city to Tenerife, charming Milton, Hamilton and Ascot, South Brisbane and Kangaroo Point, just to name a few.
Buy medium to high density residential property in the best inner urban areas of Brisbane, and I am confident there is only one way for it to go with all the underlying demand it must experience over the next half decade.
More Information
We have been advising clients on property investment, amongst other investments, for over thirty years. For more information on any topics covered in this discussion paper, please call our Client Liaison Officer on 1300 726 082 who can arrange for an appointment with a suitable John Hopkins Adviser.
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