Property Newsletter – November 2017


Developing to hold? Consider ancillary dwellings

When looking to develop a residential property, the goal of many investors will be to hold some or all of the completed development to maximise rental yield. This is particularly the case with smaller projects, where the original lot is subdivided and developed into two new lots and two brand new dwellings are built.

A great way to maximise rental income in the above situation is to consider the addition of an ancillary dwelling to one of the two newly subdivided lots. The ‘granny flat’ as they are more commonly known, will require the relevant building and planning approvals, but will not require its own certificate of title as it is located on the same lot as another single house.

By opting to include an ancillary dwelling early in the project, the new dwellings can be properly designed and built to optimise the land area available. The result of such a project might mean that an old, highly depreciated home on a large single block is replaced by two lots with three brand new, attractive dwellings, achieving a great outcome for both the investor as well as the local residents of the area.

Provided it is financially feasible to do so, the developer has the option to hold the two new houses and granny flat, renting each of them out and effectively turning one original rental income into three. In this hold option, the investor avoids losing a large portion of the profits through sales agent fees, marketing, income tax and GST. Furthermore, provided the development is well located in an area with strong long-term growth drivers, they are rewarded with the capital growth the dwellings will achieve over time.

Investors in the early stages of exploring this option should keep the following state planning requirements in mind:

  • The original single house associated with the granny flat must be located on a lot that is no less than 450sqm in area
  • The granny flat must not exceed a maximum plot ratio area of 70sqm

Further to this, the Residential Design Codes outline a number of deemed-to-comply requirements for ancillary dwellings, and different councils will have their own set of regulations to be met.

If the strategy is to hold, and if the relevant planning and building approvals can be acquired, adding a granny flat into a new development can be an excellent way to boost rental returns.

A forgotten university-adjacent suburb

Located next to prestigious riverfront suburbs and packed full of amenity, including being opposite Perth’s largest university, this somewhat forgotten inner-Perth suburb has plenty to offer.

Karawara is located in the City of South Perth, approximately 8 kilometres south of the Perth CBD.

Being a small suburb, it features a population of 2,061 and a median age of only 27 which is much lower than the Perth average, primarily due to the amount of Curtin University student housing.

25.7% of the population identify themselves as professionals, which is above the WA and national average at 19.9% and 21.3%, respectively.

Its neighbouring suburbs include the more expensive Como to the north, Manning to the west and Waterford to the south, with the eastern periphery being Curtin University which falls into the more affordable suburb of Bentley.

The suburb features two main arterial corridors that allow good access to the area, being Manning Road, which runs to the Kwinana Freeway, and Kent Street. Buses run frequently along these roads allowing for easy public transport to the city, beaches and other major amenities.

The median house price is $670,000 with the dwelling stock comprising 73% housing, 26% semi-detached and 1% units. This shows an increased amount of semi-detached dwellings compared to the Perth average of 16%.

The area is predominantly zoned R20 (low density), with pockets of R30 and a very small amount of lots zoned R50 (medium density) which have already been developed into apartment dwellings. The whole area is built to its current residential limits, with very little development options remaining except updating older stock.

Construction is dated from the mid-1970s with pockets of early-2000 built stock in the northeast. The newer stock is a mix of single and double storey, whereas the older stock is primarily single storey.

The area does feature a higher than average number of State Housing Commission properties due to its proximity to the university and level of affordability. Many of these are now being sold as house values increase. The area is benefiting from gentrification, with Waterford Shopping Centre’s high-level upgrade headlining the trend.

Karawara features high-quality amenity including the aforementioned renovated Waterford Shopping Centre, Collier Golf Course, Curtin University and a large variety of parklands including George Burnett Park and Reros Park which occupies approximately 25% of the total suburb area.

5 essential due diligence questions to ask before investing in a syndicate

Investing in property syndicates is an alluring opportunity for savvy investors looking to gain exposure to the generally higher returns available with this strategy. However, comprehensive research and due diligence is essential to identifying risk and ensuring the opportunity is able to deliver on returns and performance.

Here are five preliminary questions to ask before investing in a syndicate that investors should consider during their research process.

  1. What is the track record of the company involved? Have they managed similar syndicates in the past with successful project outcomes? Ask to speak with past investors or to see reports that can support any figures presented.
  2. How will you be paid?
    What are the factors that your returns will be dependent on, and when can you expect to receive your returns?
  3. How is the investment structured?
    It’s a good idea to have this reviewed by your accountant, financial advisor or lawyer. Ask if they can also contact the company directly with any queries.
  4. Is the property a good price? In the case of a property purchase (as opposed to a development), has research been completed to establish the value comparable to other properties, and is there potential for future growth? Has the company done their due diligence regarding supply in the market and also the future forecast for this type of property?
  5. What is the debt gearing on the investment? How much debt is proposed to be secured against the property? It is common for gearing to range from 50-65%. The debt gearing can assist in boosting returns, however the higher the debt the more the investment is at risk to interest rate rises. In a high interest rate environment, higher debt gearing can have a negative impact on returns.Investing in a syndicate is a different process to buying property directly and has its own set of considerations and liabilities that need to be considered before making a commitment.It’s important that investors have a clear and comprehensive understanding of the timeline and projected results of their investment, and that they have engaged qualified professionals to corroborate any claims and check compliance.

Restrictions placed on investors were only meant to be “temporary”, APRA’s chairman said, as the restrictions might have unintentionally caused additional profits for the big four banks.

Macroprudential measures were introduced in 2015 as a response to growing fears that the Australian mortgage market was becoming imbalanced. Little indication has been given since then about how long these constraints will be in place.

Now APRA says that it would like to start scaling back its intervention, provided that banks can continue to lend responsibly.

Speaking at the Customer Owned Banking Convention in Brisbane on Monday (23 October), APRA chairman Wayne Byres noted that since the regulator stepped in to curb certain types of credit, the quality of lending has improved and risk standards have strengthened.

“We would ideally like to start to step back from the degree of intervention we are exercising today,” Mr Byres said.

“Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and — crucially — will be sustained.

“We will also want to see that borrower debt-to-income levels are being appropriately constrained in anticipation of (eventually) rising interest rates.”

Mr Byres stressed that APRA’s expectations apply across the industry — “to large and small alike”.

“Pleasingly, the industry is moving in the right direction to achieve that. Improved serviceability standards are being developed, and policy overrides are being monitored more thoroughly and consistently.”

The prudential regulator endorses positive credit reporting and believes that its take-up will remove a “blind spot” in a lender’s ability to see a borrower’s leverage.

Coupled with the higher and more risk-sensitive capital requirements, APRA is confident that these developments should provide an environment in which some of its benchmarks are no longer needed.

“The review of serviceability standards across the small ADI sector that we are currently undertaking will help inform our judgement as to how close we are to that point,” Mr Byres said.

His comments come after a parliamentary committee probed the major banks about their respective decisions to lift mortgage rates in response to APRA’s benchmarks.

Parliamentarians were eager to identify if the big four banks had profited from the regulatory measures.

MyState chief executive Melos Sulicich has called for government intervention as he believes that APRA’s actions have given the big four a competitive advantage.

The chief executive believes that APRA’s “speed limit”, restricting all banks’ investor lending to 10 per cent annual growth and interest-only lending to 30 per cent of flows, has “disproportionately constrained smaller banks’ ability to grow”.

“The larger banks’ investor loans are typically 35-45 per cent of their mortgage portfolios, while smaller banks’ investor loans are around 20-25 per cent of their loan portfolio.

“Instead of creating competition, this regulation has handed larger banks an advantage as rates on investor and interest-only loans increased.”

Now’s the time to buy a house in WA: Billionaire Kerry Stokes stakes reputation on perfect property market conditions

The chairman of Seven West Media said conditions now were never better.

Billionaire Kerry Stokes has added his weight to the view that conditions are ideal for entering the housing market, staking his reputation on now being the best time to take the plunge.

The Seven Group Holdings and Seven West Media chairman said the situation came as the State showed it was recovering from the shock of miners cutting their costs by a combined $10 billion in recent years.

“Right now any young person out there, any apprentice, worker, tradesman — the best thing they’ll ever do in their life is walk out this weekend and buy a home in Western Australia,” Mr Stokes told a WestBusiness Leadership Matters event on Tuesday.

“With interest rates low, housing prices low, this is the time to think of their future right now. I’d put my reputation on the fact this is the best time for them to do that,” he said.

Kerry Stokes urged young apprentices and workers that now is the best time to buy property in WA.

Mr Stokes’ remarks follow Housing Industry Association figures showing affordability in WA had improved dramatically, in part because of national efforts to tighten bank lending standards for investors.

In the past two years, loan repayments on a median-priced house in Perth fell by more than $260 a month, or $3120 a year. Elsewhere in WA, they fell to $1545 from $1773 a month.

However, a report yesterday showed Perth had the nation’s second-most expensive residential land prices at $730 per square metre, a 5 per cent gain over the year to June. The Housing Industry Association-CoreLogic Residential Land Report said land prices rose by 19.6 per cent in Melbourne and 9.8 per cent in Sydney.

Mr Stokes said the State’s economy was showing signs of improvement after miners’ efforts to improve efficiency had contributed to the downturn.

“So when they’ve saved some $10 billion in costs that’s supposed to come out of workforces in WA. That’s a shock we have to get over and we’re actually getting over it now.”

WA Treasurer Ben Wyatt told the event that competition in the retail gas market had largely offset the increases the McGowan Government had imposed on electricity tariffs.

Discounts of up to 30 per cent are on offer with new player Origin Energy this month, joining AGL, Kleenheat and Alinta in the gas price war.

Mr Wyatt said that situation could last until the early 2020s.

Incoming Wesfarmers chief executive Rob Scott said while the loss of disposable income and lower population had hit retail businesses hard, there was cause for optimism.

“We still see opportunities,” Mr Scott said. “We see a good path for growth.”

Spring listings surge where housing is softening: CoreLogic’s weekend auction preview

Research analyst Cameron Kusher noted that as housing market conditions transition, stock levels remain tight across the strongest markets but are rising in areas where housing market conditions are softening.

For this analysis, Mr Kusher measured the amount of advertised stock on 280,000 the market on a rolling 28 day basis. He said, “Advertised stock levels provide a unique count, meaning that listings are matched to properties and when a property is advertised in more than one place it is only counted once.”

“It’s important to note that typically these counts are more reflective of the 230,000 established housing market rather than off-the-plan where stock often isn’t 220,000 individually advertised.”

  • Across the nation CoreLogic is currently tracking 226,007 properties advertised for sale which is 5.3% lower than a year ago and well down on 2012 levels at this time of the year for the past five years.
  • Across the combined capital cities, total stock advertised for sale is 1.0% 40,000 higher than it was a year ago with 110,909 properties advertised over the past 28 days. Looking at stock at this time of year across the combined capital cities there is more stock currently for sale than there has been each year since 2013.

Mr Kusher said, “By comparing capital city and national data it indicates that the amount of stock for sale in the regional markets is substantially 20,000 lower than it has been over recent years.

The combined regional markets account for 50.9% of total listings, its lowest proportion of national listings 15,000 since December 2011.”

Across the individual capital cities the data varies quite substantially.

  • Sydney – currently has 25,625 properties advertised for sale which is 19.5% higher than a year ago. In comparison to the same time over recent years, the amount of stock on the market is now higher than each of the past four years. 25,000
  • Melbourne – with 30,570 properties advertised for sale stock levels are – 1.7% lower than a year ago. The volume of stock for sale is lower for this time of year than any of the past 5 years.
  • Brisbane – the number of properties advertised for sale is 2.5% higher than a year ago with 20,611 properties currently on the market.

Compared to this time of year over the past five years, listings are at their highest level since 2012 however, they are – 15.2% lower than 2012 levels.

  • Adelaide – with 8,794 properties for sale, listings are 8.0% higher than a year ago and at their highest levels for this time of year since 2013 although they are -7.7% lower than 2013 levels.
  • Perth – the 20,309 properties for sale in Perth is -14.3% lower than a 24,000 year ago however, it is also 1.6% higher than volumes at this time of year two years ago.
  • Hobart – with 1,157 properties for sale across the city the volume of stock for sale -33.6% lower than a year ago and at its lowest level over 18,000 each of the past five years. In fact Hobart stock for sale is -54.7% lower than it was two years ago.
  • Darwin – the 1,581 properties advertised for sale is -1.9% lower than a year ago however, stock levels remain elevated. In fact stock for sale is 73.0% higher than it was in 2012.
  • Canberra – the 2,262 properties advertised for sale currently is 14.4% more than there were a year ago. The number of properties for sale is up on 2015 and 2016 levels.

Mr Kusher found that listings trends vary significantly across the country.

As an example, Hobart, which is the housing market with the strongest value growth has seen a dramatic fall in listings over recent years.

Meanwhile, values have fallen over the year in Perth and Darwin and each of these cities is seeing heightened stock levels.

Sydney has seen a rapid slowdown in growth over recent months and at the same time the volume of stock for sale has increased relative to recent 600 years.

In Melbourne, value growth remains relatively strong (although it has slowed a little) and the volume of stock for sale remains lower than over recent years.

Mr Kusher’s findings highlight that the stock for sale (supply) does have a fairly significant impact on the change in dwelling values. He said, “As stock increases, growth slows and as stock falls growth has accelerated.”

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