Property Newsletter October 2012

Why I’m not Worried About the End of the Mining Boom

The more I investigate the bigger picture of what is happening in Australia’s resources industry and the impact it will have on the economy (and property markets), the more I am convinced the naysayers will ultimately be proven wrong.

I don’t have to tell you that there has been a fair amount of talk recently about the supposed end of the resources boom, which has some property investors worried.

While I am not involved directly in the resources industry, I do invest a lot of time into researching issues that could potentially affect our clients and this always involves looking beyond the mainstream headlines.

Most of the negativity in the media has focused on the recent cancelling or postponing of a number of projects by major mining companies, falling commodity prices and waning demand from China. But the more I investigate the bigger picture of what is happening in Australia’s resources industry and the impact it will have on the economy (and property markets), the more I am convinced the naysayers will ultimately be proven wrong. Here are some of my reasons:

Plenty of investment ahead
BHP Billiton’s decision to shelve $US50 billion ($A47.89 billion) of major projects, including an expansion of its massive Olympic Dam uranium mine in South Australia, made for some big headlines. But such announcements need to be put into perspective.

Firstly, they relate to planned projects not started or completed ones. Secondly, recent postponements or cancellations make up a very small component of the total planned investment pipeline. Data suggest the value of all projects deleted over the past 13 months (including Olympic Dam and Outer Harbour) total $51bn or 11% of all advanced and less advanced projects.

In WA alone, the investment pipeline is extremely healthy. According to the WA Department of Mines and Petroleum, more than $180bn of projects are committed or under consideration in the state. This includes the $43bn Gorgon LNG project, the $29bn Wheatstone LNG project, Hancock Prospecting’s $9.5bn Roy Hill iron ore mine and Citic Pacific’s $8bn Sino Iron project.

The consensus seems to be that based on the active projects yet to be completed, iron ore-related capital spending is likely to peak this financial year, and coal and liquid natural gas related investment is likely to peak in 2014-15. But even if the peak is a few years away, many experts expect investment to remain high beyond that time-frame.

The Chinese juggernaut will continue

China’s economic growth over the past 10 years has been nothing short of staggering. And while the growth rate has recently decelerated, it still remains at an impressive level. Based on some people’s reactions you would think that China’s economy is contracting, which it certainly isn’t.

The rise in demand for our resources from China over recent years is not a short term phenomenon; it reflects a structural change in the world economy driven by China’s long term goal of lifting the living standards of a very large population.

It is premature to suggest that demand for our resources from China and increasingly India is going to cease anytime soon. China and India remain, on the whole, very poor countries with a per capita income of just $US8,400 and $US3,700 respectively, so there is clearly a lot of catch-up potential ahead. The amount of iron ore, coal and energy needed to power the industrialisation machines of these mega-nations is truly immense.

High costs will not send work overseas
Some commentators have claimed that labour costs are too high in Australia and mining companies will outsource work overseas. While our labour costs are high by international standards, recent decisions by some companies to outsource particular work to overseas companies, in my opinion, is more likely to do with the shortage of labour. In WA alone, there were recently more than 5000 job vacancies in the sector and interestingly almost half of the jobs were based in Perth.

Australia isn’t reliant on iron ore alone

With all the media coverage about the iron ore mines, it’s easy to forget that Australia mines and produces more than just iron ore. Significantly, LNG is becoming an increasingly important commodity. According to some reports, of the resource projects currently under development in Australia, around two-thirds are represented by very major LNG projects.

Has the real boom even happened yet?
Whether or not we’re nearing peak levels of mining investment, the fact remains that the important export boom has much further to run. Waning mining investment will definitely reduce future GDP growth but this will be more than offset by the ramp-up in output and exports. Once all the current major projects are completed and fully operational, I think we’ll start a whole new phase of prosperity that will last decades not years.

There will always be volatility in the short term but I am very optimistic about the long term prospects of our resources industry and the economy it will help support.

Rents Continue to Rise in Perth
Property investors will be happy to hear that the extraordinary growth in Perth rental prices over the past year seems to be continuing.

Data from the Real Estate Institute of Western Australia (REIWA) released recently show median rents for house rose by $10 a week between May and August and $20 a week for units, apartments and villas.

REIWA president David Airey said the vacancy rate has also tightened in the three months to August, to just 1.8 per cent across the city.

Mr. Airey believes strong population growth, first home buyer activity and weak investor interest have all contributed to put immense pressure on the rental market.

“Our state has the highest rate of population growth in the country and this is placing increasing demand on the rental system,” he said.

“The number of properties listed for rent has fallen by 15 per cent from almost 2700 properties in early July to 2300 by the end of August.

“In addition to this, first home buyer activity is strong and this means that a lot of the stock for sale at the more affordable end of the price range is being snapped up by young buyers rather than investors, who remain scarce in the current market.

“Investors are not replenishing the housing system with much needed rental stock as dwellings are being removed from the market by owner-occupiers.”

“I can’t see any signs on the horizon that will reduce the demand for rentals,” he added.

“It appears Perth is a popular place to live, we’ve got an ongoing shortage of rental supply, so it’s likely that rents at the very least will remain stable but are likely to have increases.”

Suburb Snapshot: Victoria Park
Plans for development over the coming years by the local and state government are likely to enhance the potential of the area and see a solid rebound in capital growth.

Victoria Park is an inner-city suburb developed in the late 1800’s and situated approximately 3km south east of the Perth CBD. It fronts the Swan River and consists mainly of residential properties but also some commercial.

Being just minutes from the Perth CBD and with easy access to Canning Highway, Great Eastern Highway and Albany Highway, Victoria Park is ideally positioned. It makes transportation to and from key destinations such as the Perth CBD, South Perth, Fremantle and the airport a breeze.

It is also well placed to take advantage of many local and nearby amenities including, but not limited to, a train station; parks; the Swan River; four schools; numerous cafes, restaurants and retail shops (on Albany Highway); Centro Victoria Park shopping centre; and Crown Resort and Casino.

Victoria Park is an old suburb and as such it is home to a variety of housing types that have emerged over the years including turn-of-the-century cottages, modern houses, small groups of villas and townhouses, as well as apartment complexes. Some parts of the suburb even offer views of the city.

Prices start from around $250,000 for a 1-bed apartment, the mid $400’s for a villa, and houses from $600,000. Rents typically range from $250 – $750 per week on average. There is a good level of turnover of properties in the area and the average days on market is currently around 88 days, similar to the Perth average (Source: Australian Property Monitors, to May 2012).

For investors, Victoria Park offers an opportunity for those wanting to get close to Perth city at an affordable price. It also has parcels of land available for development, old character homes waiting to be renovated and is a highly desirable area for people to rent, including students, because of its proximity to Curtin University in Bentley.

Although the area has not performed as strongly in recent times, plans for development over the coming years by the local and state government are likely to enhance the potential of the area and see a solid rebound in capital growth. Such projects to keep an eye on include the light rail network, the new Perth Stadium earmarked for construction on the Burswood Peninsula, and urban infill developments as part of the state government’s ‘Directions 2031’ strategic plan.

The unique combination of Victoria Park’s proximity to the city, lifestyle amenities and suburban feel should underpin and protect the long-term investment prospects of the suburb.

Growth   rate (1 year average) -8.9%
Growth   rate (5 year average) 0.7%
Growth   rate (10 year average) 9.1%
Population 7,175
Median   age of residents 33
Median   weekly household income $997
Percentage   of rentals 52%

Source:, September 2012

Property Management: Fixing Problems Before they Happen
Unexpected repairs can really put a dent in the bank balance. But there is a way to eliminate, or at least lessen, the blow of these costs by thinking ahead.

The phone rings and it’s your property manager with the news you’ve been dreading: something needs fixing at your property and it’s going to cost serious money.

This is a situation most property investors would be familiar with. Owning an investment property can bring enormous rewards, but like any other business, it also has its associated costs and some of these can be unexpected. The nature of these unexpected repairs or replacement costs can really put a dent in the bank balance.

But there is a way to eliminate, or at least lessen, the blow of unexpected costs through a program of preventative maintenance. It’s not a new idea but many investors have yet to fully appreciate the importance of investing in the ongoing maintenance of their property. A small investment in the right areas can go a long way to avoiding massive problems later on.

Some owners would rather just wait and see, hoping they’ll be lucky and not have to spend a cent on their property. But inevitably something happens to shatter that dream. And the feeling gets worse when they discover the major unexpected costs could have easily been avoided with some minor maintenance.

As a property manager, I can’t stress enough the importance of developing a maintenance plan and budgeting for it. Areas of potential concern should be identified as early as possible and a program of maintenance should be put in place. Maintenance costs should be considered even before agreeing to purchase a property because if you can’t afford the maintenance you can’t afford the property.

The amount of preventative maintenance that you should do varies from property to property, but I am yet to see a property that wouldn’t benefit from basic maintenance, such as the clearing of gutters before winter.

Have you ever heard a selling agent use the phrase “set and forget” to describe a property that is for sale? While you might be able to “forget” about some properties for a short while, this never lasts long.

Despite the best efforts of a diligent property manager, properties inevitably change over time through natural wear and tear. Even a brand new property will need some care after 5 years, whether the carpets need replacing or the walls need painting.

Investors can often be shocked to visit a property after 5 or 10 years to find their memory of it is no longer accurate. Photos can certainly help inform investors but they never truly give the full impression. This is why we recommend our owners attend at least one inspection per year, to get an up-to-date picture of their property.

Finance: The Lure of the Fixed Rate Returns
Lenders are once again trying to lure borrowers to their fixed-rate loans by slashing rates – sometimes up to half a per cent lower than variable loans. And some borrowers are definitely taking notice of the low advertised rates.

Is it a good time to choose a fixed-rate loan? While every borrower is different and will have unique circumstances that determine the suitability of a fixed-rate loan, it pays to have a general understanding of what you get (and what you don’t get) when you choose one of these products.

It’s worth noting that although exit fees have now been abolished, borrowers will still face break costs should they exit a fixed-term loan to get a lower interest rate. These costs are designed to cover the lender for the money they are foregoing and could add up to tens of thousands of dollars depending on the situation.

Other drawbacks of fixed-rate loans worth considering are that they often have restrictions on making extra repayments and usually have no features such as offset accounts or redraw. When considering a fixed-rate loan you should also be clear on what happens after the fixed rate period expires, as some loans may revert to an uncompetitive variable rate.

If you are thinking about choosing a fixed-rate loan, you should talk at lengths with your broker about the pros and cons in relation to your own circumstance and perhaps consider fixing a portion of the loan or fixing for less than 3 years to minimise the risk. While we think the low rates make consideration of fixing your rates worth giving serious thought to, there’s more to consider than just the rate.

Property Acquisitions: Doing the Research is Only Part of the Challenge
One of the obstacles to good research is the fact that it requires considerable time and effort. But another challenge for investors is making sense of all the detailed information that is uncovered.

We all know research is important when buying an investment property. It can help identify the areas with the best drivers for growth and shed light on which parts of a suburb offer the best investment options. Research can also play a part in helping investors compare one property with another.

One of the obstacles to good research is the fact that it requires considerable time and effort. But another, often overlooked challenge for investors is making sense of all the detailed information that is uncovered. Ironically, the more research that is done, the more difficult it can be to know which pieces of information you should base your decision on. This is where an expert buyer’s agent can help.

We recently had an investor approach us looking for advice and assistance with regard to locating and purchasing an investment property with high-growth potential. After an extensive search we located 3 viable options and subsequently presented them to the investor with corresponding market evidence and detailed analysis weighing up the advantages and disadvantages of each option. The information was thorough to say the least.

The problem was that the investor could not decide between the 3 excellent options, which were all located in one suburb. However, we were able to offer some useful suggestions to help the investor to make a decision.

Firstly, we suggested that we try to determine which of the 3 sellers was more motivated to sell. This could potentially save the investor thousands of dollars and sway the decision towards a particular property.

Secondly, we suggested the investor focus on the micro-locations of each of the properties, as this can make an enormous difference to the ultimate long term performance of the property.

These suggestions ultimately helped the investor to make a decision to choose one property, which had a location slightly better than the others. This property was not only in a popular school zone but it was also near the proposed light rail route, which could help boost the property’s appeal over time. The investor then confidently proceeded with purchasing the property.

Finding a property that outperforms the rest of the market requires a lot of leg work, but you also need to be able to interpret the information you find to make an informed decision. This is why more and more investors are relying on our established expertise in this area.

What is MySuper?
MySuper is a new low cost and simple superannuation product that will potentially replace many existing default fundswhich has been developed as part of the Super Reforms. MySuper is not a new or separate superannuation fund in and of itself – instead it is a framework and a set of requirements for low-fee, low-frills superannuation products. Retail and Corporate superannuation funds can develop a superannuation “product” to meet the MySuper requirements.

How will it affect me?
If you are going to be moving your existing superannuation fund/s over to a MySuper qualified product you need to be aware of a few important issues such as:

MySuper is an Opt-Out system. This means that your superannuation, and the insurance it contains, will change across to a MySuper account unless you actively choose otherwise.

What does it have to do with my Wealth Protection insurance?
Many Australians have some insurance and don’t even know it – it’s held “out of sight” in their superannuation fund. If your funds in superannuation are moved to a My Super account, the insurance, however, will not be moved automatically– instead, the policy will be closed and a new policy will be started in the MySuper account.

You might be thinking, “Can’t I just reapply for the insurance if I want it?” Risk insurance is very different to insuring your house or your car – simply because your personal circumstances and your health change so much over time. If you lose insurance you took out at 25, and reapply now that you’re over 40, you’re likely to face more obstacles and costs to getting insurance this time around. Health conditions like diabetes, high cholesterol, high blood pressure or even being overweight can either disqualify you from obtaining insurance or can drastically increase your premiums. Once an insurance company has issued insurance they can’t cancel it while you (or your super fund) continue to pay the premium (only you, the customer can, however, Life companies can cancel your cover only once the term has expired).So, if you have develop a health condition that an insurer typically won’t cover, exclude certain events or charge you more to cover you may be better off maintaining any existing cover you may already hold via your current Super.

So, what do I do?
A review of your current insurances (inside and outside of superannuation) will help you assess which policies you’d like to keep in place, and which you’d like to change. For those policies held in an old superannuation fund, you can in some cases move them to your chosen superannuation fund – so that you don’t lose the benefits when you consolidate your funds and close down the redundant superannuation accounts.

If you do nothing, you could be losing benefits you didn’t even know you had! So it’s important to take an active role in protecting your assets for yourself and for your family.

Wealth Protection is a complex area, with detailed policies and loopholes which can trip you up if you’re not careful. It’s best to seek the advice of an insurance specialist to make sure that the cover you receive is what you intended and expected. After all, if you are in the unfortunate position of making a claim in the future, you don’t want to add to an already stressful situation by finding out that your insurance doesn’t pay out like you thought it would.

Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs


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