Review, research, react
By DAS NAIR
In the first part of this report we revealed six indicators that give us an idea of where property prices are heading in Sydney (Hot, hotter, insanely hot! – The Indian Telegraph, August 2015 issue)
In this second part, we share our experience in the past 24 months in the Sydney market. Based on existing research, growth evaluation and rental yield potential, incorporated with macroeconomic and microeconomic fundamentals to support the investment decision we believe that there still are good deals in the market.
Some of our past projects demonstrate the efficacy of our research and fundamentals which translate into the advice we give.
Punchbowl : This development at the corner of The Broadway and The Boulevard, exchanged between April-June 2013 and settlement in Nov 2014 made in excess of 25% capital growth, rental yield of 5.8% or higher and have put the investor in a strong cash flow position
Lewisham: This development in Old Canterbury Rd, exchanged between May-Sept 2013 and settlement in May 2015 made in excess of 28% capital growth, rental yield of 5.5% or higher.
Campbelltown: This development on the main street into town, exchanged between Sep-Nov 2014 and settlement in July 2015 made in excess of 23% capital growth, rental yield
of 5.9% or higher.
Kogarah: This development in Princess Highway, exchanged between Sept-Dec 2013 and settlement in Aug 2015 made in excess of 13% capital growth, rental yield of 5.2% or higher.
How is the rate/speed of sale in the current market?
My opinion is clear that the rate of sales has slowed in the past 6 months. Where a simple small tower of 20-30 units usually gets sold out in 1-2 months, a comparable tower today is taking 4-6 months. Buyers are getting cautious, off the plan pricing is still at a premium to current pricing of finished or completed products. This is based on builders/developers making a bold assumptions that prices will continue to grow. What if it doesn’t?
Every investor should note that while this is not usually an issue with an existing property, buying off the plan carries valuation risk at the time of completion. Buyers need to understand how they could mitigate this risk, or how this risk could impact their finances at settlement if the valuation does not stack up to purchase price. Getting pre-approval on the amount you can borrow has nothing to do with the final valuation of the product. The current market is based on the assumption that markets will continue to grow and if that does not happen or slows down eg. the property that you bought for $800K may be valued significantly lower at the time of settlement or completion. You have to ensure you have the funds to top up the gap or risk defaulting on the deal. This opens a can of worms you may not be able to handle. Know your risks carefully and evaluate all options to mitigate and minimise the risk before going into a deal in the first place.
Are banks getting cautious with lending?
While we do not deal in mortgages, in the past 6 months, we are seeing clients with good levels of equity not getting the desired lending, often banks proposing a lower loan to equity % despite the valuation exceeding the purchase price. There is clearly more scrutiny with SMSF purchases that we can see and overall fair to say that lenders are beginning to take a more cautious approach in evaluating the loan. There is more noise in the news in the past 2-3 weeks and buyers must take note.
What could happen to negative gearing?
Both, politicians and the RBA have views on negative gearing despite the current government clearly refusing to make any changes to negative gearing. The recent intervention of RBA will no doubt put pressure on policymakers to rethink this topic. The bottom line is that no one really knows how any future intervention would look like.
I also recall that each time there is a property boom, negative gearing always is a topic for discussion. We only need to look at national news archives in the past 20-30 years to realise that a lot has been said and proposed about the positives and negatives of investor based gearing; however nothing has changed.
If we are to look at negative gearing carefully, lets assume you are achieving an average $10K p.a. net loss and at a 40% marginal tax rate, you will get $4K refund back from the tax man. In a scheme of things, would you stop your investing strategies because you cannot get this tax refund? Definitely a point for debate over coffee!
If for argument sake the property is valued at $400K and you can get an annual capital growth of 4%, net asset gain before inflation is $16K. You are still ahead in your wealth creation
strategy. I have always argued that property investment is a long term game. If you can get between 4-8% annual capital growth per annum over a 10-20 year period, you would have done well, with or without negative gearing.
What is a s66W Certificate?
The practice of entering into a contract to buy a property is called an exchange. Assuming when the purchaser and vendor have agreed to the various terms and conditions of the contract and the price, they exchange contracts and the agreement becomes binding upon the two parties.
In an exciting market like Sydney, buyers have often lost out due to time taken to review the contract, time taken to get the deposit bond or bank guarantee ready, only to be told that despite a contract being sent out to their solicitor, the property has exchanged as another buyer has exchanged with a s66W waiver. So what is a s66W waiver? It simply means you are waiving your right to the 5 day cooling off period and the contract is exchanged immediately. How would you decide if this is a good thing to do?
There is not a clear right and wrong answer if a purchaser would provide a s66W to the vendor however some of the positives and negatives are as follows:
If you rescind the contract, the penalty as per the contract will apply, generally 10% of purchase price compared to the 0.25% penalty during the cooling off period.
In an existing property, if you find anything wrong with the property, e.g. structural defects, termite infestation, etc., you really cannot back out or the penalties as per contract applies.
Where there are various buyers, your offer to waive the cooling off period will be attractive to the seller/vendor.
You have this as an additional bargaining tool to secure the property and beat the competition. In my opinion, it is always best to have your solicitor review the contract and make a decision after taking your solicitor’s advice. If you want to offer the waiver or agree to the waiver if the seller/vendor has requested for it, it is preferable to be conservative and ensure the pest and building inspections are done and the contract is reviewed by your solicitor before you make a decision.
Our personal experience has been that in the current hot market, there are many buyers who are providing the s66 waiver and signing the contract and paying the 10% deposit in fear of losing out. This is an unfortunate outcome of a frenzied market like Sydney. What you really got to ask yourself is this, would I make a commitment to purchase a $650K property, taking the risk that I have not yet fully evaluated the property and contract because I do not want to miss out?