What is the value of a car space in Sydney?

Peak hour - Sydney Harbour Bridge

Peak hour traffic in Sydney

As the population of Australian capital cities grow in record numbers due to recent increases in migrant intake and the mini baby boom, residential areas around CBDs have become even more popular among city dwellers due our appetite to live close to work, public amenities and beaches surrounding our beautiful seascapes, harbour and waterways.

Australian property prices have increase by 20% to the year ending March 2010 as a result of many factors among which were record low interest rates, impending end of the First Home Owner’s Grant, low level of supply, strong consumer sentiment due to Australia’s strong economic performance during the GFC and generous government stimulus under the Rudd government.

Sydney city parking ranger

Sydney city parking ranger

What is becoming even more significant is the value of a car spaces in inner city areas, be it public on-street parking or private off-street parking. New residential and commercial developments within a 5km radius of Australian capital cities are becoming increasingly scarce due to ever growing demand and as a result, it will be imperative for residential properties to offer the invaluable convenience of private off-street parking facilities. As it is, Sydney is one of the most expensive cities in the world to park your car in public places when compared to big metropolis like London, Tokyo and New York. Sydney City Council and many Local Government Areas are raising millions of dollars in revenue each year through parking meters, fines and other offences as a result of increasing demand for public parking. Parking in most of Sydney’s CBD areas and city attractions such as the The Rocks, Botanic Gardens, Darling Harbour, King Street Wharf and Woolloomooloo  will incur meter charges even during weekends as people converge into the city during these times. An average parking fine in Sydney can range from $66 up to $190 for illegal parking on public disabled parking bays.

In addition, Sydney’s International Airport also has the unpopular reputation of being the most expensive airport to park your car and worst service among major Australian capital cities. Sydney International “T1” terminal parking fees is $7 for the first half hour or part thereof.

Global Parking Rates

Source: Colliers Global CBD Car Parking Survey

Indeed, many new residential apartment developments sprouting out around Sydney do not provide car spaces for the smaller studio and 1 bedroom apartments. Sydney suburbs which enjoy strong demand for apartments without parking facilities include Potts Point, King Cross, Darlinghurst and Surry Hills to name a few. These suburbs are right in the heart of Sydney and are close to cafes, restaurants, shopping, public transport, entertainment and commercial precincts.

Apartments close to the CBD without a car space will only appeal to a more narrow tenant market – people who are more transient within cities who have decided to do away with a car and prefer public transport instead. These people may include the expat executives market where they may be looking for a rental property close to the city or workplace for short periods of up to six months.

In the long term, this may mean higher tenant turnover and  a less favourable investment proposition when compared to properties with private parking facilities. From an investment point of view, it certainly pays to have secured private parking facilities for properties within a 5km radius of capital cities as the demand for car spaces can only become even more intense and scarce in the future.

There are also numerous companies who seek out residential and commercial car spaces either for lease of for sale. Such companies include findacarpark.com.au, carparking.info and rentmycarpark.com.au where parkers can search residential or commercial car spaces by location throughout Australia and investors can search for relatively  cheap positive cashflow investments in car spaces. One may find the price of a car space for sale around Sydney CBD to be anything from $45,000 up to $100,000. Generally, there are no Council rates involved except for quarterly strata levies. Return on investment can vary between 5% up to 12% per annum.

A recent survey by Susan Wellings of the Sydney Morning Herald shows how much value a car space can potentially add to the value of a property:

Suburb Added value
Bondi $100,000 – $200,000
Paddington $100,000 – $200,000
Mosman $100,000 – $500,000
Surry Hills $100,000 – $250,000
Annandale $50,000 – $100,000
Balmain $50,000 – $100,000

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Top pros and cons of selling your investment property

I have met many property investors who steadfastly hold the principle that one should always buy and never sell investment property. A discussion of whether to sell can be fairly controversial and depends on many factors which can differ from one investor to another. Before getting into the pros and cons of selling, it may be useful to look at how an investment property might perform over time.

image

Property Life Cycle

Over time, investment properties experience different phases where, when new, they tend to generate higher returns. As capital growth generally increases faster than rent, the property will go through a cycle of growth and maturity where returns will start to slow and eventually decline. Newer properties in the market with modern facilities will generally command higher returns than properties where fixtures and fittings are older and dated.

Just as there  is a right time to buy, there is also a right time to sell. And I have learnt from Steve McKnight that your chances of achieving financial independence are almost non-existent if you dismiss selling as a possible option over your investment lifetime. The right time to sell is when you can earn a higher return from your investment elsewhere.

Cons of selling

Investors who believe that selling is a ‘bad’ idea will invariably have the following arguments against selling:

  • Paying Capital Gains Tax, selling costs etc – Selling an investment property requires effort, let alone time and money. Costs involved may include hefty CGT, agent’s fees, legal costs let alone stamp duty and other acquisition costs during purchase. The emotional factor may also loom large when sentiments are attached to the property and when it has made decent returns over many years.
  • Refinance the capital gains – This is a convenient option to access equity without having to incur CGT and other costs.
  • Forgo future capital growth – Selling will involve “missing out” on any future capital gains the property may yield.
  • Cost of buying back in – Buying another property upon selling may seem futile as there will be additional costs such as stamp duty, legal fees notwithstanding the costs of selling. There can also be no guarantee the next investment property will perform better than the existing one.

Pros of selling

There are obvious drawbacks about selling as discussed above. However, there are also key advantages:

  • Crystallising your profits – A capital gain is only worth its paper value unless it is realised and converted into cash through a sale. Many investors, especially those in the US would have seen their capital gains vanished overnight when property values nose-dived in the wake of the global financial crisis.
  • Investment focus as a key criteria – The aim of sustainable property investments should be to constantly achieve the highest possible returns rather than to save tax.
  • Refinancing and its setbacks – Refinancing is a popular way to access the equity or capital gains achieved. However, the most important thing is to ensure the refinanced funds will be utilised in such a way as to achieve a higher return than the additional interest charges from the refinance.

a) Finding a suitable lender – Refinancing involves borrowing from the same lender and if that is not possible, refinancing the entire loan can be costly.

b) Increased credit risk – A larger loan exposure means higher risk from adverse movements in interest rates and exchange rates for investors who own off-shore investment properties.

c) Valuation and LVR – Refinancing is subject to the bank’s valuation and limits on amounts that can be borrowed.

  • Paying down debt – The proceeds from the sale can be used to reduce debt and interest charges and hence, improve cashflow or be used as a equity for a property with better returns. It can also demonstrate to your financiers that you are in control understand how and when to realise a gain on your investment.
  • Tax deferral – By deciding not to sell, you are deferring tax liability to a later date when and if you do eventually decide to sell. You will need to take into account inflation although this may (or may not) be compensated by higher capital growth.
  • Fund your path towards financial independence – you need to be able to fund financial independence from positive cash flow properties. By not selling and refinancing equity to take on more debt, your interest bill will be increased and it should be remembered that in funds used for lifestyle expenses is not tax deductible.

Outlook for property rental rates in 2010

National rental rates and yield

The RBA left interest rates on hold yesterday in view of the instability in Europe and tell-tale signs that its 6 rate hikes of 25 basis points each since October 2009 is beginning to take its effect on the Australian economy.

These tell-tale signs include, among other things, a weakened consumer sentiment, cooling auction clearance rates, decreasing rate of new home loans and lower new dwelling starts.

However, property investors and landlords who have been slugged with the additional 1.5% rise in interest rates since last year will be feeling the heat and whilst rents rose by just under 2% in 2009, Australian Property Monitors chief economist Matthew Bell expects rents in 2010 to grow strongly from the back of the weak growth in 2009.

“Over the last five years, rental growth for most of the major capitals averaged 6% – 7% for houses and 7% – 10% for units,” he says.

“As the economy continues to improve as the year progresses, rents are expected to get back to and exceed those longer term levels of annual growth.”

Many property investors and landlords deferred increasing rents during the global financial crisis in 2009 due to the low interest rates, uncertain and volatile economic conditions and fear of unemployment. However, conditions have improved since and there is greater job security in 2010 and the recovering economy, although patchy at times, offer some renewed hope for optimism for tenants to deal with the effects of higher rents.

In general, tenants realise that 2009 was a good rental year where rental rates were modest and landlords were tentative in exerting a heavy-handed approach.

Bell expects prices to cool and plateau rather than fall towards the latter part of 2010.

According to APM figures, the strongest growth in rents were recorded for houses in Darwin which rose by 10% in the quarter to $550, while rents have increased by 14.6% in the 12 months to March 2010.

Median weekly asking rent – Houses

Mar-10

Dec-10

Mar-09

Q0Q % chg

Y0Y % xhg

Darwin

550

500

480

10.0%

14.6%

Adelaide

330

320

310

3.1%

6.5%

Perth

370

360

360

2.8%

2.8%

Melbourne

370

360

365

2.8%

1.4%

Brisbane

365

360

350

1.4%

4.3%

Canberra

440

440

420

0.0%

0.0%

Sydney

460

460

450

0.0%

2.2%

Hobart

300

300

300

0.0%

0.0%

Source: Australian Property Monitors

Median weekly asking rent – Units

Mar-10

Dec-10

Mar-09

Q0Q % chg

Y0Y % xhg

Perth

358

350

355

2.1%

0.7%

Melbourne

340

335

330

1.5%

3.0%

Brisbane

345

340

340

1.5%

1.5%

Canberra

403

400

400

0.6%

0.6%

Adelaide

260

260

250

0.0%

4.0%

Sydney

420

420

420

0.0%

0.0%

Darwin

480

400

400

0.6%

0.6%

Hobart

243

245

220

-1.0%

10.2%

Source: Australian Property Monitors

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Will the RBA raise interest rates in June 2010?

Australian Interest rates

RBA cash rate trend

Source: Reserve Bank of Australia

The RBA has increased the cash rate from a 49-year low of 3% in October 2009 to the current 4.5%, a strategy of six 25 basis point increases over the last 8 months to bring interest rates to “more normal” levels. During this time, there were an estimated 270,000 first home buyers who entered the property market, taking advantage of the lower interest rates and the First Home Buyers Grant which have since been wound back by the government. As a result, property prices across Australia rocketed up by 20% in the year to March 2010, fuelled by the record low interest rates, a strong Australian economy with solid export figures fuelled predominantly by a growing Chinese economy where GDP grew by 8.7% in 2009. This is a strong case for the RBA to try and keep housing prices in check. However, the RBA’s over-riding priority is to keep Australia’s underlying inflation rate in check, that is to have the CPI fluctuating between 2 – 3% in the long run. Moreover, there are now signs the property market is beginning to feel the effects of the 6 rate rises:

  • Auction rates have cooled down, particularly in hot markets in Melbourne and Sydney. Australian Property Monitors indicate Melbourne’s clearance rates were down to 73% last weekend from 82% in the same weekend last year and from 62% to 60% for Sydney.
  • New home loans have been decreasing over the last 6 months to March 2010 to hit a 9-year low.
  • A drastic decrease in first home buyers who have put off buying their first home due to a combination of near unaffordable prices in popular and high growth suburbs across major capital cities, rising interest rates, job security and the end of the FHOG.
  • Home buyer sentiment is now weaker compared to 2009.
  • The Melbourne property market is bracing for a record 1,210 auction listings to enter the market over the next 2 weeks where REIV CEO Enzo Raimondo says is mainly due to the sharp increase in interest rates which are reducing pressure on house prices.

However, I believe the current housing shortage in Australia and strong population growth coupled with strong migration figures will continue to support house prices at current levels although there have been some recent indication the stock of supply is increasing albeit very slowly. Unless there is a clear solution to address the supply shortage and barring any major downturn in the world economy such as the current European debt crisis, there will still be pressure on house prices in the near future. Personally, I am tipping a 95% chance that interest rates will remain on hold at its current level of 4.5% and a mere 5% chance the RBA may actually reduce rates by 25 basis points to 4.25%.

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Statement by Glenn Stevens, Governor, Reserve Bank of Australia ~ 1 June 2010

Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.


European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.


The effects of these various factors on the world economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace in 2010. Conditions in Europe overall have been relatively weak, and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, growth has continued to be quite strong and may need to moderate in the year ahead.


In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.


Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term.


Source: First Chartered Capital

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