2011 – Investment strategies for a year of consolidation

Investment strategies for 2011

Melbourne - stellar market performer of 2010

2010 – The Year of Robust Growth

This time last year, I was finalising my research and due diligence which eventually lead to the purchase of two properties in Melbourne in December 2009. I vividly remember market sentiments were mixed – there were bargains in good suburbs and at the same time interest rates have began to move from its 49-year low of 3% in September 2009. Investors were cautious because the outlook in employment was still uncertain and the media was sending out conflicting messages of both recovery and gloom. Fast forward a year and in hindsight, the performance of most property markets across Australia, especially Sydney and Melbourne from the beginning of 2010 to May 2010 was the strongest in many years. Auction clearance rates were in the 80% in major markets although it should be remembered auctions account for a mere 10% of all property sales in Australia.

Prices continued to firm in the second half of the year although the seven interest rate rises since October 2009 have obviously taken effect in slowing down the market and if the auction clearance rates are any indication, it is pointing towards a slower 2011.

As I write this review a year later, I don’t feel the same “pulse” as I did during the Christmas season a year ago because prices and interest rates have both surged. In short, the investment climate has changed significantly during the year and 2011 calls for increased caution.

Key Observations

Some key observations through 2010 include the following:

  • Strong performance of some city fringes suburbs over inner city locations

KPMG demographer Bernard Salt has found the fringe suburbs of Wyndham Vale, Werribee and Melton precincts in western Melbourne to be the fastest growing area in Australia with 18,000 new residents over the year. At the same time, inner city hotspots such as Middle Park and South Yarra experienced modest growth at best. The traditional preference of staying close to CBDs and inner city areas are proving increasingly more difficult and many first home buyers are coming to more realistic terms about starting out in suburbs a little further away just to get a foot into the property market. I foresee this to be an increasing trend as fringe city suburbs and so-called second-tier areas with good transport links and public amenities herald and perpetuate “sub-markets” – that is, cluster of suburbs or areas within major capital cities which may have its own “pulse” and demand drivers which may move contrary to general market trends.

  • Apartment growth rates outperforming landed property

Traditionally, many property investors have the mindset that landed property with freehold titles have much higher growth rates than apartments and strata-titled properties. The CEO of Residex John Edwards had correctly predicted the growth rate of apartments will increase more substantially and 2010 had seen many suburbs with predominantly median density housing recording very strong growth rates over those with landed properties. In general, apartment growth rates are on par with landed property in many major capital cities with changes in demographics such as smaller households, single occupants and affordability being the key factors influencing this change.

  • Melbourne now most expensive city in Australia

By far, Melbourne has been the stellar property market in Australia over the 2009 and 2010 period where strong surge in property values have seen some areas such as Sunshine grow by as much as 50% over the year. Couple with slightly lower wages in general, analysts believe that Melbourne has now overtaken Sydney to be the most expensive capital city in Australia to buy a home. Melbourne has also seen very strong net immigration where some 1,700 new residents call her home each week. Melbourne has a relatively strong State government which is continuing to boost its status as an international city with a relatively high standard of living.

What will 2011 hold for property investors?

2011 will be a year of consolidation where previous strong capital gains will be countered by slower growth rates due to a rising interest rate regime. Most industry analysts are anticipating at least 2 more interest rate rises. For this reason, I foresee 2011 to be generally a buyer’s year where there will be an increased level of stock in most markets across Australia. Conservatively, I believe investors should budget for a full 100 basis points increase in the current cash rate of 4.75% to 5.75%.

In recent times, the media in the form of newspapers, property reports from industry analysts, experts and finance commentators among others have played an increasingly influential role in investor sentiment and confidence. There are many mixed messages and this seem to add more confusion than to actually clarify issues and give clear indication of where our property markets are heading. There are approximately 2,650 suburbs which investors can buy real estate in Australia. Each state within Australia has its own property cycle and within each state, cluster of suburbs and different locations are experiencing increasingly different trends and growth rates as our property markets become more sophisticated due to increasingly sophisticated demographics and factors which influence its dynamics. Therefore, although 2011 is generally tipped to be a buyer’s year, it should be acknowledged that our property markets are becoming increasingly fragmented as a result of the above. There will be areas where property prices will be flat or falling and at the same time, there will also be suburbs and / or types of properties that will be bucking the trend. In this regard, investors should do their homework and conduct due diligence in a very systematic and consistent manner in order to fully understand the areas or suburbs they wish to invest in. Generally, I would advise investors to take media commentary with “a pinch of salt” and do their own research.

Investment strategies 2011

Personally, I would advocate the following simple strategies for 2011:

1. Reduce debt and value add

As interest rates rise, it will be prudent, if possible, to try and reduce borrowings so as to reduce exposure in the event there is a down turn in the property markets. Although capital growth is expected to slow, rental rates for well-located properties are expected to further increase due to interest rate pressures. Sprucing up your investment properties will allow you to command better rental returns and coupled with reduced debt levels, this strategy will negate or minimise the effects of the anticipated higher interest bills for 2011. Renovating your properties, subdividing and developing are great ways to “manufacture” equity and grow your portfolio during flat markets.

2. Do your research and devise a game plan

What is becoming increasingly important is due diligence of an area or suburb over a period of what I believe to be at least 3 – 4 months. The research should necessarily include property inspections, attendance at auctions, observing demographics of residents, buyers, investors, tenants, type of housing which are in demand or over supply, best and worst streets, prices trends, proposed infrastructure, public and private investments in order to gain a good appreciation and understanding of the suburb in detail. Developing strong local networks with real estate agents are also imperative to gain a good source of information before taking the plunge in 2011. Lastly, do have a detailed game plan which include desired outcomes, strategies and action plans, time frame and contingencies.

3. Watch out for emerging suburbs

As interest rates are anticipated to further rise in 2011, housing unaffordability will become an issue again with both investors and first home owners alike. This will fuel demand for “newer” or emerging suburbs which have previously been overlooked and now seem more attractive. In particular, I would target areas where public transport are being planned or upgraded, suburbs or cities with new infrastructure investments and public amenities such as shopping malls, hospitals, schools and mining activity although the last item requires a lot more caution and good due diligence.  Suburbs which are close to areas which have previously experienced strong capital growth may reap spill-over effects in times where growth is slowing down. Second, third and even forth cities within each state in Australia should also be considered seriously especially those which are within close proximity to capital cities.

4. Look beyond our shores

One of the key dynamics of 2010 is the rise and rise of the Australian dollar. The little Aussie battler is widely tipped to trade above parity with the US dollar as the largest global economy continues to struggle and ease monetary policy to stimulate its faltering economy. However, the obvious caution from forex experts is that the dollar is currently trading well above its long term average. Foreign investors which have previously found Australia to be a good investment destination will find Australian real estate to be increasingly more expensive whilst local investors will do well to look beyond our shores to find bargains as a result of the strength of the Aussie dollar. These markets may include those closer to home such as Thailand, Singapore, Malaysia and Indonesia. For the more adventurous in markets further away from home, the US, UK and certain parts of Europe present great opportunities with strong yields due to their struggling economies. Although strong gains are not expected anytime soon, this may be an alternative strategy to hedge your currency in exchange for good yields in the event the Aussie dollar retreats.

Albert Wong is economics editor for
Disclaimer: Views, opinions and comments expressed in this article are general in nature and do not constitute investment, legal or financial advice. Readers are advised to seek their own professional advice as and when required.

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