Is development the right strategy for you?

Many property enthusiasts consider development the “sexy” side of property investment. The glamour of high returns combined with the creation of a physical building may sound appealing, but it’s important you are fully aware of the inherent risks this strategy brings.

The returns developers chase in today’s market is an internal rate of return of approximately 15% + per annum. These returns can yield profit margins in the millions for certain development sites. While these strong returns may sound incredibly appealing, there is a significant added risk. Such risks include:

• Property market fluctuations: the market may not hold true in terms of value for the end product, which may be different to the pre-feasibility price expectations.
• Your builder may encounter unexpected problems during the build which escalate costs creating financial burdens, or the builder themselves may reach financial hardship threatening their capacity to finish the project.
• Setbacks in terms of planning and design can add to costs and stretch timelines.
• Increased supply through completion of similar developments may create a more competitive market, putting downwards pressure on prices.
• Overpaying for the site and under planning for costs creates an unfeasible project.

It is a common misconception that most property developers walk away with a lucrative profit margin. This can certainly be the case with well planned and executed developments, however, without proper research and development analysis things can also go spectacularly wrong. Plenty of unsuspecting investors end up in financial distress in the form of capital losses and cash flow issues.

Ultimately, development is a more volatile strategy which means it is of greater importance that you are in a secure financial position. You need to be able to afford any issues that may arise through cost escalation or timeframe extensions, which increase holding costs. It wouldn’t be the first time an inexperienced developer gets into the unfortunate position of having to sell a very attractive development site, due to their financial inability to hold/develop the asset.

If you are considering whether property development is a suitable option for you, start by carefully considering whether you are in a positon to take on the elevated risks. You must have the capabilities to afford the initial large capital outlay as well as be able to service the loan during the times of peak debt.

Finally, development has very lumpy capital transactions which can cause strain on cash flow. The strategic developer will not place the majority of their money within a single development, as it heightens the risk drastically.

Are you suited to development?

If you are at the start of your wealth building journey, you are probably better suited to purchase growth assets, or development sites with the aim to develop in the future. The capital growth achieved in these assets will help finance the developments down the track.

Generally, development won’t be part of your investment strategy until you are further along in your journey. In today’s market with its stringent finance requirements, it is typically reserved for more experienced property investors with an appetite for risk, the serviceability to pay for the development and the cash to obtain the site.

If you would like to find out whether development is right for you, request a no-obligation consultation with our team. We will obtain an understanding of your situation and will be able to advise you on whether development is the right strategy for you.

Perth is a two-speed property market

The Perth market has entered into a recovery phase but not as one homogeneous property market. With prices in outer suburbs still stalling, Perth has become a two-speed property market.

There is currently a very diverse property climate in Australia’s most Western capital, with property prices in some areas going up when other suburbs struggle along, trying to shake off excess supply and falling house prices.

The first home buyer’s grant policy is also not making it easier for the Perth market. The grant of $10,000 is currently only available for new builds, resulting in a market where first home buyers prefer to buy land and build a new home further away from the city over buying an established property.

As a result, outer suburbs which feature a lot of development are contributing to oversupply, putting downwards pressure on prices in those areas. This in turn brings Perth overall median prices down.

But a different scenario unfolds when we look at suburbs closer to the CBD, and particularly in the second or third home buyer tiers. Houses in the $700,000 plus price bracket in more established suburbs closer to the city are selling fast. Prices in these suburbs are rising.

Damian Collins, managing director of Momentum Wealth, comments: “There is no doubt that in the established market at a higher price point we are seeing the start of a recovery in the market.”

This can be explained to some extent by the renewed confidence in the economy and increased job security. Buyers who had been sitting on the fence are taking advantage of the lower prices to upgrade and get into what are traditionally more expensive neighbourhoods.

While we do not expect the market to run away any time soon, we do know that often this kind of recovery causes a ripple effect, with areas neighbouring popular suburbs seeing increased demand and price upticks as people are being priced out of their first suburb of choice.

There are however still bargains to be had in Perth. You just need to know where to look and have the negotiation skills to get them. Our buyer’s agents have picked up on the increasing competition for investment grade stock. While prices in certain areas may not have started to move yet, savvy investors are snapping up opportunities before word gets out, cashing in on the capital growth that will occur once others do catch up.

It will not come as a surprise that by buying at a time when the market is bottoming or even in the early stages of recovery you have the best chance of getting accelerated capital growth. If you have been thinking about investing in Perth, now’s the time to get yourself organised. Contact us to find out how we can help.

Momentum Wealth snaps up Best Customer Service Award

At Momentum Wealth, we understand the significance of good customer service and endeavour to always maintain a strong level of respect for the principle of ‘good customer service is good business’.

Hence, we are honoured and grateful for the recognition and acknowledgement we have received for our dedication to excellence in customer service.

Recently Momentum Wealth was awarded the Best Customer Service award in the Better Business Awards 2018, an award we have had the privilege of winning two years in a row, and one of 10 awards the Momentum Wealth Broking team has received in the past two years. We are also very proud and grateful to be nominated as a finalist in the upcoming MFAA awards in May and would like to thank all of our partners, investors and staff for their continued support.

As always, our broking team is committed to offering you the best service, so please contact your consultant or us at info@momentumwealth.com.au should you wish to discuss how we can assist you in your investment journey.

The $3.3b retail revolution helping to transform Perth

Picture this. It’s the not-too-distant future. Think Perth, 2020. After spending the day lazing about on Scarborough Beach, strolling around the area’s now two-year-old beachfront redevelopment, the time comes to head home.

Driving back towards the city along Scarborough Beach Road, the familiar site of Innaloo Shopping Centre slowly comes into view. It has been there a while, that big ol’ concrete block. In fact, last year the shopping centre — WA’s first — turned 50 years old. But in this near-future, the concrete is gone.

As you get closer, the centre, with its palm trees and open-plan design, looks more like a resort than a concrete jungle. Inside, big-name luxury brands are mixed in with David Jones, while roof-top restaurants offer a range of dining options. There’s even a health club, cinema complex and apartments.

This may seem like some sort of fantasy world, but it’s a reality the Scentre Group, the owner-operator of Westfield in Australia and New Zealand, is set on in a bid to transform the place into a “premium lifestyle destination”.

“It is a big, big investment in WA,” Scentre’s manager for development Roy Gruenpeter tells STM. “And it is all part of the evolution about what a shopping centre offers. We are creating places that people want to go to … a place that is a lifestyle and community hub — that’s the really critical part.”

In amended plans that were given the green light this year, the shopping-centre giant will spend $600 million to transform the old concrete block that will be renamed Westfield Stirling. The redevelopment will double the size of the centre, with more than 300 shops over 110,000sqm, making it one of WA’s biggest shopping centres. Construction is expected to start later this year.

Scentre’s plans to transform the area include the neighbouring Spud Shed site on Ellen Stirling Boulevard, and the Innaloo Cinema Complex on Liege Street (on the opposite side of Scarborough Beach Road), which the Group paid $48 million for in 2016.

Plans could include redeveloping both additional sites, adding apartments and linking them to the shopping centre.

Innaloo’s reinvention is just one element of a retail revolution that has already started in Perth. There is a flurry of activity in the shopping-centre world worth about $4 billion to the WA economy — a flurry so competitive one expert has labelled it an “arms race”.

Perth will see six of its major shopping centres transformed over the next few years.

Whitfords Shopping Centre, which reopened its doors after a transformation late last year, comes as Carousel, Garden City, Karrinyup and Morley Galleria are all set for massive makeovers, creating hundreds of new shops.

There’s also the new direct factory outlet near the Perth Airport, which is set to open later this year. Though its owner says no retailers are yet confirmed for the airport site, Sydney’s Homebush DFO houses high-end brands such as Burberry, Hugo Boss, Lacoste, Salvatore Ferragamo and Armani, suggesting what could be on the way for Perth.

This retail revolution has also spread to the outskirts of the metropolitan area. This week the doors to Mandurah Forum, upgraded at a cost of $350 million, officially opened. Looking out over the glistening new building in front of her in Mandurah this week, the centre’s manager, Jacqueline McKenzie, can’t help but feel a sense of pride.

And she should — the 33-year-old has been there from the start of the transformation. “I do feel proud,” McKenzie says as the doors to the centre open. “It’s been a lot of hard work. But, more importantly, it’s great for the community and great for Mandurah and the region.”

The opening marks the beginning of a new frontier for the one-time sleepy holiday and retirement community. It means new shops, new jobs, new cafes and new places to eat. But it also means people will no longer have to travel to Perth for high-end fashion.

David Jones is the key tenant — the kind of retailer many thought would probably never get to the seaside city.

But it is not all about the shopping.

To beat off the rapid rise of online retailers, such as Amazon, shopping centres are evolving into more than just places where you park your car, buy things and then leave. Like it or loathe it, Perth’s shopping centres are turning into community centres — the modern-day version of the town square.

For McKenzie, the new Mandurah development is about building a sense of community — a place where people can go to feel a part of something.

“We want the forum to be a place where people gather — a large part of the community that has a positive influence on it,” she says. “I mean, having that element helps to build a sustainable business as well, of course. But, for example, in Mandurah, where there is a youth unemployment problem, we’ve been holding job fairs for all the new retailers coming in, making it easier for jobseekers.

“We’ve encouraged the new retailers to hire locally. And we’ve partnered with the City of Mandurah to conduct eight-week hospitality courses for all the new food vendors. That’s what I mean about a positive influence.”

“I think there’s easily still room for growth,” McKenzie says. “Shopping centres are now catering to the needs to the community. There’s entertainment, health, education — it’s now a place where the community feels comfortable and feels like they own, because if you don’t do that then the community will abandon you. It’s somewhere to meet, to shop and connect with your family and friends and give you a bit of a break.”

Back in metropolitan Perth, this theory appears to ring true.

Like Hawaiian Group’s Claremont Quarter shopping centre redevelopment, which opened in 2011, the Karrinyup and Garden City redevelopments, owned by AMP Capital, both have residential apartments included as part of their redesigns.

Garden City’s redevelopment is set to finish in the second half of this year, while Karrinyup’s upgrade will begin within six weeks. The combined upgrades will cost a staggering $1.4 billion.

The company’s divisional development manager in WA,Scott Nugent, says the inclusion of apartments is all about giving people a chance to live “closer to the action”.

“Perth’s taken a while to adapt to this trend,” he says. “It’s been happening a lot on the east coast.

“We recognise people don’t really want to live actually on top of a shopping centre, so the apartments are constructed on what we call the ‘frames’ of the shopping centres. So they’re not actually inside but more just part of a hub.”

He describes this “hub” as a community centre point.

It will host street parties and pop-up events — an initiative known in shopping-centre circles as “place making” — similar to those that have sprung up around Perth’s urban centres.

“Place making is a term to describe the way people feel and interact with a space,” he says. “The design and feel — making it feel like a nice place to be. That’s what we really want to encourage, so people can just come for the day — you don’t have spend anything, just be part of it.”

This is a cultural phenomenon in some parts Asia, where going to a shopping centre is a day out. In the Philippines it even has a name, malling, where families go to walk around the mall with no real purpose other than to be there. The Grove in Los Angeles is another example.

For some West Australians, just coming to a shopping centre and “walking around” may indeed be a bridge too far. But there is little doubt the attraction of a shopping centre — a one-stop-shop for all you need — is a major pulling point, and has seen traditional shopping precincts, such as those in Subiaco, Mount Lawley and Perth city, struggle.

With all these redevelopments finishing within a few years of each other, is there a chance Perth people will become shopped out? According to retail expert Darryll Ashworth, this is a real possibility.

“It’s a race,” he says. “Not just to complete them (the redevelopments), but to get the best retailers. There is going to be incredible competition between them all to attract the right tenants. For example (Swedish fashion house) H&M may only have two more stores in Perth; Uniqlo may only do three stores … it’s going to be very competitive.”

Ashworth should know. He was once the man in charge of Westfield in WA, the company behind Whitfords, Carousel and Innaloo shopping centres, and is now a managing director and retail expert at consulting firm Metier.

“It’s going to be very interesting,” he says. “It’s a great boost for the WA economy, and they (the shopping centres) will be popular, no doubt. But every second day there are stories of retail decline, and I’m unsure about it all.”

Yet for the true believers, it is onwards and upwards.

Gruenpeter says his confidence in a redevelopment such as Innaloo comes down to one simple element.

“We’re humans,” he says. “We do thrive on personal contact. And the modern shopping centre is about providing the environment for that to happen.”

The changing face of shopping

Whitfords: $110 million

299 stores over 76,450sqm.

Includes apartments, new cinema, food hub and brewery.

Opened September, 2017.

Mandurah Forum: $350 million

220 stores over 63,000sqm.

Retailers include David Jones, new food hall.

Opened March 22, 2018.

Direct Factory Outlet (near Perth Airport)*:$150 million

120 stores over 24,000sqm.

No retailers yet confirmed.

Due for completion later this year.

Karrinyup: $500 million

290 stores over 109,000sqm.

Apartments, cinema, new high-end retailers, food hub.

Due for completion 2020.

Garden City: $750 million

370 stores over 120,000sqm.

Apartments, cinemas, new retail mix, food hub.

Due for completion 2021.

Innaloo: $600 million

300 stores over 110,000sqm.

Apartments, new cinema, new retail mix including David Jones, food hub.

Construction to start this year, completion date not yet confirmed.

Morley Galleria: $500 million

330 stores over 126,000sqm.

Town square, new food hub, retail mix.

Completion date not yet confirmed.

Carousel: $350 million

390 stores over 110,000sqm.

David Jones, cinemas, new rooftop restaurants.

Completion date 2018.

NAB Quarterly Australian Residential Property Survey Q1 2018

The NAB Residential Property Index rose 3 points to +23 in the March quarter 2018 and remains well above its long-term average (+14).

By NAB Group Economics

• Sentiment towards the Australian housing market improved in Q1 as strong gains in WA and QLD offset falls in NSW and VIC.
• Confidence improved sharply in WA, but fell further in NSW amid expectations for bigger price falls.
• NAB has lowered its house price forecast for 2018 on continuing weakness in Sydney and a softer Melbourne market.

The NAB Residential Property Index rose 3 points to +23 in the March quarter 2018 and remains well above its long-term average (+14).

“But the overall result is masking an ongoing shift in sentiment across states” NAB Chief Economist Alan Oster said.

It fell further in NSW and Victoria, driven down by weakening house prices, and was also lower in SA/NT.

Sentiment towards the housing market in WA however rose strongly and recorded its first positive read since early-2014. It also continued to strengthen in Queensland.

Overall confidence levels were broadly unchanged, but have risen strongly in WA and softened in NSW.

“Survey house price expectations are mirroring these trends” said Mr Oster.

Property experts are predicting bigger house price falls in NSW and have scaled back their outlook for Victoria.

But they are much more bullish in WA, with stronger growth also expected in Queensland.

Among other key survey findings, the market share of first home buyers climbed to new survey high, but that of resident investors hit a new low.

According to Mr Oster: “Recent efforts by state governments to improve housing affordability is helping first home buyers, especially in Victoria and NSW, but the APRA inspired crackdown in investor lending is hurting investors.”

Surprisingly, there was a small increase in the share of foreign buyers in new property markets after having fallen to a 6-year low in the previous quarter. This was led by NSW and WA.

“Property experts also continue to tell us that credit access is still the biggest constraint on new housing development in the country and the biggest impediment for buyers of existing property” Mr Oster said.

But concerns over interest rates are growing.

“We’re not surprised given NAB’s own view is that interest rates will start rising gradually from late-2018, albeit with the risk this could be delayed until 2019” said Mr Oster.

 NAB’s forecasts on residential prices

NAB’s view for 2018 now has a small fall in house prices in 2018 (now -0.8% was +0.7%). This is largely related to continuing weakness in the Sydney market (-3.4%) and a softer Melbourne market (+0.1%) with little improvement now expected during 2018.

According to Mr Oster: “Looking forward it’s hard to see a near term rebound in Sydney and Melbourne house prices, especially given consumer concerns over the cost of living and high levels of household debt.”

“Strong performances in Tasmania and to lesser extent in regional areas, along with higher confidence in the West and Queensland won’t offset the aggregate effects of lower prices in Sydney and Melbourne. Nor will increased first home owner demand fill the gap” added Mr Oster

For 2019, our house price forecasts remain broadly unchanged at +0.8% with only Sydney expected to fall (albeit modestly).

Apartment forecasts are also broadly unchanged (-0.8% in 2018 & -1.8% in 2019) reflecting large stock additions and softer outlook for foreign demand.

For 2019, weakness will likely be concentrated on the Eastern seaboard – with apartment prices expected to fall in Sydney, Melbourne and Brisbane.

“Naturally, any additional changes to government or prudential policy to address affordability or financial stability concerns are likely to have an impact on these forecasts” said Mr Oster.

About 300 property professionals participated in the Q1 2018 survey.

Increasing property taxes won’t fix WA’s budget woes

The property industry is calling on the WA Government to not burden West Australians with unfair taxes, as a means of budget repair, following yet another disappointing GST carve up.

REIWA President Hayden Groves said while the Institute understands the WA Government is facing another difficult budget, relying on the property industry to prop up state finances will do very little to ease the state’s fiscal pressures.

“WA already has one of the highest rates of land tax in the country. Any further increases would deter much needed investment, driving up rent prices and pricing the most vulnerable out of the rental market.

“The property market has been weak for some time. We are beginning to see some green shoots of recovery, but increasing taxes could jeopardise WA’s economic bounce back.

“Access to affordable and appropriate housing is still one of the more challenging issues facing West Australians. Whether it be first home owners finding their feet in the market or seniors looking to right-size into more manageable accommodation, the WA budget should outline key reforms to open doors for those that need it most,” Mr Groves said.

In its pre-budget submission, REIWA has called on the State Government to introduce measures that will improve housing affordability for all West Australians including;

o    Re-introduce the First Home Owner Grant of $3,000 for buyers of established home of less than $430,000.

o    Introduce a transfer duty concession for seniors ‘right-sizing’.

o    Commit to no increases in property taxes, or changes to thresholds to either transfer duty or land tax.

“In the long term a complete tax review is needed to ensure taxes are being utilised as efficiently as possible. REIWA recommends a report into phasing out transfer duty in favour of a broader-based land tax.

“Safe and suitable housing is intrinsic to the success of local communities and the WA Government should be doing everything it can to ensure access to home ownership is a reality for everyone.

“Now is not the time to be burdening property with additional taxes,” Mr Groves said.