A Healthy Driver of Growth

It is estimated that around $5 billion will be invested in health care building projects in Perth over the next five years, but how will these significant projects affect the local property market?

Hospitals are rarely far from the news and it’s no wonder given the critical role they play in modern society. In Perth, much of the recent talk has surrounded the various major hospital projects that are planned or already underway.

A key question for property investors is how will these significant projects affect the local property markets? There will undoubtedly be both positive and negative consequences.

A quick summary

Let’s start by summarising the major hospital projects in Perth:

Fiona Stanley Hospital

The flagship project of the city is the $2 billion Fiona Stanley Hospital in Murdoch, which will be the state’s most sophisticated health facility. The hospital is one of the biggest infrastructure projects in WA history and is scheduled to open in October 2014.

New Children’s Hospital

A project that has seen its fair share of media scrutiny is the new children’s hospital, which will replace Princess Margaret Hospital for Children. Construction for this project began in January 2012 on the Queen Elizabeth II Medical Centre site in Nedlands and is due for completion in 2015.

Expansion of Joondalup Health Campus

The Joondalup Health Campus, the largest health care facility in Perth’s northern suburbs, has recently undergone an expansion and redevelopment worth around $393 million, delivering extensive new facilities and expanded services for public and private patients.

Midland Hospital

The new Midland Public Hospital, scheduled to open in 2015, will be the first new hospital in the area in more than 50 years and construction is already underway. The new facility will replace the existing Swan District Hospital, providing new and expanded services and a 50 per greater capacity.

Jobs, jobs, and more jobs

Hospital projects often involve enormous amounts of construction and therefore generate large numbers of construction related jobs, which can last many years.

But even after construction has finished, hospitals still require many permanent and part-time jobs making them a major local employer. It’s not just the obvious medical jobs required, such as doctors and nurses, but also positions in areas such as administration, cleaning, IT, security, accounts, legal, marketing, and HR. Jobs attract people and naturally increase the demand for housing.

Economic activity

The economic impact of a new hospital extends beyond the hospital itself. With its large workforce and ability to attract people from a wide area, a hospital can have a tremendous impact on the community in which it is located. It can spawn a variety of other businesses servicing the local population, from non-hospital medical services to cafes.

This increased economic activity not only injects life into an area and makes it more appealing, but it also creates even more jobs. A new hospital can also trigger new transport infrastructure, a further boost for the area.

The local property market

How does a new hospital impact on the local property market? Firstly, it could increase the demand for housing in the area, both from people who work at the hospital during or post construction, and from people who value living close to medical facilities.

New research has found that health infrastructure is a key driver of where Australians will choose to live, surpassing employment as the most essential consideration.

In a survey of more than 1,000 people by MWH Global, respondents were asked ‘Which of the following would improve the quality of your life if they were in closer proximity to you?’ The option ‘Better access to hospital/specialist medical care/24-hour medical care’ was chosen by 53 per cent of respondents.

The extra demand for housing triggered by a new hospital could put upward pressure on rents and property prices in the surrounding areas. And these areas should continue to experience the benefit of increased demand well into the future, fundamentally shifting the nature of the local market.

Any risks?

With the amount of people coming in and out of a hospital, there is a risk that increased road traffic could affect some properties in the immediate area. Previously quiet areas could suddenly experience more noise and congestion, devaluing properties.

Hospitals by their very nature can attract a certain degree of anti-social behaviour, which can spill out into local areas. This is especially true for hospitals in inner-city locations that report high incidents of drunkenness and violent conduct.

Could a new hospital encourage new housing developments that flood the market? While developers may be encouraged to build apartment complexes and other housing to cater to hospital staff, limited land supply often curtails the amount of development that is possible.

Is there a risk that a hospital closes down? Given the significant investment that goes into a new hospital and the vital services it provides, it’s unlikely that one would suddenly close down. But over many years, it’s possible that a hospital could scale back or move to another location. If this happened, there could be negative consequences for the local area.

Conclusion

A new hospital can certainly change the economic landscape of an area and therefore have a significant impact on the local property market. Buying close to the site of a future hospital can prove to be a wise investment, especially in the parts that will have good transport links, but the risks need to be carefully evaluated.

Perth Houses Leading the Way

Perth’s median house price rose 3.2% over the three months to April, according to Australian Property Monitors (APM).

This was the strongest amongst the capital cities, and took the annual growth in the median house price to 6.7%.

The unit market hasn’t performed so well. The median unit price rose a marginal 0.4% over the quarter, with the annual figure showing a drop of 0.6%.

Most experts predict growth in the Perth market will slow over the remainder of the year, as the market responds to changes in the mining industry.

Large WA mining projects are transitioning from a construction phase to a production phase.

“What’s happening in WA is not an end to the mining boom, it’s an end to the infrastructure boom,’’ said RP Data analyst Tim Lawless.

“If you find some indicators are weakening, they’re actually weakening from an exceptionally high level,” Mr Lawless said.

Local market commentators are expecting a slowdown in growth in the Perth market overall. However well selected properties should still generate strong capital growth.

Property Acquisitions: Why it Pays to Understand the Valuation Process – Part 2

This month we will explain the role that sales evidence plays in the valuation process, some of the challenges faced by valuers and how investors can get the most out of their valuations.

There is a saying you often hear in real estate circles that a property is only worth what someone is willing to pay for it. But if the property hasn’t sold and isn’t even on the market, how does a valuer determine its value? Just like a crime scene investigator, a valuer must examine the evidence. Specifically, a valuer will look at recent sales of comparable properties in comparable locations.

By using the information uncovered during the inspection and comparing the target property to similar properties that have sold, the valuer can determine a valuation. Of course, the more similarities there are between the target property and those used for comparison, the more accurate the valuation will ultimately be.

At least 3 properties will typically be used as sales evidence and these properties must have sold recently, say within the last 6 months. However, depending on the state of the market and how rapidly it is changing, valuers may choose to only rely on sales that have occurred within the last 3 months.

With the analysis of sales evidence complete, the valuer will compile a report outlining the properties that were used for comparison and how these properties differ from the target property. The report, specifying the valuation figure, will be supplied to the person that requested the valuation. If the valuation was commissioned by a lender for a loan application, the borrower may not be given a copy of the report. The borrower can however ask the lender for the valuation figure.

One of the major challenges facing valuers is performing their role under immense time and cost pressures. Valuation fees are typically quite low and this means that valuers can’t always invest the amount of time they would like into each valuation. Some people describe the valuation process as a production line.

There are also legal pressures facing valuers. If a borrower defaults on a loan and the sale of the repossessed property fetches less than it was valued for, the valuer could potentially be sued by the lender. Although this is a rare occurrence, many people believe the threat of legal action causes valuers to be overly conservative. Examples have shown that different valuers can provide very different valuations for the same property.

Why is it valuable for investors to understand the valuation process? There are a few reasons. Firstly, understanding the factors that determine a property’s value can help you to spot a bargain and avoid overpaying for a property.

Secondly, having knowledge of the process can help ensure you get favourable valuations on your new purchases or existing properties. Providing the valuer with information relating to relevant sales evidence can help you make a strong case for a higher valuation. Pointing out positive characteristics about the property, which might not be obvious to the valuer, can also work in your favour.

It’s important to remember however that valuers are experts in their field, so you don’t want to patronise them. But if you have information that may save them time, most valuers would be willing to look at it.

Finance: The Weird World of Lender’s Mortgage Insurance

Lender’s Mortgage Insurance (LMI) is a type of insurance that has been used by millions of Australians who have entered the property market, but it’s a product that isn’t widely understood. So, what is it, when is it used and who is it actually for?

LMI is a type of insurance that is generally required when you are buying a home or investment property and you don’t have a large enough deposit. Generally, it kicks in when you are trying to borrow over 80 per cent of the property value.

LMI is arranged by the lender during the loan approval process and involves a one-off cost, which can often be added to the loan. The premium, which can be many thousands of dollars, is calculated based on a sliding scale that relates to the value of the property, the percentage of the purchase price being borrowed and the loan amount. However, there are other factors that can impact on the figure, such as the type and location of a property.

The biggest misconception about LMI relates to who it actually protects. Although it is paid for by the borrower, its purpose is to protect the lender in the case of a default on the loan. It covers any shortfall that may arise if the lender repossess the property and isn’t able to recover enough money to repay the loan and relevant costs. The clue is in the name. LMI doesn’t benefit the borrower as the borrower would still be liable for a default.

LMI should not be confused with Mortgage Protection Insurance, which covers your mortgage repayments in the event of death, sickness, unemployment or disability.

Some people believe that LMI is overly expensive, especially when you consider that default rates in Australia, even among first-home buyers, are very small. Another common gripe is the fact that refinancing a loan can trigger LMI, even if it was paid when the original loan was approved.

How do you avoid paying LMI? One way is to save enough of a deposit, generally at least 20 percent of the property value. Another way is to have a guarantor, perhaps a family member, provide security to cover an agreed portion of the loan.

As different lenders have different criteria and premiums in relation to LMI, it makes sense to consult with a finance broker who can discuss the pro’s and cons of LMI. Borrowers still may choose to pay LMI if it means getting their home or investment sooner, particularly where costs of a rising market may outweigh the time it will take to save a larger deposit.

Property Management: How Changes to the Residential Tenancies Act Will Affect Investors – Part 2

Now that July 1 has passed, a new set of laws have come into place that govern renting in Western Australia. We discussed some important changes last month and we now continue with this theme, focusing on pets, bonds, security and repairs.

Expanded use of pet bond

Prior to July 1, you could only charge your tenant a pet bond (to cover fumigation expenses) if the tenant kept a dog or a cat at the premises. Now, under the new laws, it’s not just limited to cats and dogs. A pet bond can be charged when your tenant (with permission) keeps any pet capable of carrying parasites that can affect humans. This, however, does not apply to guide dogs that are kept on the premises.

Increasing the security bond

One of the reasons why you might want to increase the amount of the security bond is to keep it in line with increases in rent. Previously, this could only be done 12 months after the start of the tenancy or 12 months after the last bond increase.

With the new laws, you will be able to increase the security bond every six months as long as there has been a lawful increase to the rent in that time. A minimum of 60 days written notice must be given to the tenant and, as before, the security bond cannot be more than the equivalent of four weeks rent plus a pet bond (unless the rent for the property is $1200 per week or more).

Minimum requirements for locks and security

Under the old laws, you were only required to provide normal locks to external doors and ensure all opening windows can be secured by catches on the inside.

The new laws contain far more detailed requirements by specifying the minimum standards that need to be in place to ensure premises are reasonably secure. The minimum security standards relate to door locks, window locks and exterior lights.

Under the new requirements, the main entry door must have either a deadlock or a key lockable screen door. Similarly, all other external doors must have either a deadlock or, if a deadlock cannot be fitted, a patio bolt lock or a key lockable security screen. This excludes balcony doors where there is no access to the balcony except from inside the premises.

The new laws state that your property must have an exterior light that can illuminate the main entry and be operable from inside the premises. However, this does not apply if a strata company is responsible for the lighting to the main entry.

Luckily, you will have two years from 1 July 2013 to make sure your property complies with these new security requirements.

Don’t have to repair everything

Under the new laws, if you tell a tenant that a fixture or chattel is not working before they enter into a tenancy agreement, or if it’s obvious that it was not working at the time they entered into the agreement, you will not have to maintain or repair these fixtures and chattels. However a property must be habitable and safe so you will not be able to contract out of those items being in working order.

Property Tax Tips: Choosing the Right Investment Structure

It’s one of the most important decisions when buying an investment property. What structure should you use to hold the investment? Given that the there are numerous investment structures available including Individuals or Jointly, Partnerships, Companies, Fixed or Unit Trusts, Discretionary (Family) Trusts, Hybrid Trusts, and Superannuation Funds, how do you decide? Here are some important considerations:

Accessing negative gearing benefits

If you purchase property in a trust or company and the property is negatively geared, the losses will be trapped at the trust or company level (unless you have other income, such as business income you can “inject”) and cannot be offset against income derived by a beneficiary or shareholder. However, an individual (including a partner) can offset negative gearing losses against other income.

Whether the 50% CGT discount can be accessed

Companies are unable to access the 50% Capital Gains Tax (CGT) discount and superannuation funds are only eligible for a 1/3 discount. Individuals receive the full 50% discount and trusts can pass out the CGT discount to individuals.

Ease of accessing equity

As property prices rise, you may seek to draw down on the capital (by refinancing, for example) to use for other purposes. However, capital can generally only be accessed tax-free from discretionary trusts and by individuals (including in partnership). Capital cannot generally be accessed tax-free from a company, as any payment is generally treated as a dividend. In relation to unit trusts, any drawings by the beneficiary will reduce the cost base of the units, potentially triggering a CGT event.

Asset Protection

In an increasingly litigious society, protection of assets from lawsuits and creditors is an increasingly important consideration for people who may be at risk. Professionals, such as doctors or dentists, due to their exposure to professional negligence, may have asset protection as their main aim. Different structures offer different degrees of asset protection.

Ultimately the decision will be between you and your Accountant as to which structure is most suitable for you. However it’s important that you choose professionals such as finance brokers who understand the different structures so they can work with you to ensure you are structuring your loans in the most appropriate manner for you.