Lenders continue policy changes following APRA restrictions

Most property investors are aware of APRA’s recent clampdown on lending in the Australian residential mortgage market, however some have been caught unprepared for the implications. What are the actual changes that have been implemented and how do they affect investors?

The Australian Prudential Regulation Authority (APRA) is the national regulator for banks, credit unions, insurance companies and most of the superannuation fund industry. It is largely funded by the industry it regulates.

Essentially, APRA provides guidelines to the banks and other institutions to ensure they are not over-committing themselves. Failure to adhere to these guidelines will result in substantial fines to the institution.

APRA has been closely monitoring residential mortgage lending in recent years due to heightened activity and growth in the Sydney and Melbourne markets, and has imposed restrictions in a bid to cool off some of this activity.

Lenders have been ordered to reduce their mortgage exposure and reign in investment lending growth, with interest-only loans being targeted in particular.

As of March this year, limits were put in place for interest-only loans to amount to no more than 30% of new loans – or roughly 1 in every 3 loans – and rates increasing substantially on this type of loan.

Servicing rates have also changed, which are what the banks use to calculate the repayments on the loan you are applying for, and this is then used to determine how much you can borrow. Currently, banks are using a pre-determined interest rate to calculate your repayments, regardless of your actual rate.

Such substantial changes can have a significant impact to investors, as demonstrated in a recent webinar held by two of our mortgage specialists, Ashleigh and Scott. They uncovered some real-life examples of the effects of these changes, and the advice they’re giving to clients. You can catch the webinar here.

Deals and Don’ts – Bassendean, South Perth, Greenwood

Here we take a look at just some of the different properties on the market and explain why they’re either deals (that represent a good investment) or don’ts (that should be carefully avoided by investors).

Deals

Bassendean Purchase price: $530,000 Purchase date: August 2017 Block size: 878sqm corner block Specification: 3 bedroom, 1 bathroom, lock up carport, built in 1971, zoned R20.

Deal: This property represents a good deal because of its corner block location. Under the Bassendean local planning scheme, corner blocks receive a density bonus, increasing this property’s zoning from R20 to R25 and giving it good development potential. Approximately 90% of its value exists in the land component yet the property is still in good rentable condition.

South Perth Purchase price: $677,500 Purchase date: April 2017 Block size: 227sqm Specification: 3 bedroom, 2 bathroom, double garage, built in 1993, zoned R25/40.

Deal: This street-front townhouse in a small complex of three represents a deal because of its excellent location. Tucked away in a desirable pocket of a blue chip suburb, it is situated within 3km of the Perth CBD, and within walking distance to the South Perth foreshore and café strip. The townhouse is in good condition and will be easily leased at a yield close to 4%.

Greenwood Purchase price: $538,000 Purchase date: July 2017 Block size: 689sqm Specification: 4 bedroom, 2 bathroom, double car port, built in 1979, zoned R20/60

Deal: This green title home represents a deal because of its location within the suburb and its significant development potential. Situated in a quiet cul-de-sac the property is within 600m of the Greenwood Tran Station and just a short walk to a local park. Its zoning means the land can be developed into multiple lots in the future.

Don’ts

Huntingdale For sale price: Offers above $350,000 Block size: 716sqm Specification: 4 bedroom, 1 bathroom, single garage, built in 1977, zoned R17.5

Don’t: This property doesn’t represent a good investment because it’s located on the busy Warton Road and would frequently be disrupted by noise and traffic pollution. The house is in original condition with no major improvements, so attracting quality tenants would be difficult. It has been on the market for over a year proving there is little demand from buyers.

3 questions to ask when investing in commercial property

When investing in commercial property, many investors seek out research and statistics to aid in their decision, only to discover the actual performance of the property is vastly different. Why does this happen and what should investors look for instead?

There is a myriad of statistics offered in property industry publications, such as rental yields, vacancy rates, capital growth, incentives, land value, and replacement value. The problem for many investors is they base their purchase decisions on these figures, only to find their commercial property performing very differently down the track.

It’s not that the statistics are necessarily incorrect – but they may often be incomplete or irrelevant if the investor simply takes them at face value. This data is only useful when you’re asking the right questions.

Here are 3 questions every commercial property investor should ask before their next purchase:

1. Are the statistics relevant to the investment location? Large research houses will generally focus on locations with a higher concentration of property. This means that numbers for the office segment, for example, tend to be from the city centre. Industrial figures may be from one or several key industrial locations.  But it’s important to keep in mind that commercial property vacancy rates and rental incomes can vary widely from one suburb to another – even when they are only a few kilometres apart. For instance, the Perth office market has rental vacancy rates ranging from 2% to well over 50% in different suburbs. If an investor has the CBD rental vacancy in mind but purchases a suburban office property, they may find this a poor indicator of the property’s performance.
2. How important is the size of the property? Most investors will have a budget which will likely influence the size of property they consider for purchase. In some cases, a commercial investor will choose to buy several smaller properties instead of one large one because it may seem less risky. This would be a good strategy if the performance of different-sized properties was consistent. Unfortunately, the yield and vacancy of a commercial property can be significantly affected by the property size and grade. For example, a smaller property that works well for an owner-occupier may not be suitable for attracting quality, long-term tenants. Generally speaking, rental yields are lower for smaller properties and they typically fall vacant more often, which means less income and greater re-leasing costs over time. So is larger always better? Having a larger budget won’t necessarily result in a higher return, but it does provide more opportunities to source a quality property. For some, this could mean opting for a different location in order to obtain a higher-quality property. For others, they may decide their best option is to invest with others in a property trust, and own a smaller percentage of a high-performing portfolio instead of owning 100% of a smaller property.
3. Are there any hidden factors influencing the rental yield? Commercial properties are often advertised with a passing yield percentage. Purely assessing this figure on face value might attract an investor to a property or make them dismiss it straight away. Unlike residential property transactions which are fairly transparent, there can often be factors influencing commercial leasing and sales listings which are not on record. For example:

• A vendor offers to lease back a property at an above-market rate, but a credit search shows the business is in trouble and may not be able to meet the terms of the lease long-term
• An office has a high rental yield, but there are several incentives built into the lease that will effectively lessen the yield over the next 2 years
• The yield for a retail property is below market, however it turns out that the supermarket tenancy is bringing on new managers which will have a positive impact on the performance and income of the centre

Without professional connections, it can be difficult for investors to access all of the relevant information on a property. Not having all the information can turn a commercial investment into a costly exercise, so it’s wise to seek professional advice before making any purchase decisions.

If you want to learn how to get started in commercial property, check out this useful guidebook from our sister company, Mair Property Funds.

Boom in Jobs as Resources Take Off

A new report revealed a 30% rise in job vacancies in the last year.

A jobs bonanza is about to be unleashed with thousands of construction and operational jobs forecast for at least 15 different mining projects.

Although the sector has been in the doldrums for several years, the Chamber of Minerals and Energy claims confidence has finally returned.

Analysis by The Weekend West of 15 mine projects that have been approved or are likely to go ahead within years shows about 10,000 new construction and operational jobs.

The list considers most of the major new projects due in WA within a few years but is not a comprehensive tally of all upcoming projects, expansions, extensions or upgrades.

Iron ore projects are leading the charge, after a resurgent spot price, which rose to $US75 a tonne last week from $US31.50 in January last year.

Lithium — a key ingredient in the batteries that power electric cars — is also responsible for thousands of jobs in WA, though gold producers claim they may have to cut positions if the State Government’s planned increase in the gold royalty goes ahead.

CME acting chief executive Nicole Roocke said most commodities — excluding gold — were in a strong position.

“The industry is a lot more optimistic now and is well-positioned for new growth opportunity and replacement mines,” she said. “There is a sense of stabilisation in the sector.

“We have to be careful about (calling it a) jobs bonanza, but there is an increase in job opportunities and advertisements, and with that we are seeing an impact on wage pressure as well.”

The DFP Resources job index out this week showed a 29.6 per cent rise in WA job vacancies in the year to August compared with the same period the previous year, in fields including geology, drilling, engineering, business support, operational managers and trades.

Pilbara Minerals managing director Ken Brinsden said lithium was an important new subset of WA’s resources economy.

Pilbara Minerals is investing $235 million in its Pilgangoora project, creating 400 construction jobs until mid next year.

It will create about 150 operational jobs thereafter.

“The lithium sector itself is the new kid on the block in terms of commodities that WA is investing in, but I am really optimistic about it being one for the future of WA,” he said.

“I think WA is going to be a really important global supplier to the global market.”

Mr Brinsden said the gold industry was partly responsible for buoying the WA resources sector last year by helping lift confidence. Changes in the global economy had also lifted it out of a slump.

“The market has definitely turned a corner, for sure,” he said. “We saw the bottom of the market about mid last year and in the period of time since there has been a general uptick in mining — in most commodities — and I think that is reflected in the level of activity.”

Northern Star Resources chairman Bill Beament said the State Government’s gold royalty hike could drastically undermine the sector that had been crucial in restoring WA’s resources confidence.

He said the royalty hike would affect coming decisions by WA’s three biggest gold mines over whether to extend mine life, which were due in the next six to 12 months.

“A lot of people made investment decisions based on a royalty scheme they were promised was never going to change,” he said. “So a 50 per cent increase is going to put a lot of people’s expansion’s and future extensions of life … into jeopardy.”

The Weekend West revealed last week the number of mineral exploration licence applications — known as the canary in the coal mine because the number indicates the amount of work in the pipeline — was up 45 per cent in the June quarter, at 669, compared with 460 in the June quarter the previous year.

The annual figure was up 29 per cent last financial year compared with 2015-16.

Mining tenure applications — usually the first step in setting up a mine project — rose 14 per cent from 3685 in 2015-16 to 4197 in 2016-17.

The demand for professionals involved in exploration has been so intense that skills shortages are starting to emerge in some fields, such as exploration geologists, drillers and underground engineers.

Mine projects that will definitely or most likely commence in the next few years in WA:

Rio Tinto – $US2.2 billion Koodaideri – 1600 construction jobs and a 600 operational staff if approved – 2017 to 2021

Rio Tinto – $US338 million Silvergrass – 500 construction jobs from early this year, operational job numbers not available

Rio Tinto — Yandicoogina mine – 470 construction jobs from this year, operational job numbers not available.

BHP Billiton – $US3.2 billion South Flank – several thousand jobs – 2017 to 2021

Newcrest — Jundee and Kalgoorlie mine expansions — 200-300 jobs (if gold royalty hike does not go ahead) — due late 2017/early 2018, operational numbers not available.

Pilbara Minerals – $235 million Pilgangoora project — 400 construction jobs and 150 operational jobs — construction until mid 2018.

Altura Resources – $139 million Pilgangoora project — hundreds of jobs — construction from March this year and operational from early next year.

Talison Lithium – $340 million Greenbushes expansion — 200 construction jobs from May 2017, 40-60 operational jobs from mid 2019.

Tianqi Lithium – $400 million Lithium Hydroxide plant and a possible $317 million expansion —500 construction jobs — phase one to finish late 2018 and the expansion would finish late 2019

Dacian Gold – $200 million Mt Morgans gold project — 330 construction jobs and 300 operational jobs — construction underway and due for completion early next year.

Gold Road Resources/Gold Fields – $532 million Gruyere gold project — about 500 construction jobs and 300 operational jobs — timing not available.

Gascoyne Resources – $100 million Dalgaranga gold project 180 construction from December until mid 2018, 250 operational jobs from March 2018.

Sheffield Resources — $350 million Thunderbird mineral sands project in the Kimberley — 200-300 construction jobs — commencing later this year

Iluka – $250 million – $275 million Cataby mineral sands project — 220 construction job, 120 operational jobs — construction likely to start next year.

Blackham Resources – $115 million Wiluna expansion — 100 construction jobs, 80-100 operational jobs — construction to commence mid 2018, operational from mid 2019.

Northern Minerals – Browns Range rare earth project Kimberley

Kidman Resources – Mt Holland lithium project

FMG – Eliwana or Nyidinghu replacement options for Firetail mine, both in feasibility stage.

FMG – Iron Bridge magnetite project, in feasibility stage.

WA Budget a Positive for Property Investing: Momentum Wealth

The WA Labour government’s first state budget is relatively positive as there are no direct increases to property costs for residents of Western Australia though foreign investors will face new taxes, according to property investment consultancy Momentum Wealth.

The government, recognising that the market was still recovering, decided to leave land tax, stamp duty exemptions and first home owner grants unchanged. Lobbying from key property industry bodies such as REIWA and Master Builders WA helped.

Momentum Wealth managing director Damian Collins said the fact that there were no major changes directly effecting domestic buyers was “important for the rebounding industry”.

A recent report by Momentum Wealth said that Perth’s property market had entered a recovery period amid tightening housing supply, with better affordability and a strengthening labour market being tipped to draw buyers back.

However, there will be a four per cent foreign owner duty surcharge introduced on purchases of residential property by foreign individuals and entities from 1 January 2019, which aims to increase state revenue by $48 million by 2020/21.

“While there could be a slight impact from this, foreign investment only represents a small proportion of the WA property market, instead, the billions of dollars’ worth of key transport infrastructure spending will put the property market in a strong position to continue its steady recovery,” Collins said.

“It is also encouraging to see such positive estimates for the economy which supports our view on the recovery of the residential property market as well,” Collins said.

He added competition was already increasing along with confidence.

Road and rail infrastructure has been the main focus of the budget with billions of dollars put aside to increase the networks, including 20 road projects totalling $2.7 billion.

The budget announcement also included the identification of the first stage of funding for Labour’s ‘Metronet Plan’ with a total of $1.34 billion over the next four years of the project.

“Property owners will also welcome the investment in infrastructure, in particular public transport infrastructure, as it adds to the amenity of the nearby residential areas and is a strong driver for property price growth as well,” said Collins.

The infrastructure improvements in the first stage include:

– $535.8 million for the construction of the Thornlie to Cockburn line with new stations at Nicholson Rd and Ranford Rd. – $520.2 million for the construction of a 13.8 kilometre rail extension from Butler to Yanchep which includes new stations at Alkimos and Eglinton. – Continual planning and detailed design for the next stages including the Morley-Ellenbrook Extension, the Midland Station Project and the Byford Rail Extension.

Vacant Perth rental properties drop below 10,000

For the first time since January 2016, the number of vacant rental properties in Western Australia’s capital have fallen below 10,000, which may be indicative of future rent rises.

Data from the Real Estate Institute of Western Australia shows the fall of vacant Perth properties to 9,990.

Shane Kempton, chief operations officer of Professionals Real Estate Group, said this fall is significant and attributes it to an increase of investment in the resource sector and improvement in WA’s state economy.

In comparison to this time last year, there were 10,924 vacant rental properties.

“Over the past two years, there has been a surge in vacant rental properties in Perth due to weak population growth and a boom in new home construction. The number of vacant rental properties in Perth peaked well over 11,000 earlier this year and has been on a steady decline since,” Mr Kempton said.

“With the number of vacant rental properties on a downward trajectory, Professionals is predicting that by mid next year landlords in Perth will be able to review their rents upwards once the rental vacancy rate falls below 3.5 per cent.”

Over the last two years, Mr Kempton said landlords in Perth have cut rents, discouraging new investors entering Perth, but now expects to see an increase of investor levels with the decrease of vacancies.

“Once rents start to rise, we should see an influx in property investors into the Perth market particularly as property prices in Perth are so competitive,” he said.

“For example, the median price of a home in Perth is around half that of Sydney and substantially below that of Melbourne.

“Now is a great time to buy an investment property in Perth, especially in the more affordable areas of Perth where there a still a plentiful supply of homes for under $400,000.”

Of note is the south-eastern corridor of Perth from Kenwick to Armadale Armadale, WAArmadale, VIC, to which Mr Kempton stated: “is very established with a high level of social infrastructure including a rail link to Perth as well as schools and shopping [areas] which appeal to renters”.

Kenwick in particular, Mr Kempton said, offers a median price for a home of $340,000, located 15 kilometres away from Perth’s CBD, and is in proximity to a train station and has access to the Albany and Roe highways.