Unlocking the door to investors

Thanks to a combination of factors including the phasing out of the beefed-up First Home Owner Grant, solid population growth and continued pressure on housing supply, as well as solid rental yields and steady vacancy rates, both new and seasoned investors are flooding into the market.

ABS statistics reveal that the number of investor-borrowers in November last year was up 2.3 per cent on 2008 while Westpac’s latest economic report claims that investor numbers rose a further 0.5 per cent in December.

In fact investors are the only market segment to have held steady, accounting for around one-third of all new mortgages, according to market analysts Rismark International.

“Conditions are currently as good as they have ever been for investors,” says Rismark International managing director Christopher Joye. And near perfect market fundamentals could ensure that they’re in for the long haul.

“I predict that investors will remain prominent in the market for the next three to five years,” says Mr Joye.

AN ERA OF INVESTMENTS

Investors held off entering the market in 2009, largely because of fears of a housing bubble thanks to the Federal government’s boost to the First Home Owner Grant.

The phasing out of the beefed-up grant as well as factors such as renewed job market confidence have helped encourage investors back into the market over the last six months.

National Mortgage Company’s head of mortgage origination Jeff Chapman says people have started to feel more secure in their employment following the financial crisis, which has contributed to improved investor confidence.

“Investing is a cash flow game, and employment is critical to cash flow. Property prices appear to be stabilising but it is the continued confidence in employment and income that will drive activity in the investor market,” he says.

Solid population growth and the continued strain on housing supply are also factors spurring renewed investor interest.

Australia’s population growth rate is at a record

high for the first time in 40 years, rising from 1.7 per cent at 30 June 2008 to 2.1 per cent 12 months later, according to ABS data.

Overseas migration has been a major factor in Australia’s population growth rate, explaining the surge in foreign investors entering the domestic property market, which has incidentally helped drive demand.

Population growth has also contributed to high rental yields and low vacancy rates across the country. According to Rismark International, the rental yield in December 2009 for Australian houses was 4.1 per cent while units performed better at a 4.9 per cent yield.

Rismark International’s Mr Joye says these combined factors have resulted in a “positive gearing phenomenon”, which he believes will continue to grow in the medium to long term.

Property is also considered a safe bet by many Australians compared to other non-tangible investment options, such as shares.

This was highlighted back in 2007 and 2008 when share prices plummeted as a result of the global financial crisis, while property values held up relatively well by comparison. Property prices also bounced back faster than share prices following the downturn.

It’s unsurprising then that investors who are keen to manage their financial risk will continue to invest in property.

THE KEY TO FUTURE GAINS

Investors may well remain a dominant driver of growth in the property market in coming years.

According to AFG’s February Mortgage Index, first home buyer activity halved over the 12 months to January 2010, falling to 12.9 per cent, while investor activity rose by 7.2 per cent over the same period.

Foreign investors are also tipped to enter the market in droves following the Federal government’s relaxing of foreign investment laws including removing development restrictions on new dwelling sales to foreign buyers.

WHAT LURKS BEHIND

The outlook for the investor market is indeed a promising one but a number of threats to investor confidence remain.

One of the biggest is the prospect of increased housing supply, which would mean falling rental

yields and rising vacancy rates and may even lead to a flattening in prices – a potential deterrent to prospective investors.

In NSW, proposed new laws increasing tenants’ rights may also discourage investors from taking the plunge.

But Better Mortgage Management (BMM) managing director Murray Cowan says perhaps the biggest threat to the investor market is the continued tightening of credit policies from lenders and mortgage insurers, particularly in the low doc market.

“Without the adequate availability of credit, any increase in property investment will not reach its full potential,” Mr Cowan says.

Mr Cowan also says interest rate rises, if they continue, will also act to quell activity.

National Mortgage Company’s (NMC) head of mortgage origination Jeff Chapman agrees.

“At the moment investors could probably handle a rise of 25 basis points without too much concern, but if rates were to climb by 50-75 basis points quickly that may put a dent in confidence levels which would in turn slow growth,” Mr Chapman says.

LAYING DOWN THE INVESTOR WELCOME MAT

In the current environment, Mr Cowan says now is the time for brokers to make their mark on the investor market.

But he says brokers first need to understand the needs of investors.

This means employing different marketing strategies to those aimed at first property buyers.

According to NMC’s Mr Chapman, investors are looking for a lot more from their broker and from their lender’s offering.

“Investors have come out of the financial crisis a lot smarter when it comes to sourcing quality loan products,” Mr Chapman says.

This means that in sourcing the best loan product, investors will actively research the various product options, rates and offerings on the market, and will not discriminate when it comes to bank or non-bank lenders.

But this doesn’t mean that investors conduct their research in a vacuum. Mr Chapman says this is where brokers can prove their value, by providing investors with a quality service and ongoing support.

“Most investors want a loan that they can ‘set and forget’ and they are looking for the appropriate support to make this happen,” he says. Mr Chapman says investors also want a loan that works for them not only during the approval process, but also after settlement.

“Investors are looking for a specialised service, and [those seeking construction loans for example] want to be looked after throughout the building process,” he says.

Collins Securities’ general manager Allan Willoughby agrees that investors are loan-savvy. He says that rates, fees or lender reputation are not factors investors consider in isolation when determining the product most suitable for them.

“Ultimately, investors will source the best whole loan product,” says Mr Willoughby. “[They] are seeking the highest loan-to-value ratio that they can get, and they are keen to use their existing equity to secure future loans.”

Murray Cowan says BMM aims to attract investors looking to leverage off equity by offering products that take the complexity out of refinancing. These include products that do not require BAS statements for self-employed borrowers or for full doc loans where the LVR is less than 75 per cent.

Mr Cowan says in his experience, investors are typically looking for a loan where they have the option to make interest only repayments and have competitive fixed rate options. But as interest payments are tax deductible, he says investors are usually prepared to concede some ground on rates if the overall product suits their requirements.

“Exit fees and loan features such as unlimited free redraw are usually not as big a concern for investors [as they would be for first home borrowers] as they are not using these loans for day to day banking duties. Investors are generally looking to hold their investments for the whole loan term,” Mr Cowan says.

Collins Securities has also turned its attention to investor-friendly loan products, offering a range of low doc, full doc and high LVR loans.

“Investors are keen to use their existing property as equity in order to tap into the property market,” says Collins Securities’ Allen Willoughby. “Our range of products aims to assist investors by using their existing collateral to fund their further investments.”

TAKE THEM TO MARKET

So, how does a broker successfully market to his or her investor clients?

Referral relationships are one way, according to NMC’s Jeff Chapman. Dealing primarily in construction loans, NMC has referral relationships with real estate agents and property developers alike. As well as referrals, NMC uses a range of specialised tools to support the close relationship investor clients have with property marketing and development companies.

“Investors want to work closely with their developers and builders, and as such, they want a loan that supports them in relation to these aspects,” he says.

This is why NMC offers a five day turnaround formal approval guarantee.

“Investors find that the five day approval guarantee is a deal ‘sweetener’ when they are negotiating development contracts,” says Mr Chapman.

“It essentially means that they can settle the purchase quickly, usually within 14 days, because they are assured that they will receive a response to their loan application before that time.”