Investors set to boom

“It’s a low maintenance property with solid rental returns and a promising outlook for re-sale if we want to explore other [investment] options,” says Ms Gray.

Ms Gray took out an interest-only loan for half the value of the property. Her husband continues to dabble in shares, but with her property purchases in the mix their investment spread remains robust.

Ms Gray may fall into a special category of property lover, but she’s not alone in trawling Saturday auctions for assets. A pessimistic global outlook for equity markets has turned the heads of seasoned investors back towards bricks and mortar as they chase higher yields and safer opportunities to grow their wealth.

A SHIFT FROM SHARES

Risk minimisation is expected to be a key driver of the rejuvenation of Australia’s property investment sector in the coming months, on the back of dwindling equity returns.

In January, the Australian sharemarket experienced its worst consecutive slide in 26 years, with the month’s losses totalling more than $282 billion.

But it’s not just a volatile sharemarket that is prompting a return to property. A severe shortage of housing in Australia, which is expected to drive house and rent prices up sharply, is also swaying investors.

The statistics back this up. ANZ’s Australian Property Outlook for January 2008 revealed that in risk-adjustment terms, property is offering significantly healthier returns than other asset classes.

Over the past 23 years residential property has delivered investors a compound annual return of 13.4 per cent – a strong result compared with commercial property (10.3 per cent) and bonds (9.4 per cent).

The risk for investors is further reduced with Australia’s record-breaking low vacancy rates of less than two per cent holding steady for over two years now, according to the Real Estate Institute of Australia (REIA).

These factors combined, the mortgage industry can expect to see both experienced and novice investors entering the market in the coming months.

THE NEXT WAVE OF BUYERS

The December 2007 results from Wizard’s Tomorrows Property Investors series suggest that first-time investors are likely to drive sector activity in 2008.

In recent years, blue-collar workers aged 25-39 have dominated demand for residential investment finance, according to Wizard. But the current conditions are now seeing an influx of affluent Baby Boomers into the market as well as Gen Xers keen to rebalance their investment portfolios with tangible assets.

Along with some small business owners, these two groups are set to emerge as the ‘new wave’ of sophisticated investors, looking to capitalise on those forced out of the market by tightening affordability and higher interest rates.

It’s certainly good news for lenders, with the number of prospective first-time property investors looking to purchase over the coming 12 months set to rise to 446,000, according to Wizard. And with investors typically sticking with the same financial provider when building an investment portfolio, they are a market well worth chasing.

“These two segments [Baby Boomers and Gen X] will be the most active as they have reached a stage in their life cycle where wealth creation and management is in full swing – and opportunism will be at its greatest,” says group general manager of operations at Capital Securities, John Pehlivanidis.

According to Mr Pehlivanidis, well-off investors will be scouring auctions for bargain buys as first home buyers and lower income earners struggle in a higher rate environment and are forced to exit the market.

As well as stimulation from domestic demand, Australia’s economic stability, growth and favourable rental market may also spark an influx of overseas property investors.

Foreign investors can only purchase new property so any increased demand could help stimulate much needed construction activity.

“Australia is seen as a safe haven and ideal option for investors looking to build their off-shore assets,” says Mr Pehlivanidis.

But not all market segments are likely to perform as well when it comes to investment with Generation Y looking like the demographic least likely to become tomorrow’s landlords.

Genworth Financial’s recent profile on the youngsters – as part of its Spotlight Series – revealed a generation that is eager to invest, but may struggle to service extra repayments.

SAFE AS HOUSES

Genworth Financial’s country executive and director for Australia and New Zealand Peter Hall says the odds are in favour of the investment property sector performing well this year.

“Australians traditionally always fall back to property as their wealth creation tool; it’s only been over the last decade that investors have looked at the share market,” he said.

But potential borrowers still have some tough decisions and a few challenges ahead.

For many, affordability will be a challenge. Inflation is still a major concern and the RBA has shown it won’t shy away from rate rises if the economy overheats.

While investors can expect to be compensated for any further rate rises by rapidly rising rents, gaining a foothold in the market could still be a problem. This could translate into demand for higher LVR loans or refinancing for investors that can leverage off equity in existing property.

But arguably the most difficult challenge for investors for the coming period ahead will be the availability of stock.

ANZ’s Property Outlook has estimated that in 2010 Australia will have an undersupply of nearly 200,000 dwellings – so investors will have to move quickly if they want to snap up the best yielding properties.

But despite the restriction faced by investors, the long-term outlook for this market remains extremely strong.

“This [property investment] is a viable wealth creation strategy that will bear long-term dividends for savvy investors,” says Wizard chairman and founder Mark Bouris.

With residential property prices rising in most cities, and the short-term outlook for equities markets uncertain, it’s fair to say property is now in investors’ sights.”

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INVESTOR PROFILE

WHERE:

For total returns – rent and capital – Brisbane, Adelaide and Melbourne will be the market winners according to ANZ’s Australian Property Outlook, with each city achieving well over 20 per cent in returns.

Queensland is the state to watch, with the number of property investors in the Sunshine State jumping by 68 per cent from 143,000 to 241,000 in the last quarter of 2007.

WHAT:

Houses and units located in affluent suburbs – close to city centres or water – will out-perform average returns and astute investors will be chasing these down as they become available.

Houses are still the most popular property type at 78 per cent according to Genworth Financial, but investors are increasingly looking to units for their low maintenance and high market demand.

HOW MUCH:

Serious property investors will be focused on mid-priced properties in popular locations. The average size for property investment loans according to Genworth Financial is $243,495.

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EXPERIENCE AND SPEED

To capture the best returns shrewd property investors are looking to their lenders for more than just finance

Service will be the key to lenders’ ability to attract investors in 2008 – with borrowers looking for both experience and speed to help them make the most of current real estate market conditions.

Serious investors offer lenders a pool of repeat business opportunities. But in return, they have high expectations and require more attention than your average borrower.

Harry Tan of Melbourne-based brokerage HJT Mortgage and Finance has found that the most successful way to connect with the investor market is to arm them with the tools they need to make their own decisions to manage their investment portfolios.

HJT Mortgage and Finance specialises in the investor market and the brokerage has found that educating borrowers on ownership strategies and taxation requirements, as well as product and property structures, puts the borrower in a more confident position.

“We keep in touch with our clients through newsletters and emails – letting them know about new products, property hotspots or changes in interest rates so they feel more connected to the investment and the market in which they are based,” says Mr Tan.

In terms of products, longer-term fixed-rate mortgages are more likely to be popular in light of current market conditions, which favour investors looking for long-term rather than quick capital returns.

Professional and experienced investors will be looking to hold onto these assets for at least the next six years, according to Genworth Financial’s country executive and director for Australia and New Zealand Peter Hall, and will need products to help them ensure the best returns.

For those aiming to maximise the benefits of negative gearing and who want more certainty on their likely capital gain, a loan with a fixed-rate component for the first three to five years is likely to prove popular.

“Investors will want to calculate their cash-flow and estimated return before they buy – so knowing the outgoing costs up front will be essential,” says Mr Hall.

Product innovation is also expected to attract more investors to the property market in 2008 as a result of key changes to Federal legislation around self-managed superannuation funds (SMSF).

Borrowers who are self-funding their retirement will be able to unlock their superannuation – under strict conditions – to apply for loans specifically designed for SMSF to purchase investment properties.

SMSF borrowers must have a demonstrated investment strategy and SMSF products require lenders to work in tandem with accountants and financial advisors.

“The first SMSF products have only just been launched but we expect to see their volume build very quickly,” says Siza Capital’s director Jo Parkinson.

“There is a huge buzz growing in the market over this product – but the broker channel needs to be prepared and confident to offer it,” he says.

New products and a different approach to service will make catering for the investor market an exciting challenge for the mortgage industry in 2008.

Conditions won’t be easy, but good returns and solid relationships can be forged with the right tools, knowledge and skills.