Special report - Investors

Investing in the investor

The investor market is stronger than the owner-occupier market at present, offering the perfect opportunity for brokers to target this lucrative segment

IMAGINE A client base that buys property regardless of market cycles, that delivers regular referrals and is ready to buy property again and again.

Welcome to the investor.

According to the latest data from the Australian Bureau of Statistics, investors currently account for approximately 30 per cent of all new mortgages written.

And, if economists are to be believed, this figure could be set to grow over coming months as investors look to take advantage of market conditions.

Any experienced property investor will tell you the best time to invest is when the economy is stable, and right now, the Australian economy’s vital signs are – with some qualifications – generally healthy.

In fact, the economy is performing better than those of almost every other developed nation.

Favourable indicators of strong employment levels, wage and productivity growth and manageable inflation drive the demand for property.

But the economy is not the only influence on investors’ purchasing decisions: interest rates also play a key role.

While the Reserve Bank of Australia (RBA) raised rates four times in 2010, it has held them steady in 2011.

In fact, the RBA has not only chosen not to raise rates, but also has indicated that the next rate movement could be downwards.

All these factors translate into an attractive time to buy property for investors, as we are now in the classic buyers’ market stage of the property cycle.

Property prices that are either stagnating or on the decline and rents trending upward are strong indicators that the market is again strongly favouring the investor.

According to RP Data’s Hedonic Home Value Index, capital city home values fell 2.1 per cent in the March 2011 quarter. Meanwhile, weekly rental rates have risen 4.6 per cent over the past six months.

RP Data’s findings are reflected in the kind of business seen by the banks, according to ANZ’s head of broker distribution, Meg Bonighton

“There is still a strong demand for investment properties, given rental shortages in most capital cities across Australia, so this is still an appealing investment option,”  Ms Bonighton says.    

ANZ research shows near record low vacancy rates and accelerating rents in most capital cities.   

WHAT’S IN IT FOR ME?

So, with indicators suggesting that now is a good time to invest, it is also a good time for brokers to concentrate on this particular market segment.

Not only are investors seen to be the dominant buyer in the mortgage market, they can also in many ways represent the perfect client.

Why?

According to Ms Bonighton, brokers who successfully target and help investors can assure themselves of a client for life.

“Those who aspire to own an investment property will need good guidance from a specialist about structuring of current loans to ensure that they are well equipped to service the mortgage as well as being landlords.

“The best brokers know there is opportunity for further referrals with investors,” Ms Bonighton says.

House + Home Loans’ chief executive Rael Bricker (half of whose database comprises investor clients) agrees.

“They provide excellent repeat and referral business,” he says. “Investors are far more active in the market than first home buyers. In addition, investors are more likely to mix with other investors and thus have the opportunity to recommend me and my services to others.”

More importantly, provided the broker does the right thing by the investor, they are easy clients to build sound relationships with, Mr Bricker says.

“A majority of investors are savvy professionals who are looking for quality advice around property. A broker is more equipped to handle the needs of an investor than a bank – and the good investors know this,” he says.

Investors seek out a broker’s help, because they want the help and advice of a professional.

“In many instances, I get my investor clients a loan that has a small line of credit for emergencies,” Mr Bricker continues. “The banks often don’t have the abilities or the capacity to do this.”

While some of the loan products for investors can be quite complex, Mr Bricker continues, investor clients on the whole are easier to deal with than owner occupiers.

“When dealing with investors, I often find there is less emotion involved, which is a great thing. [Investors] are less concerned about rate and more concerned about finding the right product. They understand our job and let us do it,” he says.

“If, for one reason or another, a loan fails to settle, they are very understanding. They are easier to deal with, which is why I choose to actively target this particular market segment.”

Looking forward

Uncertain economic conditions and reduced growth prospects have kept many investors on the sidelines, but market forces appear to be aligning for their return

JUST LIKE the owner-occupier, first home buyer and upgrader markets, the investor market has shrunk significantly in recent months.

According to QBE LMI and BIS Shrapnel’s Australian Housing Outlook 2011-2014, the value of loans for residential property investment contracted by 30 per cent over 2010/2011.

That reduction was driven by a range of factors, including but certainly not limited to weak or negative price growth and extremely fragile consumer confidence.

Australian property price growth was weak in 2011. According to RP Data and Rismark’s Hedonic Index, the combined capital city price index contracted by 3.2 per cent in the year to August 2011. Prices slumped by as much as 7.1 per cent in Perth and 6.1 per cent in Brisbane. In fact, all capital cities recorded price falls over the same period except for Sydney where prices were flat, recording just 0.3 per cent growth.

International economic uncertainty, political instability and the rising cost of living have all contributed to an unusually negative outlook in Australia. In fact, according to business research house RFi, Australians were more negative in September than they were in the depths of the global financial crisis.

Brokers should, however, take comfort in the fact that the outlook for the economy and the property market now appears to be more upbeat.

First and foremost, unlike some of our international counterparts, weaker price performance is, on the whole, not expected to lead to any substantial price slumps.

According to QBE LMI and BIS Shrapnel, economic conditions are expected to improve locally, spurred on largely by strength in the mining and resources sectors.

QBE LMI/BIS Shrapnel forecasts suggest the economies of Western Australia, Queensland and the Northern Territory will all be beneficiaries as a result.

But while the Northern Territory, Western Australia and Queensland will benefit from the resources boom, ANZ’s head of Australian property research Paul Braddick says a lack of construction will help boost house prices in every other state.

“Housing market fundamentals continue to tighten as new residential building fails to keep pace with expanding physical demand,” he says. “Many capital cities currently face unprecedented housing shortages and with new home building falling further below underlying demand, shortages will continue to worsen.

“The fundamental tightness of the housing market is reflected in near record low vacancy rates in most capital cities and accelerating rents. Combined with a flattening of home prices, the acceleration in rents is improving investor yields, particularly in Sydney.”

A heavily undersupplied housing market will drive strong rental growth and improved investor yields for the foreseeable future.

Mr Braddick says he expects that low vacancies and improving investor yields, combined with heightened equity market volatility, will put a floor under house prices and eventually encourage investors and first home buyers back into the property market.

While a structural reduction in interest rates over recent decades has moderated the rise in debt servicing costs, deposit affordability remains a key hurdle to first home buyers.

“Australia enjoys one of the highest housing owner occupation rates in the world,” Mr Braddick says. “However, with home affordability to remain a key constraint in the decade ahead, we expect an ongoing shift in tenure towards home rental.

“This shift implies a gradual rise in the share of investors in the market. As a consequence, the growth in investor finance is forecast to rebound and outstrip growth in owner occupied finance in the years ahead.”

Good investors will realise the opportunities that await them in the property market, he says, and will look to capitalise on these opportunities within the next six to 12 months.

Getting to know investors

Investors represent lucrative opportunities for brokers, but to crack this market you’ve got to have a clear understanding of the investor client and their unique needs

THE INVESTOR market segment is set to regain momentum, something that would be very welcome news to mortgage brokers.

There’s no doubt that investors represent a profitable source of business to anyone in the home loan business.

From consecutive loan opportunities and long-term refinancing requirements to big dollar loan potential and the need for a raft of other financial products and services, there are plenty of reasons why investors are a popular target for brokers.

But only brokers who truly understand the needs and the motivation of investors will be able to capitalise on this market in full.

TAPPING INTO THE MARKET

It is crucial to understand not only what makes an investor tick but also how they differ from other home buyers.

“They are savvier, having [generally] purchased before; they know what they want in a product; and normally they have spoken to an accountant, so they are aware of the strategies behind investing, that is, maximising capital growth and minimising taxable income,” Finance Made Easy’s Tony Bice says.

Investors are also generally less sensitive to interest rate changes than other home buyers.

So, when purchasing a property, investors are less likely to focus on rates and will instead look at three main points:

• The price of the asset
• The potential capital growth
• The potential rental yield

Brokers who know their products and have experience in property investment will be well placed to service investor clients, not least because they respect the opinions and advice of professionals.

It is therefore essential that brokers treat their investor clients with respect, says Mr Bice.

“Don’t treat them like first home buyers – be there to guide them in areas that are a little more complex. Work with their accountant or financial planner and know your products,” he says.

Mr Bice has dealt with many types of investor, from seasoned professionals to first timers, and from young professionals to mums and dads.

So, how does he target this wide market segment?

Putting articles in his newsletters that deal specifically with investment is one way. This not only lets his client database know he has the necessary abilities to cater to the investor sector, but also that he has experience in the field himself.

“If you appear familiar with investment strategies then they will listen,” Mr Bice says. “Being a financial planner certainly helps to give me a certain level of credibility, and using your own experience, having bought a number of investment properties over the years, also helps [by providing] real live examples.”

Newsletters, however, are just one way to maximise your chances of tapping into the investor market.

House + Home Loans chief executive Rael Bricker says investment seminars are another great way to attract clients.

Mr Bricker, who regularly hosts seminars across his home state of Western Australia, says the key is to create a program that is intelligent, sophisticated and informative.

“Investors are savvy,” he emphasises. “They know the market, so they don’t want to go to a seminar that has been played down for the lowest common denominator. The trick is to know what investors want, understand their needs and then to deliver on that.”

CATER TO THEIR NEEDS

Of course, to understand investors properly, brokers must first know what it is that investors want from their broker.

Mortgage Choice’s general manager for product distribution, Andrew Russell, says there are several things an investor looks for in a broker.

The first is quick turnaround and excellent service.

“Investors are typically very intelligent operators, so they want to deal with someone who has a good understanding of the market, the various products available and any product nuances,” he says.

“They want to deal with someone who can get their loan approved fast and without hassle.”

The second thing investors look for is expertise and experience.

“Investors need to have a high level of trust in their broker,” he says. “Brokers can build up this trust by taking the time to understand their client, their specific needs and their future desires.

“Moreover, investors want to deal with someone who has access to an extensive panel of lenders, good relationships with those lenders and good relationships with other industry professionals.”

Investors are often time poor; they don’t want to see 10 industry professionals just to get their loan approved and their finances in order.

They want one person to do the leg work and get everything sorted.

“If you provide your investor with an exceptionally fast, comprehensive service, you can be assured of them coming back time and time again,” Mr Russell says.

Brokers who can create a professional relationship based on trust, knowledge and expertise will do incredibly well in the investor sector, he adds.

And because investors are typically property enthusiasts, they can be strong word of mouth advocates for a broker. Investors tend to mix and mingle with other investors, so the potential to add big dollar new clients is high.

“Understand the property market, understand investors and what they want from their broker, deliver on that, and you can’t go wrong,” Mr Russell says.

What do investors want?

There are plenty of loan products for investors out there, but what defines those that will meet their needs?

INVESTORS’ NEEDS differ from those of home buyers and the right loan product can have a significant impact on building a property portfolio successfully.

While first home buyers and up-graders may be happy with a basic home loan, an investor may need something more complex.

Some, for example, might like a line of credit attached for emergency use, while others may need an offset account.

“We are seeing many types of investor these days, some that are looking for a long-term yield as well as younger investors who want to get on the property ladder but may not have enough money to buy their ‘dream home’ right now,” says ANZ’s head of broker distribution, Meg Bonighton.

As winner of the coveted Investor of the Year award as well as overall Lender of the Year at this year’s Australian Lending Awards, ANZ and the bank’s broker distribution team are only too familiar with the needs of investors.

It is essential that brokers understand exactly which products are available to this sector, Ms Bonighton says.

House + Home Loans chief executive Rael Bricker agrees.

“It is important to understand their situation and their needs. That way you can advise them properly.”

Basic variable home loans with a small line of credit are proving to be very popular with home owners, he adds. This can give them the flexibility they need to move quickly when an investment opportunity arises.

“If they are new to investing, I tell them exactly what expenses they will be up for. Sometimes, they don’t think of all the little things – like property repair bills or disagreeable tenants – which is why so many then opt to have a line of credit attached for emergency use.” Brokers may also need to educate investors on the role of interest-only mortgages and the importance of cash flow.

PRODUCTS AND SERVICE

Investors look for some flexibility in their mortgage. While some will just want a product that they can happily set and forget, others will look for something more sophisticated.

“Offset accounts and flexibility of redraw are important to investors,” says Andrew Russell, Mortgage Choice’s general manager for product and distribution.

“Investors will come to a broker after they have done their homework and know a lot of the products out there that are available to them,” he explains.

“[Investors] want some help and guidance in understanding the product nuances and figuring out which one is best for them and their needs. This is where brokers come in.”

However, while product flexibility is important, investors are typically time-poor so by the time they speak to a mortgage broker, they likely want to move on a property immediately.

“While first home owners often don’t understand the mortgage process and are happy to wait for things to be approved, investors are not so happy to sit idle and wait for something to happen,” Mr Russell says.

Brokers who want to ensure they retain their investors long term will need to get their loans approved in a seamless and efficient manner.

“Because investors are generally more experienced buyers, rates are not necessarily the key factor. They are more likely to place value on the overall service and guidance they receive from their broker,” says Ms Bonighton.

Investors use a broker because they don’t want to have to do all the leg work themselves.

Cracking the market

Breaking into any new market segment can be a challenge, but with the right strategy, brokers may find the investor sector easier to get into than they had thought

INVESTORS ARE right up there for brokers when it comes to attractive demographics. Unlike home buyers, they see opportunity in adversity so are less likely to get spooked when market conditions look uncertain.

What’s more, investors are not limited to their local market and will often look at the Australian market as a whole, targeting the areas with the best returns as they arise.

There will always be areas of growth – even in uncertain times – and so there will always be opportunities for investors.

And a client base that continues to buy regardless of market cycle will form the backbone of a lucrative business for a broker.

So, just how should you go about tapping into the investor market?

First, analyse your existing client base to see what proportion of your loans are for investments.

You already have a relationship with these clients, you know they are a quality prospect and you already have an overview of their financial position. Plus, some of them are probably considering investing again in the future.

“When approaching potential investors, good brokers look for affluent property holders who have equity in a current property with the ability to take on an additional mortgage,” says ANZ’s head of broker distribution, Meg Bonighton.

“Many of them have great systems in place to contact clients from five to 15 years ago to see if an investment property may be within their current financial plans.”

Brokers should keep in regular contact with their existing and potential investor clients to ensure they are ready to act for them should the opportunity arise. Investors often need to seize opportunities quickly and a broker could miss out if they’re not on the ball.

“Speed is of the essence,” Ms Bonighton says. “Investors are generally experienced buyers so they are looking for the best deal overall, which means they are not just after the cheapest rate, but the [best] level of service from both their broker and bank as well as a good product offering.”

The number of investors you currently service, however, will in many ways determine how you market yourself to them.

If you’re looking at just a handful of clients, a personal call can be highly effective; if their ranks are somewhat deeper, an email or newsletter will go a long way to informing clients about your services as an investment specialist.

“Send annual reviews, birthday cards, personalised emails and company newsletters as often as you can,” says 1st Street Home Loans’ Mardee Thomas.

“If, in addition, your clients have a high net worth, it might pay to conduct six-monthly reviews of their mortgage, just to let them know you care about them and their financial needs.”

Now, with your existing client base covered, it’s time to turn your attention to building new business opportunities.

You need to be especially innovative, including taking advantage of events such as seminars and information nights.

Also, leverage any referral partnerships that are likely to provide a more direct route to investors, including those with buyer’s agents, accountants and conveyancers as well as with real estate agents, developers and financial planners.

INVESTMENT SEMINARS

Educational seminars can be particularly effective in reaching local first-time investors.

Once again, the place to start is your existing client base, but for greater reach, look at joining forces with another professional, such as an accountant, a buyer’s agent or a developer.

A good seminar will be of value to your clients and other prospects, further strengthening your value proposition. But when brokers collaborate with other professionals they are also potentially getting a new referral partner.

Essential to the success of hosting an investor seminar is planning. It is not just the smooth running of the event that needs to be considered, it is also the content.

“I would recommend these evenings to all brokers, provided that the strategy and alliance you set up is in line with the purpose of the information evening,” Mortgage Solutions Australia’s Steve Smith says.

“Having a mortgage broker, building expert, estate agent and surveyor speaking creates a great deal of interest because you give a good cross section of the industry.”

INVESTMENT CLUBS

House + Home Loans’ Rael Bricker encourages brokers to establish a referral relationship with a buyer’s agent or investment club – something that has proved very lucrative for him over the years. “Buyer’s agents in particular are great referral partners to have because they do not expect a cut of the commission,” he says.

“Be upfront and honest about your intentions. Let them know what you can do for them and then over-deliver on that promise,” he says. “I have had the same referral partners for years. They stay with me because I am incredibly loyal and honest.

“If I think a client shouldn’t be buying an investment property I won’t advise them to do so. Similarly, if I hear one of my clients is thinking of using a particular buyer’s agent I will redirect them towards my referral partner.”

The investors clubs has provided Mr Bricker with his greatest number of business leads over the years, but he remains optimistic about his newest referral partner, Iron Fish, which specialises in working with foreign investors, a market segment to which Mr Bricker is particularly close.

Mr Bricker’s office team includes Mandarin and Cantonese speakers, which has obviously helped his business create its referral partnership with Iron Fish.

Maintaining it comes down to professionalism: “If you set your stall up on being professional, your referral partners will trust you and your business,” he says.

MARKETING AND PUBLIC IMAGE

While you don’t need to totally reposition your business, the more visible you are as an investment specialist, the more effective you will become at winning new business.

First, dedicate a section of your website to investment, introducing your services and including testimonials from investor clients. To further support your positioning, you could include market reports and economic forecasts that focus on the property market – as long as they are properly reproduced and attributed to the source (with permission, if required).

Investors are more likely to use the services of a broker who is perceived by the community to be an authoritative and trustworthy spokesperson. This is why some brokers also seek opportunities to engage the media.

Those who receive publicity for their professionalism, market knowledge and insight will gain a significant advantage over their competitors. In an industry in which local area marketing is critical, local media exposure can be one of the most effective – and cost-effective – marketing initiatives.

There are several ways to engage the media, whether it’s the local paper, radio station or magazine. The gateway to good publicity, however, is the editor so if you make a good impression at the first contact you’re well on your way.

Brokers who already have a substantial database also shouldn’t overlook their own backyard. Now that detailed fact finds are carried out at the initial interview stage – as required under NCCP – a broker will know sooner whether a client has aspirations to buy an investment property sometime in the future.

RETAINING THE INVESTOR CLIENT

Whether the clients in question are home buyers or investors, retaining their business for the long haul is crucial.

“Brokers should be mindful of their client’s overall lending portfolio,” Ms Bonighton says. “Property investments have returned some excellent yields in the past, but it’s important for brokers to know their client’s appetite for risk as well as what banks will lend in the current environment.

“The best brokers know that there is opportunity for further referrals with investors, so it’s best to keep these clients happy by demonstrating professionalism and being open and honest, as well as providing them the best products to suit their needs.”