Targeting investors

Four cash rate cuts by the Reserve Bank of Australia during the course of 2012 have meant that the rate now sits at a historic low of three per cent.

In addition, the unemployment rate – as of late December – was sitting at 5.2 per cent.

Analysts had expected the unemployment rate to increase to 5.5 per cent, with the September quarter growth data published in December showing the resources-driven economy had slowed as China’s growth moderated, impacting commodity prices.

But it is not just employment that is faring relatively well; property prices are also stagnating. While that may not sound like a positive, for investors it certainly is.

The property market may be flat at the moment, but it won’t remain that way for long. Indeed, according to some economists, including RP Data’sTim Lawless, Australian property prices have hit the bottom of the cycle and the only way now is up.

In other words, there is no better time to invest in property than right now.

And while prices are low, rents are high, giving consumers even more reason to jump into the investment property market.

According to research conducted by RP Data, there are even 494 suburbs in Australia’s capital cities where it is cheaper to own a home than to pay rent.

In the latest Buy Vs Rent report, RP Data found Queensland boasts the greatest number, at 185, of these suburbs and towns where it’s cheaper to take out a mortgage than a rental lease.

New South Wales has 122, with 48 suburbs located in Sydney. Victoria increased its tally from 17 suburbs in October to 28 areas where, again, using a variable interest rate mortgage structure, it is cheaper to service a mortgage for a property than pay rent.

According to Mr Lawless, the Australian housing market experienced one of its toughest years ever in 2011, with challenges continuing through much of 2012.

“Capital city home values fell by 3.8 per cent throughout 2011 and have followed it up with a further 0.1 per cent fall over the first 11 months of 2012,” he says.

“This is the first time in a long time that capital city home values have fallen over successive years, indicating very different market conditions to those which most homeowners have become accustomed to.

“With capital city dwelling values 5.5 per cent lower than when they peaked, and discounted variable mortgage rates 150 basis points below their 2011 peak, coupled with fixed mortgage rates 225 basis points lower, we may see consumers returning to the property market as they realise that residential property may not cost them that much more to own than to rent.

“In some suburbs it may actually be cheaper than renting, especially where we are seeing evidence of tight rental markets resulting in rental increases and lower home values.

“For many buyers, now may be a good time to either re-enter the market or buy their first home.”

EDUCATING CONSUMERS
While now may indeed be a good time to invest, it seems that not all consumers are ready to take the plunge.

According to the latest Westpac-Melbourne Institute Consumer Sentiment Index, sentiment currently sits at a historically low level.

The index fell from 104.3 in November 2012 down to 100.0 in December.

“This is a very surprising result,” Westpac’s chief economist Bill Evans says.

“When we saw the 5.2 per cent increase in the index in November, which came despite the Reserve Bank surprising by holding rates steady, it appeared that sentiment was finally starting to respond to the accumulated series of rate cuts since November last year.

“With that in mind it was therefore reasonable to expect that the index would respond quite positively to the rate cut the Reserve Bank delivered in December.

“Instead, the index fell back to near its October level and is now 3.2 per cent below its November 2011 level. Households with a mortgage did respond positively to the rate cut, with their confidence rising by 4.4 per cent. However, on the whole, property confidence was down 10.9 per cent.”

So, with consumer confidence sitting at such a low level and the Reserve Bank’s series of rate cuts failing to provide a much-needed boost, what can brokers do to ensure they attract and then retain investor clients?

House and Home Loans’ Rael Bricker says he likes to sit down with all his clients and explain to them the benefit of investing in property.

“There are a lot of excellent investment properties out there at the moment,” he says. “I like to discuss the various yields with my clients and the possible returns they will receive on their properties.

“In Western Australia at present, yields are back over five per cent and the difference between owning a property and paying rent is next to nothing after tax.

“Better yet, in Western Australia salaries are good, which means borrowers can save a good deposit for their home before making any purchasing decisions.”

Mr Bricker says he takes the time to discuss market conditions with each of his clients so that they know exactly what they are getting themselves into before they buy a property.

“If you can explain the property to them as well as the benefits that are associated with buying an investment property right now, you will definitely retain your clients long term. Clients want to know they are dealing with brokers who know their stuff.”

Mr Bricker is one such broker. One of The Adviser’s Elite Business Writers, Mr Bricker specialises in the investor market and has plenty of referral relationships with buyers’ agents. He also hosts investor seminars in his home town of Perth.

“The seminars not only give me the opportunity to meet a whole lot of new potential investor clients, but it also helps me build my profile in the community,” he says.

Property Secrets’ Paul Giezekamp agrees with Mr Bricker and believes it is important that clients trust a broker’s skills and knowledge.

“They aren’t going to deal with you if they think for one second you don’t know what you are talking about,” Mr Giezekamp says.

“If you can prove you know what you are talking about when it comes to investing in property, you will find it easy to retain your clients long term and generate referrals from them on an ongoing basis.”

To prove to his clients that he knows what he is talking about, Mr Giezekamp – who has purchased more than 20 investment properties – will often discuss his own investment experiences.

“I talk about my own investment portfolio and how I built my wealth through property,” he says. “In this industry, I think it is essential for brokers to practise what they preach.

“I always tell people about my own investment strategy and then try to help them implement that strategy into their own life,” he says.

Mr Giezekamp’s investment strategy involves “starting small”.

“When I first started out, I bought cheaper properties and built up my portfolio that way. Today, I buy properties worth $1 million or more, but you can’t rush into big purchases,” he says.

“Even if a borrower comes to me with a huge deposit, if they are wanting to buy an investment property, I tell them to start small.

“Research from RP Data continues to show us that the cheaper properties located 25km outside of the city centres are offering the best value for money and the biggest returns.

“We know these properties will continue to increase in value, so it makes sense that investors just starting out in the game would cut their teeth on the cheaper properties.”

Mr Giezekamp is confident 2013 will be a good year for property investors.

“The fact is rates are low; fixed rates are sitting at the bottom of the cycle; and property prices are stagnating,” he says.

“While some people are hesitant to take the plunge and jump onto the property ladder because of the political unrest in Australia and the problems plaguing our overseas counterparts, there really isn’t a better time to invest.

“When the majority of people are nervous about making big decisions, it really is the best time to take the plunge.

“If you have the nerve, you can secure a property for a good price, lock it in at a cheap rate and then wait for that asset to build in value.”

CONNECTING WITH INVESTORS
Harry Tan of Melbourne-based brokerage HJT Mortgage and Finance says the best place to look for potential investors is in your own backyard.

“Most brokers will find that they have a lot of investors or second and third homebuyers on their client database.

“And as the saying goes, the best place to dig for gold is in a goldmine – in that respect I believe brokers should target their own database through niche marketing strategies before looking anywhere else.”

He says that “newsletters, phone calls and seminars [are] the best way to keep in touch with your past clients.

“Newsletters are particularly effective because I can highlight changes such as the super cap, as well as the strength of the property market through market statistics and encourage my clients to consider investing in property.

“Of course, nothing beats sitting down with your clients and taking the time to really help them see the benefits of property investment.

“I like to discuss what opportunities are available to my clients.

“However, unless a broker has a strong understanding of the pitfalls associated with property market investment, I do not suggest they should go around giving clients property advice,” he says.

PROVIDING ADVICE
While both Mr Bricker and Mr Giezekamp are happy to say they provide their clients with advice based on their respective investment strategies, other brokers may shy away from doing so as they feel this contravenes the legislation.

However, MFAA chief executive Phil Naylor says investment advice, including engaging in market talk and interest rate banter, is allowed.

“Brokers are allowed to provide advice, so long as that advice is around credit,” Mr Naylor says.

“They can talk rates with their clients and they can talk about the state of the property market. If they want to talk extensively about financial strategies, then they need to have an AFS [Australian Financial Services] licence.”

Mr Naylor says many brokers worry unnecessarily about the rules and regulations that apply to credit advice.

“Some brokers believe they cannot provide any kind of advice and this is simply not the case,” he says. “Nowhere in the legislation does it say that brokers cannot provide advice around credit. We know they can and should, which is why we are moving to rename all brokers credit advisers.”

LOOK BEFORE YOU LEAP
The line between what constitutes advice and what is a broker’s duty of care is often blurred, with brokers understandably wary of straying into a minefield when it comes to advising clients.

But with an understanding of where the boundaries lie brokers can, with due care, provide advice to clients when it comes to investing in property.

Vincent Power of Investors Direct, a brokerage located in Melbourne, says while brokers should not offer any kind of financial advice – unless they are licensed to do so – they can and should provide guidance and make recommendations to their clients.

“The word advice is so immersed in consumer protection legislation and potential litigation that its meaning in the most basic form has been lost,” Mr Power says. “Advice is defined as guidance, recommendation, suggestion, and opinion, which all fit within the basis of a broker’s role. Naturally, those suggestions and opinions relate solely to the finance product based on what’s available at the time and what the client is trying to achieve.

“The client can choose how to apply the funds that are raised by the finance, that’s their choice, as it always has been.”

PROACTIVE PROMOTIONS
Phillip Tarrant, editor of Smart Property Investment magazine, says brokers can relay accurate information about the general market in consumer-focused newsletters – as long as they are careful.

“Newsletter articles on the investment market as a whole are perfectly legitimate as long as they are factual and only provide an overview of the market – not specific investment opportunities or opinions on investment decisions,” Mr Tarrant says.

He says that brokers can quote accurate and credible key market data such as vacancy rates, house price performance and rental values from industry sources – such as the Australian Bureau of Statistics – to highlight market dynamics in client newsletters, but they must be very mindful to ensure that they always provide balanced information.

“Brokers have a duty of care to their clients and that means being objective if they are going to cover the property investment market – for example highlighting the prospect of further rate rises and the importance of not over-extending when borrowing.”

HOW TO TALK TO INVESTORS
If you want to become proficient at catering to the investor market, there are several things you need to know:

KNOW THE MARKET
It is vital that all brokers know what is happening in the property market. What are fixed rates doing? What are yields doing? What are the vacancy rates for a particular area and what is the average rental price?

KNOW THE CUSTOMER
Ask the customer about their own financial wants. What do they want from their investment property and how long are they looking to hold it for?

Property Secrets’ Paul Giezekamp says it is also important for a broker to know what the client’s long-term financial strategy is.

“Do they plan to have just one investment property or a portfolio of 20 properties? If you know their long-term goals, you can better help them create a short-term plan,” he says.

GO THE EXTRA MILE
Investors, particularly second- or third-time investors, know what they are doing – they know the property market and they don’t need a broker to hold their hand through every step of the property purchase process.

“Most investors are time poor and use a broker because they know they will get the job done fast and with minimum hassle,” says House and Home Loans’ Rael Bricker.

“If you go the extra mile for the client, they will be sure to use you again in the future and refer you on to their family and friends.”

ASK FOR REFERRALS
Most investors know other investors. Whether they are their friends or someone in their family, they tend to roll with the same crowd as other property investors.

So, if you have done a good job for them, don’t be afraid to ask for referrals – it could pay dividends down the track.