How do you measure oversupply in the market and what does it mean to investors?

How do you measure oversupply in the market and what does it mean to investors?

 

New figures illustrate just how hard some real estate markets have been hit by the downturn in the resources sector. Michael Yardney tells us where and by how much.

Senior Economist Dr Andrew Wilson explains how we can tell when enough becomes too much, that is when a market goes into oversupply and prices are impacted, investor and commentator Chris Gray speaks about how he has recession proofed his portfolio and valuer and Chairman of Herron Todd White, Gavin Hulcombe, tells us where he sees investors go wrong with research.

We have some sharp negotiation strategies to share with you as Nhan Nguyen tells us how he ensures he gets it right at the purchase stage. Remember you make money when you buy not when you sell so this advice is gold.

Australia is an enormous country. When we look at it from space, especially at night, the image can tell us a lot about the local property market and gives us an insight into why it has been reasonably solid compared to some other countries. Mark Armstrong from iPropertyPlan explains.

 

Transcripts:

Chris Gray

Kevin:  As we round out 2015 and head towards a brand new year, it’s a pretty good time to be thinking about your portfolio and how you should be recession-proofing your next investment property as you build your portfolio. Chris Gray is a great friend of ours, a media commentator, a property expert, a TV presenter, an author, and a speaker.

Gee, you’re pretty busy, Chris.

Chris:  It sounds as if I am, but the great thing is with media, you can do it absolutely anywhere in the world and you can leverage and send to thousands of people, so it’s all about efficiency.

Kevin:  Indeed it is. What’s your strategy for recession-proofing property?

Chris:  I think the biggest thing is it’s in the quality and the location of the property you buy because like in any recession, you find some businesses do the most amazing business in the recession and not everyone is affected. The main thing with property is if you buy the right property in the right suburb that is attracting the right tenants, there’s no reason for it necessarily to be affected.

Kevin:  Does it always have to be in a blue-chip area, Chris?

Chris:  It doesn’t. There are always exceptions to the rule, but I always find that if you stay around main capital cities, there are so many different industries supporting those capital cities that even if one or two industries are put down, there are certainly enough people employed in the other locations versus obviously, if you’re in a one-industry town in, say, mining, for instance, it’s hard to fight back in Perth if the whole mining industry is going down.

Kevin:  With your portfolio, when you’re looking for a new property, do you always look for something you can add some value to, and does that actually help?

Chris:  It always helps if you can add value, but for Sydney, for instance, where I’ve been buying, it’s such a heated market, I always say I’d rather buy fully renovated today where I can add no value than buy unrenovated tomorrow, because it might take me three, six or nine months to find something unrenovated and in that time, where I might have made $20,000 or $30,000 on the renovation, I might have paid $50,000 more in the price. It’s all about trying to put things into perspective.

Kevin:  How important to you is your buffer? I imagine, if we’re talking about recession-proofing your property, you’ve got to be prepared for any sort of economic situation that might come up.

Chris:  Exactly. In every part of the business world and investing world, they say cash is king and no much more than property. The majority of times people lose money in property is when they’re forced to sell, so if you have cash on hand, just like working capital in the business, even if your tenants move out, or interest rates go up, or you lose your job, if you have cash on hand that can last you maybe one year to three or even five to ten years, then that means you don’t have to sell it and so the chances are if you can hold on, in time, residential property does always come back.

Kevin:  You’re a professional investor. You’re in the industry. Do you have someone look after your properties, or do you do it yourself?

Chris:  I do absolutely nothing myself. I always think there’s always someone better who can do it much better than me so I have property managers based here and over in the UK. I say, “Look, if the repair bill is under $500 or even $1000, just get on and fix it. I can’t fix the leaking tap or negotiate a better price, so just get on and fix it.”

I have about 14 properties, and I probably spend half an hour a month. I literally just have an Excel sheet. I count 14 rents coming in, 14 rents going out, and if ballpark the numbers are roughly right, then that’s all I do.

Kevin:  How often are you checking those against the market to make sure that you’re keeping up with market conditions?

Chris:  To be honest, I don’t. I just believe in having the right property managers who do their job. They have an incentive that the more rent that they get me then effectively, they charge a percentage of that so they make more money, and at the same time, they won’t go and rent something to try to get another $50 a week if it’s going to risk losing a tenant for a few weeks because they know at the end of the year, then it’s going to cause more grief. It’s all about having a balance between getting a reasonable amount of rent and ideally, virtually no vacancy.

Kevin:  Chris, great talking to you, mate. Chris Gray, thank you very much for your time.

Chris:  My pleasure.

Michael Yardney

Kevin:  New figures out illustrate just how hard some real estate markets have been hit by the downturn in the resources sector. The figures show that homes in Queensland and Western Australia have been impacted by massive decreases in price over recent years. Michael Yardney from Metropole Property Strategists joins us.

Hi, Michael.

Michael:  Hello, Kevin.

Kevin:  Michael, what’s the bottom line here? What are you reading here?

Michael:  Recent studies have shown that the boom period for Queensland’s mining town house prices is over, and as investment spending has reduced in these areas by the big mining towns, demand for property has contracted, there are lots of properties for sale, there are lots of properties for lease, huge volatility, rental demand has decreased, and values of properties have, in some areas, dropped by up to 70%. This is devastating. In fact, in my mind, it will bankrupt some property investors.

Kevin:  Yes, that’s a terrible story. It’s continues on. You’ve been warning for some time about mining towns. Let’s look specifically at why, Michael.

Michael:  In my mind, they comprise of transient populations that are almost solely reliant on a resources project. Employment happens for that reason and because that experiences large swings in demand, I like areas that are underpinned by lots of owner-occupiers wanting to live there.

But people weren’t moving there to live long-term, and most of the properties were driven by investors buying, chasing the next hot spot and it’s just a repeat of what we’ve seen when investors have chased hot spots before. They’ll make short-term profits, and those who get in early sometimes do well but the majority of people get burned, Kevin.

Kevin:  Michael, how many times have we said, “If it looks too good, it probably is”? Maybe we should extend that by saying, “If it looks too good, it’s probably too good to last”?

Michael:  That’s probably better. One of the really popular hot spots, Kevin, was Moranbah. Its median prices grew roughly 30% each year and that was for about ten years so people said, “Yes, it’s going to last forever.” But this stopped in about 2012 when prices peaked at about $750,000, and Kevin, rents in Moranbah grew to $1800 a week. That is too good to last, as you say.

All of a sudden, the mining companies said they’re not going to be able to pay those sort of rents, so they suddenly had these fly in, fly out workers or built temporary camps themselves and now the median price in Moranbah has gone from $750,000 to $215,000. Houses, if you try to get out and sell, would now maybe take eight months to sell, if you could – because there’s no one buying – and rents have fallen from $1800 to $300 a week.

Kevin, we are regularly seeing people who have invested in those areas who come and ask us for help – not that we gave them the initial advice to do it and invest there – but we can’t and it’s devastating because they have what is called a negative equity. They own less than they owe so if they had to pay their bank mortgages out, they’d have to fork out a couple of hundred thousand dollars, and this is causing hardship, sleepless nights and probably if the banks pulled the rug out from under them – and the banks don’t want to – it will cause bankruptcies.

Kevin:  Michael, apart from not doing it, what are the real valuable lessons that come out of this?

Michael:  What you said right at the beginning, Kevin, if it seems too good to be true, it is. I think you have to stop looking for the latest hot spot, the next boom area, but invest in our four big capital cities where there are multiple drivers to the economy, which leads to job growth in a range of industries and therefore wages growth.

I’d avoid investing in regional or mining towns because they lack the multiple growth drivers and they’re dominated by investors rather than owner-occupiers. It’s owner-occupiers who bring the stability to our property markets that stops the volatility that you get in share markets, Kevin.

Then, of course, I’d only invest in those regions within the capital cities that are going to be driven by higher wages growth, so it’s being very selective in this more mature stage of the property cycle, Kevin.

Kevin:  Thanks, Michael. We’ll catch you again soon.

Michael:  Thanks, Kevin.

 

Gavin Hulcombe

Kevin:  One thing I know about valuers is that they make the valuation process look so easy. That’s because they know a lot about the market. I think sometimes investors think that they can just do five minutes’ worth of work and probably know everything about the market. I’m talking now to Gavin Hulcombe who is the chairman of Herron Todd White nationally and also Queensland managing director.

Gavin, thanks for your time.

Gavin:  No problem. Good morning, Kevin.

Kevin:  Morning. I know that valuers spend a lot of time studying the market and always looking at it. Where do you see investors go wrong with the research that they do, Gavin?

Gavin:  I think one of the hardest things for anyone to do is to come into a market that they don’t know or a location that they don’t know and try to understand the local drivers. I think that can be someone who is coming from interstate; obviously, it’s very hard to know the specifics of a location.

But I think even at a micro level, if you live on one side of a city or one side of Brisbane and you want to go to buy something on the other side, there are often a lot of local drivers or specifics that the locals know that people coming into an area might not necessarily know. I think they do tend to have a fairly big influence on value.

Kevin:  I think probably a decade or so ago, there was probably a time when the market was a lot less forgiving than what it is now and you could probably make some mistakes and just wait for the market to sort itself out, but you really have to be on top of it nowadays, Gavin, I find.

Gavin:  I think that’s right. I think you really have to be looking to outperform the market. If you’re happy to take the average of the market or if you make some mistakes, you’re right, I don’t think we have the same level of uplift. There’s the old saying “Every player wins a prize.” Well, that applies in some markets, but I’m not sure that we’re in that phase now. I think if you don’t make the right decisions, you are actually at risk of losing.

Kevin:  The topic for this conversation was where investors go wrong with their research. Quite often, you can do it at arm’s length, and I think you’ve mentioned the point that you have to get on the ground and feel what those local drivers are all about. Would your advice be to make sure you travel to the area you’re going to invest in?

Gavin:  I think you need to travel to the area. I think you need to talk to people. That might even be talking to as many property people as you can, whether that’s real estate agents, talk to council, talk to town planners. Even having chats at the coffee shop, I think you start to get a bit of an understanding of what drives the local market by doing that. It’s getting out there, talking to people, and you certainly have to walk the streets. The idea of sitting on the Internet and doing it all remotely, I think can be quite misleading.

Kevin:  What is a valuer’s role nowadays in advising investors – if that’s, in fact, what you do or you’re prepared to do – about the market that they may be looking at? Or do you simply look at it as a valuation and it doesn’t vary?

Gavin:  If I’m really honest with you, some valuers do fall into the trap of “I do valuations,” and that’s what they do all day every day. I think there are other people who can step back and take a bit more of a macro view and say, “These are the areas that I would be considering and this is why.” Then once you started to narrow down your pocket, then you can say, “Well, what’s your price point?”

Basically, you start to narrow the field within which you’re looking. I think some valuers can do that quite well and certainly it gives you the ability to tap into the knowledge that they have. More often than not, they’ll know the suburb intimately and more often than not, the street. That can certainly provide some really good insights for people who are wanting to invest.

Kevin:  In our show, we always talk with our investors and advise them to make sure they put together a team of people. Is it possible for a valuer to be on a team and look at areas outside their area of influence? As an example, would you be able to do valuations and help an investor in all parts of Australia?

Gavin:  I don’t think anyone can know all parts of Australia that well. I think what you need to do is go to locals. For Herron Todd White, we have 65 offices around the country, we have people in most parts of Australia, and it would be a matter of going to the local office and the local valuer so that they can provide the local insights.

I don’t know that anyone can give an overall view of Australia, but I think it’s about starting with the big picture, starting to narrow it down and saying, “Well, why would I go to that area over another?” Once you narrow it down to a city, then I think you can start to narrow it down to a part of a city, then a suburb, and then you’re starting to get into the specifics from there.

Kevin:  Gavin, thank you so much for your time. It’s been great talking to you as always. Gavin Hulcombe, chairman of Herron Todd White Australia and also Queensland managing director.

Thanks for your time, Gavin.

Gavin:  Thanks very much.

Andrew Wilson

Kevin:  Gee, we hear a lot about how our market has gone into oversupply. I don’t know how many times I’ve heard about the Brisbane market going into an oversupply of units only to further down the track find that that simply wasn’t the case. How do you measure an oversupply in the market? When is enough too much? Dr. Andrew Wilson, the senior economist at the Domain Group joins me.

Andrew, thanks for your time.

Andrew:  Pleasure, Kevin.

Kevin:  When is enough too much? How do you measure an oversupply?

Andrew:  Even though oversupply, of course, can have consequences for developers in the shorter term and perhaps investors in the long-term, I’m not sure that oversupply has quite the negative connotations generally that we put to that descriptor.

Obviously, markets that are oversupplied are typically high-rise apartment markets. The very nature of construction of those developments being large scale means that typically supply does move ahead of demand. There is a sense, I guess, of looking into the crystal ball from developers in terms of matching demand with supply, but over the longer term, all these markets do adjust one way or the other.

It’s interesting, of course, that we had a big oversupply issue – notionally an oversupply issue – on the Gold Coast. Of course, there was significant development over the past decade in high-rise apartments there. There were issues over the shorter and medium term in terms of prices growth, but one of the interesting facts of the Gold Coast apartment market even though prices growth has been relatively subdued is that it now offers very high yields for investors who have those investments.

Yields on the Gold Coast apartments are as high as 6% in some developments – and higher – and vacancy rates are quite low, so there is a consistency in terms of not just the return on income but the level of the return on income.

I guess it’s which way you look at it in that sense, Kevin, from the notion of oversupply. Of course, that high level of, particularly apartment construction, means jobs, jobs, jobs and that works its way then on into the economy which does then feed back into demand for housing.

I think that’s what we’ll see in the Brisbane market, particularly, as an example. I don’t think the Brisbane market will have quite the oversupply issue that the Gold Coast had, because it’s more of a residential market rather than a holiday-focused market, which of course, the Gold Coast developments were designed for. I think that Brisbane high-rise apartment market will generally absorb demand over the medium term as there is growing interest in living in the city and in apartments.

But oversupply, I guess, is signaled by falling rents or reduced rental growth and also reduced prices growth. But these do tend to be short-term dynamics and they do adjust over the medium to longer term.

Kevin:  I do think sometimes we tend to look at how many units are under construction or being planned for. We then look historically at how much demand there’s been. That can always indicate that we’re headed for somewhat of an oversupply.

I sometimes wonder, Andrew, whether it’s a bit like “Build it and they will come.” I know that you can’t say that necessarily, but sometimes it does happen.

Andrew:  That’s right, Kevin. That’s the point. The nature of high-rise development and particularly in a suburban or in a city high rise development where it’s typically brown field sites, so there needs to be some sort of a cooperative element with governments, and of course, governments are always quite keen for economic development and particularly construction given that we’re having this shakeout in the resources sector now that we need to find other ways of generating jobs. Construction is always a very positive economic driver. It creates a lot of downstream economic activity as well as onsite jobs, so governments are very keen to facilitate this.

But as I said, I think that Australia really characterized – particularly capital cities – by an undersupply of property over the longer term. I think that we’ll see most of these markets that are notionally oversupplied, these inner city high-rise markets, adjust sooner rather than later, with perhaps the exception of the Melbourne market.

That’s generally a CBD market rather than a neighborhood market, which the Brisbane market is, an inner city neighborhood market. I think we’ll start to find buyers particularly as that growing demand is growing interest for inner city apartment lifestyle takes hold in Brisbane, and we’re certainly seeing signs of that already.

Kevin:  Good talking to you, Dr. Andrew Wilson, senior economist with the Domain Group. Thanks for your time, Andrew.

Andrew:  Pleasure, Kevin.

 

Mark Armstrong

Kevin:  It’s interesting. If you’re able to get up into one of those satellites that cruises around the world, have a look at the world by night. You’re going to learn a lot about population densities. I know that Mark Armstrong from iProperty Plan wrote an interesting article recently where he drew some observations about density and where people live, especially in Australia and how that relates to property prices. He joins me.

Mark, it was an interesting article. Just tell us roughly what you gleaned from that.

Mark:  What it means is that you can see from space that Australia has a very centralized property market, which means that the vast majority – around about 70% to 80% – of our population lives in the ten biggest cities around the country. If we compare that to the United States, around about 10% to 15% of their population lives in the 50 biggest cities across the country, so they have a very decentralized property market.

Kevin:  I’m reminded of a comment by Harry Dent about 18 months ago, maybe even two years ago, how the Australian market was going to fall by 40% or 50%. He wouldn’t accept that argument, saying that the Australian and American markets are very similar. What you’re saying is there are huge differences.

Mark:  I think it’s an enormous distinction – the fact that the American population or the American people have a very well-developed small town community set-up and there is nowhere near as much pressure on land value in many parts of the United States. But when you come into Australia, we don’t have a housing shortage; we really have a shortage of housing in areas that people want to live, and they tend to be in the big cities around the country.

Kevin:  That doesn’t make a housing shortage, you don’t think, Mark? Do you think our problem here is that we are landlocked, a shortage of land?

Mark:  Our big cities are enormous, urban sprawls, and they’re getting to the point now where they’re so big that where new land is coming online, you’re pushing out 30, 40, 50, 60 kilometers from the CBDs. There is not a shortage of land a long way from the CBDs, but there’s a shortage of land, obviously, very close to the CBDs, and this is where the bulk of our population really want to live – not everyone, but the vast majority of our population.

Kevin:  Is that the reason, do you think, why in some countries overseas, particularly America, housing is more affordable – because they will actually get people into these smaller towns?

Mark:  Absolutely. When you have more land and less pressure for that land, it means the value of that land will be less. You can go into regional areas of Australia and you can find a house on a nice, big block of land and you can pay around $100,000 or $150,000 for it. But the unfortunate reality is there are no jobs there, there is very little infrastructure there, and people don’t want to live there.

Kevin:  That could be another reason why that American market when it goes into the doldrums, takes a long time to come back out of it?

Mark:  Absolutely. It takes a long time for it to come back out, because again, it takes a long time for the pressure of demand to exceed supply, and in many cases, it never exceeds supply.

Obviously, the low-interest rate environment is really enticing investors. Particularly, we’re seeing the strongest sector of the market is the 30 to 40 year olds who are upgrading their family homes. They may have lived in an apartment or a smaller house but because of family requirements, because they’re having children or their children are getting older, we’re seeing a real pressure in demand for those people who are looking to take that next step in their home-buying lifecycle. Then the low interest rates are really enticing them to do that.

My feeling on rates is it’s a great time to lock in debt, and I think that people should seriously look at locking in debt for three to five years. It gives them that certainty. Whether interest rates go up or down, the fact remains that there are great fixed rates at the moment. They may get a little bit better. I doubt it, but they may. But we shouldn’t escape the fact there are very good deals on offer right now.

Kevin:  Mark Armstrong, thank you very much for your time.

Mark:  Pleasure.

 

Nhan Nguyen

Kevin:  You’ve heard us say time and time again that you’ll make money out of real estate when you buy, not when you sell. That’s very true because when it comes to buying, how sharp you are as a negotiator is going to really depend a lot on how successful you are as a property investor. Nhan Nguyen has written and spoken a lot about this. Nhan is from AdvancedPropertyStrategies.com and joins me once again.

Hi, Nhan.

Nhan:  Good day, Kevin.

Kevin:  I know you’ve made a big study of this. Like me, you’ve probably seen a lot of people fail in the area of property development or property ownership because they simply don’t think about negotiating strategies.

Nhan:  Absolutely. There are so many circumstances and ways you can do business, but you need to think about what the options are out there. I’m happy to share with you a couple of strategies when you’re ready.

Kevin:  What are some of the tricky ones?

Nhan:  Oftentimes, when people see a property market go hot and there’s a lot of activity, a lot of people think they can do development. The reason development pays a lot of money if you get it right is that there are risks involved.

One of the risks, for example, is development approvals. Some people just buy a site thinking that they can get it approved. Part of the negotiation is, when I can through a deal, I prefer to deal directly with owners. I know that real estate agents are probably listening here, but I prefer to deal with owners because I can negotiate, for example, longer settlement terms.

Longer settlement terms allow me to, for example, reduce the risk on holding costs. It allows me to lodge development applications. It allows me to, for example, clear a site if I need to. There are so many reasons.

One tip, if you can, if you’re doing developments, is definitely get longer settlements so that it allows you more time to do things like get finance, get approvals, get valuations, and reduce your holding costs as well.

Kevin:  The market is very cyclical, and quite often when it swings from being a seller’s market to a buyer’s market, we find that a lot of multiple offers start to happen. How do you handle that situation where you’re actually competing with other buyers but at the point of contract?

Nhan:  Yes. That’s very, very difficult, especially if it’s multiple offers on the same day and it closes that day. Building up a good relationship with an agent is really, really important.

There’s a property I purchased last year where it was a private treaty and there was a two-week window. I basically negotiated with the agent. I got her into the property on the last day of the bids. I just was having a frank conversation with her and said, “Okay, do I need to offer more?” She hinted this, hinted that, and in the end, I was able to buy it, but I had to really, really be frank with her and say, “How do I buy this without her telling me an exact figure?”

She couldn’t under the law with the multiple offers. She just said, “You might have to offer more money,” and that allowed me to offer a couple of grand more than the last buyer in that particular instance and secure the property. But I had to know that the deal was solid and that I could get it through council and get it approved to build townhouses in that instance.

Kevin:  Yes, it comes back to what we spoke about several weeks ago on the show. That is when you’re building your team, you have your real estate agent, someone you actually build a relationship with.

Nhan, tell me about auctions. What’s your negotiating strategy there if you find that you have to buy at auction?

Nhan:  Auctions can be a good and bad place to buy at the same time. I’m not a big fan of them because generally the reason they’re there, it’s a deadline and it forces you to make decisions on the spot, whether you’re a seller or a buyer. It makes you commit and if you’re not ready to commit, then it basically eliminates you from the process completely.

I think it’s a good and a bad thing from a buying point of view. If the seller is desperate to sell, that might be a good case for you. However, if there are a lot of bidders, obviously, you’re going to be bidded out most likely.

I think with auctions, one of the tips there is don’t get intimidated by the other people. Know exactly what number that you’re going to stop at. That’s critical before you go into the negotiation phase, because then if there are other people there, there is a lot of traffic, and a lot of people sniffing around, sometimes you can get a bit excited and lose the plot and spend too much money.

You need to know exactly how much you’re going to spend, when to pull out, and if you want to ring in by phone, negotiate and bid by phone, that might be a good idea, as well, but you may not be able to feel where the auction is at.

Kevin:  Yes, I think it’s always good to get there if you possibly can. It allows you to see exactly what is going on and even eyeball your competition. That doesn’t hurt either sometimes.

Nhan:  Yes, exactly. My friend had a Porsche, and what we’d do from time to time with the auctions is we just parked right at the front and see if we could intimidate as many of the buyers as we can saying that we have money and we’re not afraid to spend it and you’re not going to buy this property come hell or high water. That’s potentially one way. I’m not sure if that actually worked, but that was our strategy at the time.

Kevin:  Yes, a bit bold, a little brave. Nhan, thank you so much for your time. Nhan Nguyen from AdvancedPropertyStrategies.com. Thanks, mate. We’ll talk to you again soon.

Nhan:  Thanks for having us, Kevin.

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Kevin Turner
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