07 Jul The ‘halo effect’ and its possible impact + A new investor tool
If you have a background in marketing or if you have just started to dig around in the world of property investment, you may have stumbled across the term ‘halo effect’. This halo effect can be a trap for investors because rather than choosing an investment opportunity based on research and objectivity, people can often make decisions based on bias or familiarity. Peter Gionoli from Investor Assist explains the financial implications of the wrong halo effect.
We talk to one of the authors of a new research model built to increase the accuracy of rental yield predictions. Dr Andy Krause explains how this can be a brilliant tool for investors and we tell you how you can get your hands on the report.
Many home buyers and investors are a little intimidated by the thought of bidding for a property at auction. Michael Yardney points out that if you avoid properties that are up for sale at auction, you’re going to miss out on a lot of good buying opportunities as many of the best properties are offered for sale by auction, particularly in Melbourne and Sydney so he has some tips on bidding.
According to real estate author and buyer’s agent Patrick Bright, the easiest way to keep a renovation on track is to ensure all the tradespeople do their work in the right sequence. He has some tips on getting the sequence right in a way that may just save your thousands of dollars.
We have some news today that will have major ramifications for investors and property manages and could see some tenants getting into some legal difficulties. Shannon Davis has the news on that.
Lenders should be required to provide off-the-plan apartment purchasers with a funding pre-approval that will last them until settlement according to iBuyNew CEO Mark Mendel. He explains that if banks are prepared to fund a development for construction, then they should take the same stance on providing finance when it comes to the buyers of those apartments. Hear Mark’s thoughts on that and the other challenges facing the off the plan market right now.
Peter Gianoli – The ‘halo effect’ and its impact on buying decisions
Kevin: Peter Gianoli is the General Manager for Investor Assist and is a property marketing and investment expert, and he’s talking to me this time about the halo effect.
Peter, thank you for your time.
Peter: It’s a pleasure, Kevin. Nice talking to you.
Kevin: Firstly, tell me, what is the halo effect?
Peter: Well, I suppose the halo effect has two parts. Number one, it’s probably better known where if you have a look at a property hot spot, where people are constantly looking for property hot spots, the halo effect is the impact of that particular hot spot in and around suburbs around it. So you get a glowing effect of the halo not only from the hotspot but in suburbs around it, and as a property investor, there are opportunities there that are presented.
The other aspect of the halo effect is we all have preconceived ideas. It’s a typical marketing scenario, where each of us have already made up our mind often because of conditioning. So you already have a preconceived idea that the best football team Australia is Collingwood as opposed to, say, the West Coast Eagles, so therefore everything you see regarding Collingwood, you take on a positive message, or it could also be no different to if you’d bought yourself a red car, then you go outside and all of a sudden you notice red cars all the time.
Kevin: Yes, it’s awareness.
Peter: If you have a preconceived idea to something, that can have an impact on how you make an investment.
Kevin: Well, let’s relate this to property, then. What are some of the biases or familiarities or beliefs that we have that sway us in property?
Peter: It could be house versus apartment. Certainly in Western Australia, apartments are new. The only people who lived in apartments – or flats, as they were – in the 1960s, ’70s and ’80s were people living in housing authority blocks of flats, so there is a bit of a stigma around with the empty-nester in Western Australia as an example with houses versus apartments. You’ll hear “Don’t touch an apartment, you have to have a house.” That could be true; it might not be true.
Kevin: Might not be true, yes.
Peter: New versus established. Do you want new, do you want established? Well, it could be as gruff as “Oh bloody hell, you can’t trust builders, so you have to buy established.”
In Perth, it’s north of the river, south of the river. I know it’s eastern suburbs, western suburbs in certain localities.
Kevin: North and south, yes.
Peter: Positively geared, negatively geared.
Kevin: That’s a good one, positively geared or negatively geared.
Peter: Yes, some people have heard somewhere along the line that it really doesn’t matter whether they charge you for a guaranteed rental return and put it onto the price, but it’s positively geared or negatively geared, it’s going to cost you a bucketload, but I’ve heard negative gearing is a good thing, who knows.
Or public or private education, furnished or unfurnished housing. Are we next to private schools, are we next to public schools? Should we buy something that’s already furnished or unfurnished? These are some preconceived ideas.
Kevin: What about some of the common phrases in real estate, like “Location, location, location,” or even “Buy the worst house in the best street”? Do these fall into that category?
Peter: Yes, most definitely. I think “Buy the worst house in the best street” is probably one of the biggest ones, because if it’s already the best street, the value is probably already at its max and you’re actually paying too much for the worst house in the best street.
Kevin: Yes, that’s true.
Peter: Particularly if you compare it to, say, the best house in a lousy street. You might have paid far too much, so that’s one in particular that goes. And of course, “Location, location, location” at the wrong time could be a lousy investment.
Kevin: I suppose there are many others, too, even locations close to the CBD or even easy access to the CBD.
Kevin: These are all preconceived notions, aren’t they?
Peter: Yes, absolutely. I’ve seen properties that are very close to the CBD could be termed good location in that regard but are actually on a busy freeway or a busy road, next door to a petrol station.
Kevin: I imagine this halo effect could be used to great advantage by spruikers.
Peter: Yes, and that’s what we see. That’s the sad outcome. If you already know what people have preconceived ideas to – and it’s not difficult if you have a room full of middle aged empty-nesters, and particularly if you know your market – then there’s a chance if you’re in Western Australia that if you pushed housing, new, with a very reputable builder, north of the river, that’s going to get you your tax back, and maximum depreciation, they’ll all rush to it and say yes, even though they haven’t done any research on the market, the area, the suburb, and the type of dwelling.
Kevin: It’s an interesting subject; it’s one that we should be very aware of. Peter, it’s been great talking to you, thank you. Peter Gianoli is the General Manager of Investor Assist, and you help guide people through this maze quite often. I imagine this is a question that’s asked of you as well on many occasions, Peter.
Peter: Obviously, the question on everyone’s lips is “What should I buy?” because no one wants to look foolish. It’s good if they ask the question, because then you can take them through what all the fundamentals are with property investment, but if they’ve already fallen in love with something, they generally convince themselves that it’s a good idea, and then they’re looking for just those buying cues that reinforce their decision.
Kevin: Peter, great talking to you. Thank you very much for your time.
Peter: A pleasure, Kevin.
Mark Mendel – Off the plan finance pre approvals
Kevin: I mentioned before the break I wanted to talk about off-the-plan sales, but there is another aspect to this that I want to talk about, as well, too. Lenders should be required to provide off-the-plan apartment purchases with a funding pre-approval that will last them until settlement. That’s according to a leading online property agency, which is called iBuyNew. Their CEO Mark Mendel joins me.
Mark, this of course is a major problem looming for developers, isn’t it? And that is, the funding of off-the-plan sales and whether or not purchasers will be able to settle.
Mark: Yes, it is Kevin. Hi. How are you?
Kevin: Good, mate. Thank you. And thanks for joining us.
Tell me what your proposal is and what sort of traction you’re getting for it.
Mark: It’s been brought to light, I guess, as the lending policies have changed over the last six months and they’ve become very tough very quickly for a lot of buyers. When a buyer is purchasing an off-the-plan apartment or a townhouse, it can be a lead time of anywhere from six months to 2½ years potentially when settlement will take place. The buyer might be in a position today under the current policies to be able to settle on that property, but in 18 months’ time, policy changes may be different.
Kevin: The banks have really tightened up, too, haven’t they? We’ve seen these moves by state governments – more recently, Queensland but in particular New South Wales and Victoria – making it tough on foreign buyers, too.
Mark: Yes. I think they’ve gone too far. I think foreign buyers should be paying some form of additional stamp duty.
Kevin: Why do you think that, Mark?
Mark: If they’re putting their money into Australia and they’re buying ahead of an Australian who’s missing out potentially, that additional stamp duty can be used to help the communities where they’re buying property. So additional parklands, upgrades to roads, etc. Why not give the local community the benefit of that while the foreigners might reside overseas? They’ve had the benefit of moving their money out of the country that they’re living in, investing in a stable political economy such as Australia, getting the returns that they’re after. Why not give something back to the community at the same time, as well?
Kevin: Yes, fair enough. But do you think 3%, which is what they’re proposing in Queensland, is too far?
Mark: I think today it is, because the Queensland economy has really taken a hit over the last six months. But they could have done it at 1.5% to start off with and then raised it over time. You have to remember in Queensland you’re still paying another 4.5 odd percent stamp duty as a local buyer where if you look at Victoria, when you’re buying off the plan you pay next to nothing in stamp duty. So they can raise that additional stamp duty to 7% because there’s really no other stamp duty to pay.
Kevin: There is another thing that I wanted to very quickly talk to you about, too, Mark, and get your impression on this and that is off-the-plan sales. They seem to have been tarnished a lot because of the number of spruikers who tend to lean in that direction – in other words, this is the sort of stock that they sell – which to me seems very unfair because there are some very, very, good developers around Australia. Pellicano is one that I’ve mentioned this morning. They have a great reputation and you know if you’re buying through them, these guys don’t sell through spruikers; they have their own sales people.
Mark: Unfortunately in the real estate game there is a lot of money to be made by spruikers, which is why they’re there in the first place. Our company, iBuyNew, when we sit down and we talk to a developer, it doesn’t matter whether they’re ASX-listed or a one-man band, we do our due diligence on them and we make sure that they’re going to deliver the product they say they’re going to deliver and that our clients will end up with the right product.
I think the message to buyers who are looking off the plan is it’s not a problem as long as you’re buying through the right company. Unfortunately a lot of people are not educated enough about it and they go to a spruiker who ends up selling them something that’s overvalued.
If I look at our last 700 transactions at iBuyNew, I think less than 1% have come in under value, which is a pretty strong record in the industry.
Kevin: A very strong record, yes. Good mate. You’ve made some very good points. iBuyNew.com.au is the website. Mark Mendel is the man.
Mark, thanks for your time this morning.
Mark: No problem. Thanks, Kevin.
Michael Yardney – How to win at auction
Kevin: As the auction concept grows in popularity right around Australia – it’s very well engrained in some of the southern states already, but it is growing in popularity in some of the other states, Queensland, Western Australia, South Australia – there are still buyers, both home buyers and investors, who are intimidated by the auction process. I guess it can be a fairly daunting process, so let’s give you a bit of a hand.
Michael, I know that you like auctions. Why is that?
Michael: Kevin, I believe if you have a good property for sale, auction is really the best way to sell it, and as a buyer, I think auction is the most transparent way to buy property. I can see who else is interested in the property, I can see what they’re prepared to pay. I like to see my competition where I can read their body language, watch the signs that they’re coming close to their limit.
I know a lot of people don’t see it that way. I know a lot of people get intimidated by it, and to be honest I still get butterflies when I go to an auction. I think it’s more butterflies of excitement, though, in my tummy than nerves. But I think that keeps me on my edge and makes me work well at auctions.
Kevin: There’s nothing worse than being underprepared, and that’s probably why a lot of people do get nervous – because they don’t know what to expect, Michael.
Michael: That’s right. If you’ve done your pre-auction due diligence – such as getting your finance in place, checking the contracts, determining the maximum price, understanding how the auction works – then you’re going to be in a much better position to buy well. And if you’re not able to bid yourself, I always think it’s good to authorize somebody else to bid on your behalf – a trusted friend or probably best a buyer’s agent because that’s their business, Kevin.
Kevin: I guess you can’t discount the amount of research that you need to do to put yourself in that right position to know how far you want to go and what your walk-away price is, Michael.
Michael: Let’s go through what some of the pre-auction due diligence should be then, Kevin.
Michael: I think first of all, you have to understand in which entity you’re going to be purchasing the property. Is it in your own name, is it in a superfund, is it in a trust, is it in a partnership with your life partner or your spouse? And then you have to get finance pre-approval.
I believe because an auction is an unconditional sale – you don’t have a chance to get out, there’s no cooling off period – you have to have your finance pre-approved and you have to know your budget before you attend the auction. And you have to go with a check or a checkbook – some people still have those, Kevin – because you have to actually give money across on the day when you’re successful.
I think you should also attend lots of auctions to experience the atmosphere, observe the different bidding strategies. I’d not only be going to the auctions of the company that’s selling the property that you’re interested in purchasing but most big companies have a number of different auctioneers. I’d be watching the auctioneer, specifically the one who’s going to be conducting/calling the auction – if you can find out who that is – because they each have their own particular techniques and words they use, and that will give you a level of comfort if you’re familiar with them, Kevin.
Kevin: Michael, I know doing your homework well in advance is very important. Any other thoughts?
Michael: Apart from getting the due diligence so that you understand what the highest price you’re prepared to pay or your walk away price is, I’d also be getting a solicitor to check the contracts, and you can organize amendments to the contracts. You’re allowed to, Kevin. You’re allowed to ask for different terms. They don’t necessarily have to accept them.
And then come to the auction prepared to bid and bid strongly.
Kevin: And on the day, Michael?
Michael: I like to arrive early. I survey the landscape. I see who else is there. I look to see, are they serious bidders? They’re the ones who look at the contract, they say the right things – not just the neighbors who are looking at it.
I like to stand up front, face the rest of the crowd rather than with my back to them, and I like to look like I have deep pockets, stand strongly and firmly, bid loudly – I’ll often start very close to where I think the reserve is – and make my bids in full. I don’t procrastinate, I don’t agonize. My last bid is going to be as strong as my first bid to make sure that I’m not giving away any signs that I’m reaching my limits, Kevin.
Kevin: Michael, what do you do when it passes in or if it passes in?
Michael: Kevin, I want to be in the position that if it doesn’t reach the vendor’s expectation and the property passes in, that I have first right of negotiation. So I want to be the highest bidder at that point. But I’d never bid even higher to get it on the market because auctioneers will often tell you to do that. The trouble is when you do that, all of a sudden, somebody else comes in and you lose it. I like to be in the position that I negotiate with the vendor.
Often they ask you to come inside and talk with them on their turf, and I say, “No, actually I’d rather stay outside.” That puts them off a little bit. But I stay outside on purpose because I want to see who else is hanging around. Are there other underbidders who are still interested or not?
And then the negotiation starts all over again, Kevin.
Kevin: During the bidding sequence, good auctioneers are very good at giving a strong inference of sale. In other words, they make you believe even though it’s not at the reserve that it could be and that they’re going to sell it. How do you overcome that? Do you ask them, “Have we reached the reserve?”
Michael: A lot of purchasers or potential purchasers ask have they reached the reserve, and auctioneers have clever ways of wording it. They won’t say no; they’ll say things like “I’m not going to sell it without telling you.” “You’ll know when it’s on the market.” So what you have to do is do your homework early and understand when it is on the market by hearing the words the auctioneer says.
I wouldn’t be pushing it above the price I’m prepared to bid to get it on the market, as I said before. If it doesn’t get there, let it pass in. You then have a despondent vendor and you’re in a better negotiating position. You’re going to negotiate when it passes in with a position of strength.
Remember, even in great times, at 80% auction clearance rates, 20% of properties pass in. On average, when the auction clearance rates are in the 70%, 30% of properties pass in. So have a good strategy to work when that happens to you, Kevin.
Michael: My pleasure, Kevin.
Patrick Bright – Keeping your reno on track
Kevin: The easiest way to keep a renovation on track is to ensure that all the tradespeople do their work in the right sequence, but what is the right sequence? We’re going to tap into that now and talk to Patrick Bright from EPS Property Searches, also the author of The Insider’s Guide to Renovating for Profit, and if anyone should know, he should know.
Good day, Patrick. How are you doing?
Patrick: Good, thanks, Kevin. Nice to speak with you again.
Kevin: It’s a bit of an art, isn’t it? Many people see renovation as a quick way to make a dollar, but there are also a lot of ways you can go wrong if you get that sequence wrong.
Patrick: Yes, and it costs you money if you don’t get a number of things right. The sequence of tradespeople is always an important one, and something that I notice people… So when you’re looking to do a renovation, it’s a good thing to always ask the tradespeople how long they’re going to take, ask them which trades do they follow, and ask them which trades follow them. That way, you’re not going to have people going in over the top of each other or having to redo work or fix up work and have people come back.
Kevin: We’re going to talk in our conversation with Patrick exactly how you take that information and use it, but let’s just go over those questions once again. The first one was “How long will you take?”
Kevin: Second one was “Which trades do you follow?”
Patrick: “Which trades do you follow?” and then “Which trades follow you?”
Kevin: And the only reason you’re asking those questions… Good tradies would be able to answer that, wouldn’t they? If they looked at your plans and they knew what you were going to do, they’d say “Well, we fit into this part here.” Is that right?
Patrick: Yes, correct. And some trades – like your plumbers or electricians, for instance – they might have to come in and put some pipework or some wiring in and then come back and finish off. There are some trades that will have multiple visits, but you need to know when they’re coming. That way, they’re not having to work over the top, or it makes their job easier.
If all the walls are, say, sheeted out with Gyprock, and then you have the electrician coming on, then they actually have to chase wires through the wall. It can be done, but it just takes a lot more time, marks things up a little bit, and you’re going to pay more money, and you’re going to have to have them come back.
Kevin: So once you have all this information, then you put that into a spreadsheet and format the whole thing in terms of dates?
Patrick: Yes, that’s pretty much right. It’s just using a simple old spreadsheet – nothing too complex – and then you just put the types of trades and the work that’s being done in a logical order, and then put the dates so that you have an estimated timeframe. That way, you know how long they’re likely to take, and that way, you’re going to have people dovetailing in behind the other.
Kevin: Okay, so the first question was “How long you’re going to take?” You mentioned about a buffer, how much of a buffer should you allow around each person?
Patrick: It depends on the trade. I allow 10% buffer, so if they’re saying they’re going to be a week… I’d put at least one day in-between any trade unless they’re less than a day’s work, but if they’re going to be a week or two, you might want to put in an extra couple of days as a buffer – but a, say, 10% or 20% rule of time. You have to allow for weather and things like that, as well, depending on the type of work that’s being done.
Kevin: Yes, because those things can throw the whole sequence out, can’t they? I suppose you have to advise the trades that “While I’m giving you some dates here, these dates need to be flexible, as well?”
Patrick: Exactly, yes. And you’re better of having a few days’ buffer and then ringing up the trades and say “Hey, look, the Gyprocker has just finished.” You ring the tiler and say “Mate, do you want to come a bit earlier?” Something like that is better than “Mate, I have to push you back a few days,” because then that’ll push everybody back, and they’re usually running from job to job.
Particularly in this market, I find – and have for years – good tradespeople really are busy, and they don’t have a few spaced days to space things out for you, so you need to book them in and keep that schedule running.
Kevin: Yes, so once you’ve made the dates, set them out on the spreadsheet, you then book all the tradies in in advance, rather than just ring them a couple of days out. How far out do you normally book them, or how far can you book them, Patrick?
Patrick: Weeks, if not months sometimes. I run a lot of rental projects, I’m doing a few a month, always on the go for clients who we’re managing. Most people will take, for example, about 10 to 14 weeks to, say, renovate a two-bedroom apartment. That’s completely gutting it, from start to finish. I’ll do that in about six, maybe eight weeks tops, depending on weather and things. You can do a lot quicker by being efficient, and I will book those tradespeople in sometimes six, eight, ten weeks in advance.
Kevin: Once we have all this nailed down, from your experience, where do you see most amateur or first-time renovators go wrong?
Patrick: From a renovation point of view, it’s very, very common to either under- or over-capitalize. I’d say 20% get it right, and you’re probably looking at maybe 40% to 50% over-capitalize, and probably about 20% or 30% under-capitalize. That’s simply because they’ve gone too cheap, they’ve not looked at the projects.
You can under-capitalize by doing a cheaper kitchen or cheap tile fittings or cheap tapware, and it looks cheap because they’re trying to renovate to a budget. You have to renovate to a standard, not a budget. Budgets are important to stick to, but set the budget in advance.
I find people who try to renovate to a budget because they pay too much for the property, they’re looking at their margin and it’s getting squeezed, so they start cutting costs on the items in the fitout, which ends up having a subpar job, and you won’t get the value out of it. The tiles, the equipment, or the fixtures that you’re putting in just won’t stand the test of time and just won’t look the part.
Then you have got the other side, which is what the majority of people do: they spend too much. They don’t shop around. You can sometimes spend half as much on very similar look and feel and quality if you know where to look.
That’s something that comes generally with experience, so it is a good idea sometimes for people to outsource a project, but if you’re going to make a bit of a hobby or a bit of a part time career from it, then you’re going to have to learn on the road, learn from your mistakes, and you’ll get better and better. But if it’s a one-off that you’re going to do here and there, then you’re probably better to get an outside advice.
Kevin: Okay. The message or the bottom line here is after you’ve firmed up on the price with the tradie, the three questions to ask are “How long will you take?” “Which trades do you follow? and “Which trades follow you?” then spreadsheet the whole thing. Just one other quick question before you go, Patrick. Fixed-price quoting, is that what you do?
Patrick: Yes, when it’s known. Like if you’re digging a hole in the back yard, you don’t know if you’re going to strike rock. You’re not going to get anyone to fixed-price quote that. However, I do get the fixed-price quotes from tradespeople, yes. I tell them “Look, I want to know, I want it to be fixed, I need to stick to it,” unless, of course, there’s complete unknown. But you shouldn’t have any trouble getting fixed-price quotes.
Kevin: Okay. Patrick Bright, and Patrick is from EPS Property Search and also the author of The Insider’s Guide to Renovating for Profit. Thanks for your time, Patrick, great talking to you, mate.
Patrick: My pleasure. Thanks, Kevin.
Shannon Davis – Tenants at legal risk
Kevin: I mentioned at the start of the show about an issue that could have major ramifications for tenants, property owners, and property managers. A recent ruling handed down in the Supreme Court of Victoria could have serious repercussions for all of these people. The courts there had previously ruled that a tenant may not be in breach of their lease by offering the use of an entire property through Airbnb as a short-term rental.
We’ve spoken about Airbnb on a number of occasions on this show and always expressed a little bit of concern about it. I can see there are some great advantages for it, I’m not knocking the principle overall, but I think its use sometimes needs to be very carefully monitored as you’re going to hear.
When that decision was challenged by the owner, the courts overturned the original decision. So what are the ramifications for tenants, property owners, and property managers? In fact, the courts there ruled that the owner had the right to decide who was going to live in their property.
I want to get a little bit more information about this, and I always turn to one of our experts, Shannon Davis from Image Property Management, also Metropole Property Management. They do property management, as well.
Good day, Shannon.
Shannon: Good day, Kevin.
Kevin: I want to talk to you about Airbnb. Now, I’m not knocking the business itself, but I am expressing some concern about how it’s being used. Just give me a bit of background on this, Shannon.
Shannon: It’s another one of those share economies. They actually own no bricks and mortar, but they have some of the most accommodation in the world – so people’s spare bedrooms or the teenagers’ retreats being rented out as a pseudo-hotel for a short-term stay accommodation rates.
Kevin: From a tenant’s point of view, this sounds like a great idea. This is like “Oh, wow, here’s an opportunity for me. I have a spare bedroom over here. I can maybe make a little bit of cash on the side by offering it up to somebody who might be travelling and make a bit of extra money,” but they don’t realize the ramifications of this and their legal requirements under the lease, do they?
Shannon: Yes, definitely. I think it’s a victory for common sense that now the Supreme Court has turned it around. If you have permission from the landlord, then by all means, go ahead and turn a spare bedroom into a short-term stay, but surely, the decision remains the owners of the property and for its intended use. They could have chosen that Airbnb option themselves, but they’ve taken the secure, longer, and less cash flow option of a long-stay tenant.
Kevin: As I see it, too, there are some other major ramifications that can come back on both the tenant, the property manager, but especially the owner when it comes to insurance. Now, if someone does actually come and live in the property, they’re not on the lease – so therefore they’re not legally there – and in the event that something happens – the place is burned down – as the fault of this person who’s been put in there through Airbnb, or they do a little bit of damage, what would happen to the insurance in that case?
Shannon: It makes for a very ugly scene when it comes time to claim, and there have been precedents where the insurer is going to walk away from any claims related to the Airbnb. I’ve seen the Airbnb stump up some money to mitigate damages in previous incidents, but it’s not very reassuring to the owner of the property.
Kevin: Okay. What are the other problems that could emerge, apart from insurance, as you see it? If a tenant were to do this, they are in breach of their lease, aren’t they?
Shannon: Yes, definitely, and it’s going to mean that we have to put these clauses in and get a little bit more specific, to make sure that it’s all cut and dried. I’m all for innovation and the share economy and things like that, but I think it also needs to be a bit of a level playing field.
It’s unfair if Airbnb’s competitive advantages may not be the tax that they’re paying, less regulation, or insurance compliances. I think it’s new, I don’t think any of our governments have really got their head around it just yet. I think competition, but it should have some level playing field being involved.
Kevin: Yes, I think the original idea behind Airbnb was for an owner-occupier, if they were going to be traveling overseas, maybe then do some kind of swap with someone in Paris. You know, there are those possibilities. “I’m going to go over to Paris for a couple of months, so therefore, someone from Paris can come and stay in my place.” That seems to me to make a lot of sense, and there are those business models that are out there.
I want to pick up on a point you just made about putting additional clauses into a lease. There has to be some caution here, where if an agent just goes and writes something in the lease, it may not necessarily be legal. The bodies who write these leases, what are they doing? The Law Society is an example.
Shannon: Yes. We always get our legal advice for the best clauses to use in these types of incidents and just to make our owners safer with that option. We won’t tolerate – at any stage, be it Airbnb or elsewhere – where the leaseholders are approved, that we have unapproved people living there. So we’ve always very vigorously defended that, because that should be the owner’s right, that he or she knows who’s living in their property.
The other one as well is by the unrelated people living in the same space, it’s classified as a boarding house, as well. If you had a couple of strangers with some permanent dwelling there, that’s the other bit of legislation you might be breaching, as well.
Kevin: Okay, so a boarding house therefore requires special insurance cover as well, doesn’t it? Are boarding house is still very hard to insure?
Shannon: There’s a very stringent compliance, such as cleanliness and fire regulations and stuff like that, and they get checked every one to two years by council and get another stamp for the future.
Kevin: I recall that there were a number of insurance companies in Australia who simply would not give you insurance cover over a boarding house. I wonder if that’s changed. Is it more liberal now?
Shannon: Yes, it’s very comprehensive, the checks that are made these days, so that gives the insurers a little bit more peace of mind.
Kevin: Yes, we have to give them all the peace of mind in the world, don’t we?
Shannon: That’s right!
Kevin: Shannon Davis, thanks for your time, mate.
Shannon: No worries, Kevin.
Dr Andy Krause – More accurate rental yield predictions
Kevin: Some news: two lecturers from the Melbourne School of Design, University of Melbourne, have released a report that has been looking into predicting the accuracy of rental yields – predominately in the Melbourne area but it looks like it will be extended into other areas around Australia. Let’s get a bit of an insight into this. Joining me, one of the authors of the report, one of the researchers, Dr. Andy Krause.
Dr. Krause, thank you very much for joining us today on the show.
Dr. Krause: Thank you for having me, Kevin.
Kevin: Tell me about the research. How was it conducted and what did you find out?
Dr. Krause: My co-author, Gideon, and I started off with just trying to look at what areas spatially in Melbourne had better or worse rental yields. In getting into it, we realized that the question was perhaps a bit more complex than we had initially thought, and we realized that there are a number of different ways to measure rental yields. So we ended up backtracking a bit and working through those ways first.
Kevin: Could I ask you, firstly, why did you undertake the study? What was behind it?
Dr. Krause: My co-author, Gideon, had been doing a bit of work with some of the banks here in Melbourne, and there was understanding that they were going to start to look at limiting lending in some of the various postcodes. So we thought it was a fortuitous time to take a look at the issue of how yields vary over space or over the city.
Kevin: Okay, that’s given us the basis for the study. Tell me how it was conducted and what were some of the findings?
Dr. Krause: How it was conducted is we made a few calls, and luckily we had a relationship with APM and Domain.com.au, and we were able to work out some data access from them looking at all sales and rentals of houses and units in Melbourne over the 2011–2015 period.
The first step was really getting data access, which can be difficult. Once we had that, we then said, “Okay, let’s create a property-specific yield and let’s look at each property that sold and rented, and create an actual yield value for each of those properties, plot those on a map, and let’s see what shows up.”
Kevin: Right. What were the results?
Dr. Krause: I think we have two major findings at this point. The first is that… Often when you look at information that comes out of industry, you see yields shown at a suburb level: “In this suburb, yields are 4.6, and in this one, they’re 2.3, etc.” What we found is that yields vary quite a bit even within a suburb.
I think the first takeaway is that for investors, analysts, whoever it may be, lumping everything into one suburb can make you miss a lot of variation and in some ways leave a lot of money on the table perhaps if you’re an investor.
Kevin: Just looking at some of the heat maps that I have with your report here – I call them heat maps, they’re color coded – if you look at, say, the area of Fitzroy, there are some areas in there that are offering a 6% yield compared to some that are as low as 2%. These are almost within streets of each other.
Dr. Krause: Yes. Again, the big takeaway we had was did people realize how much yield can vary over 400 meters, for instance? That was really the first takeaway.
We then started to look at that a bit more closely and said, “What are some things that may influence yields?” At this point, we started with the idea of train stations – probably something very, very important to people. What our research has shown to date is that in the middle and inner suburbs in Melbourne, for units especially, being within 400 meters of a train station can up your yield up to 0.2%. So purely looking at the transit accessibility can increase yield.
Kevin: Did you find that in areas where there was a predominance of units as opposed to stand-alone homes, there was a difference in terms of the yield? In other words, did the units offer a higher yield?
Dr. Krause: Units do on average offer a higher yield – about 0.5% higher. That’s fairly common knowledge over the entire market, you get a little better yield on units. Of course, what generally happens with units is that you get a little less capital appreciation, so there’s some trade off there as an investor, obviously.
What we tried to do was when we looked at our maps and looked at our analysis, we separated houses and units out simply because some areas are predominately units – for instance, the area around the University of Melbourne and RMIT here in Melbourne – and then there are other areas such as the near Eastern suburbs that are almost entirely stand-alone houses. So we’ve conducted our analysis splitting those two apart since the markets in some ways really are different.
Kevin: Yes, getting back to what I call the heat map, if you look at the area around Melbourne, which I assume is the Melbourne CBD, very high levels of return – around 6%. Predominately, I would imagine, they would be units?
Dr. Krause: Correct. Those are predominately units. Although if you have a stand-alone or one of our terraced homes in the Fitzroy neighborhood, if you’re renting to students, you can still pull a pretty decent yield out of some homes in that area as well. But it’s predominately units, yes.
Kevin: Then, of course, if you jump across and look at the same map that looks at the housing yields, you can see that they’re mainly in the red, which would indicate anywhere from 2% to maybe even 3% yields that you’re getting. But as you’ve pointed out, the balance there is the capital gain is probably greater with the house as opposed to the unit.
Dr. Krause: Correct. That’s generally what has happened here. If you look at the last five to seven years, your capital gain has been higher on stand-alone homes than on units.
Kevin: How can an investor use what’s coming out of this study to help them either predict where they’re going to get the best capital gain or the best return in the years to come?
Dr. Krause: I think at this point in time, what we’ve really been focusing on is trying to say something about yield. Our follow-up study is both looking at Sydney and Brisbane as well as looking into the impact of busy streets, green space, access to water. Those are all things we’re working on at the moment. What we want to be able to do is to come out and say, “Look, as an investor, these are the things to look to for yields.”
Now, each investor has their own risk appetite they’re willing to look at, and that is what they need to look at when it comes to capital appreciation and what sort of time frame they’re trying to hold over.
We’re trying to attack the first question and say, “Let’s first understand yields,” because yields vary a lot over space, but we can expect that general differences over space probably won’t move all that much over time. The capital appreciation could move quite a bit, as both sides have been saying about this election, so we want to move into that in the future. But at the moment, we’re trying really just to focus on the yield.
Kevin: It will be really interesting to watch what happens in Sydney in particular where the market is pretty hot right now, and then you look at Brisbane. Of course, one of the big influences on yield is lower mortgage rates, and we’re certainly enjoying that. That does have an impact on yield, doesn’t it?
Dr. Krause: It does. A lower mortgage rate, generally speaking, will drive up the price, which does drive the yield down. So there is certainly a relationship between interest rates and yields. If you plotted them over time you would see that. Yes, you’re absolutely correct.
Kevin: Have you got a feel for what may happen when you extend the study into Sydney and Melbourne?
Dr. Krause: In terms of looking into a crystal ball, not necessarily. We suspect that a lot of the major trends will hold – mainly that there is variation within the suburb. We don’t see a case where the suburbs in Melbourne vary quite a bit in yields and then we go to Sydney and Brisbane and it’s completely flat across the suburb.
We don’t really see any reason for that since the drivers of yields, in some way, are looking at what are the things renters value and what are the things homeowners value? And where those two things differ is where you get yields on the very high and the very low end. We think that same set-up exists in some ways in all major cities in Australia.
Kevin: Great talking to you, Dr. Andy Krause, a lecturer at the Melbourne School of Design, University of Melbourne. Tell me how we can get hold of this report. Is it available through Domain?
Dr. Krause: If you go to Domain, there are a few new stories about it in Domain, and there’s a link, too. At the moment it’s being hosted on my personal website at www.AndyKrause.com. You can go to Current Research and two different reports are there. We also hope to have this forthcoming in an academic journal sometime in the near future. But I would check out my website for the time being.
Kevin: That website again is www.AndyKrause.com.au. Look for Current Research, you’ll find that button in there.
Dr. Krause, thank you once again for your time and I look forward to hearing from you when we get some results out of Sydney and I guess also Brisbane.
Dr. Krause: Absolutely. We will let you know. It was great to speak with you this morning, Kevin.
Kevin: Thank you. Thanks for your time.