FW:There is a cautious return to bricks and mortar

OZ新人

FW:　There is a cautious return to bricks and mortar

http://www.theaustralian.news.com.au/business/story/0,28124,25317528-5001942,00.html

HE arrived in Australia with just $US100 in his pocket but in less than two decades Peter Huang has established an $80 million empire by buying only property.

The Chinese-born millionaire owns one of the biggest real estate property companies in Queensland and has built up a stable of more than 2000 residential properties across Australia.

And even as the Australian economy sinks into recession, with the more extreme predictions suggesting prices could plunge by up to 40 per cent, Huang is still buying residential property. "It's a buyer's market," he declares. "When it's a buyer's market, we should buy."

And that's what he did earlier this year, acquiring six houses in Broken Hill, NSW.

One was a vacant block for $30,000. The other houses varied in price from $50,000 to $85,000 a house, generating a net yield of about 4 per cent.

His logic is simple.

"The average price in NSW is $500,000, and Broken Hill had the cheapest property prices in the state," he says. "I think the lower-priced properties are going to have higher potential for capital gains."

Huang is just one of many investors who believes the time is right to be getting back into residential property.

"Buying into residential investment at the moment makes a lot of sense," Housing Industry Association chief economist Harley Dale says. "Residential yields are looking increasingly attractive and (with) the tight rental markets that yield situation is going to continue to improve.

"So the yield on residential properties is looking better than a lot of markets now, than keeping your money in the bank. For example, yields on term deposits are sitting at about 4　per cent. It's certainly a better play than equity markets. The yield argument is favourable and getting more favourable."

Dale is not a lone voice. There is a groundswell of support among experts, who also say the time is right to be buying residential. They argue that the holy grail of residential investment -- rising rents, low vacancy and low interest rates -- has never been better.

Sweetening that equation has been the fall in property values.

But detractors, such as property guru Rowan Wall, say there are better opportunities, such as commercial office property, and caution that the risks are still high in residential property, the No.1 risk being job security.

"I don't think we've seen any light at the end of the tunnel yet," says Wall, a director at property investment group Eclipse. "Are our clients getting in? No."

Other detractors point to a potential further slide in property prices.

Nevertheless, RP Data national research director Tim Lawless says for many investors it's a logical scenario.

"For many investors buying into the market now and positioning now, it's becoming much more likely that rental payments are becoming quite close to paying off their mortgage for them or in some cases they're positive cash flow," he says.

"For a long time, that's been the holy grail of investment, to find a rental property that you don't need to contribute any money into.

"Historically that was very rare, but we're finding that's it is becoming more and more common. So even though investors are veryactive now, I expect that over the comingmonths we'll start to see more investment activity."

Australian Property Monitors economist Matthew Bell says while there is potential for property values to come down, particularly at the higher end of the market, "when you look at the affordable end of the market, anecdotally there is a lot of support for those prices at that level based on some still inherent lack of supply, along with the Government's first home owners grant."

The Rudd Government extended the first home owners grant last year, taking it to $21,000 for newly constructed homes. After June 30, the grant is due to roll back to the initial payment of $14,000, unless the Government extends the higher rate.

But as investors consider whether to make a move back into real estate, one question is weighing heavily on their minds, aside from job security. Are there better buying opportunities to come?

In the past year, it is estimated values have come off by about 8 per cent. Morgan Stanley chief economist Gerard Minack reckons housing is going to be a "dreadful investment". He is predicting property prices will plunge by 20 per cent to 30 per cent.

His outlook comes despite positive figures from the latest RP Data-Rismark Hedonic Property Value Index, which showed that in the first two months of this year, national price values rose 1.1 per cent, with most of the gains made in February.

AMP chief economist Shane Oliver has a more tempered view. His expectation is that prices will come off by "10 per cent or so in average house prices".

Minack's sobering assessment is based on job losses.

"The only areas where we've had job losses are the lower north shore in Sydney and the eastern suburbs and some of the western suburbs, and there we're seeing 20per cent type declines," he says. "As we see job losses broaden, I would expect to see those types of house price declines."

Even with the just announced government financial assistance package for people who lose their jobs, Minack says: "We are coming into this (recession) with probably the most expensive housing stock in the world, with one of the most leveraged consumers in the world." He believes the government-banking initiative, which gives people who have lost their job a 12-month break from making mortgage repayments, is just delaying the onset of forced selling rather than changing the outlook.

"I think housing is going to be a dreadful investment," he says.

But for investors who are ready to take the plunge, opportunities are opening up.

Sydney investor Aldo Labi is undeterred. Earlier this year he spent $1.7 million acquiring a five-bedroom house at Bondi beach. He says the investment is a long-term play. "If you buy and sell, then it's not a good investment," Labi says. "But if you buy and keep, no matter what money you pay, you will make a profit. Once the economy gets a little bit better, then you will see how the houses jump by 30  to 40 per cent."

He says he aims to rent out the house for about $1700 a week.

Hotspotting.com.au director Terry Ryder, who has been following housing trends for more than 25 years, says: "The markets that are moving are the first home-buyer areas. I think that's going to continue throughout this year. That's where you are going to get thegrowth in the short term, but also longer term. My research shows that the cheaper suburbs in the capital cities are the best long-term growth."

Ryder says while there are opportunities to do some "bottom-feeding" in the more expensive areas, the biggest myth in real estate is that buying quality property in top-end suburbs offers the best capital growth.

In fact, his research shows capital growth of property in exclusive suburbs is poor and volatile. The worst long-term performance in capital growth, he says, has been Sydney's lower north shore, averaging at about 6 per cent to 7 per cent.

The better towns and suburbs are doing more than 15 per cent a year average, with the very best at more than 20 per cent a year onaverage.

In NSW, Ryder says locations outside Sydney such as Bungendore, the southern highlands and Brunswick Heads are generating growth of 15 per cent plus.

He says all the cheaper suburbs in Brisbane have done better than 15 per cent.

APM agrees the best place to be is in the lower end of the market.

"We think the first home owner grant areas, what we call the more affordable end of the market, has probably appreciated in the past quarter and will continue to do so in the next quarter," says Bell. "We still think there's potential for falls in the upper end of the market."

Ryder also points out that houses traditionally fare better than units in terms of capital growth and tend to hold their value longer than apartments.

Based on the latest data from APM, the best rental yields are in Darwin, Sydney and Canberra. Its December 2008 quarterly report showed gross rent yields in Darwin were the highest in Australia at 5.4 per cent.

Yields across most of the main cities were tracking at 4 per cent to 5.5 per cent.

In Sydney, the rental yield stood at 4.5 per cent but was higher across houses in the southwest and western region at 5.6 per cent and 5.2 per cent respectively. Unit yields in the same region were higher at 6.7 per cent and 6.8 per cent.

The gross rental yields for units in Canberra were about 5.75 per cent and 4.85 per cent for houses. In Brisbane, the area with the best unit yield was the northern area at 5.3 per cent. For houses, the best yield was in the western suburbs at about 4.6 per cent.

"My expectation (is) that the trend that's gone over essentially in the last year is going to continue," Bell says. "Rental growth is still going to be strong and I can't see any significant enough increase in price in any areas to overcome that."

For self-funded superannuation funds considering residential investment as part of their investment strategy, BT Financial Group head of investment solutions Patrick Farrell says: "I think residential investment is a good asset class to be in. It does diversify against some of the listed market equities and even in fixed income. Certainly, the stimulus that's been thrown at the market is going to be quite supportive in the short term."

However, against that, he warns that adding residential investment to your portfolio changes the risk profile of your investment strategy.

"You're not going to get anywhere near the volatility that you would have with any equity portfolio," Farrell says. "So it will drop the volatility of the fund but it introduces new risks around ... illiquidity in your fund and reduces flexibility."

He also points out that when it starts to represent 40 per cent to 50 per cent of your fund, "you have to be very cognisant of the fact that you've either got a strong income coming through or that you need to be prepared to fork out a lot in transaction costs to liquidate that investment."

Commonwealth Bank senior finance adviser Daniel Molesworth also cautions self-managed retirees against having residential property as the sole asset in a portfolio.

He says that in the pension phase the Government requires retirees aged 65 to 74 to draw down 5 per cent of their super fund a year. As such, if the residential yield returns only 3 per cent, then you are stuck and have no choice but to sell your property, he adds.

If you have a long-term outlook, Molesworth says, residential property "can definitely still be part of a balanced portfolio".

Four cornerstone investment principles experts cite when investing are:

* Buy in areas where there is infrastructure built or under way.

* Stick to suburbs within a 15km radius of cities because demand is higher, therefore the risk of not being able to rent or slow cap growth is lower.

* Make sure you can service the loan, particularly now as interest rates edge closer to the bottom.

* If buying in affordable areas, buy something with transport connections and low vacancy.

RP Data's Lawless sees the main risks in investing as rising interest rates and unemployment increasing more than people expect.

"Anybody who's buying really needs to be quite prudent in their budget and factor in interest rate rises." He also cautions investors to be conservative: "This is not the time to be leveraging yourself up to the eyeballs."

Huang says the best investment opportunities are in "established suburbs, with lower than median price and established houses".

"I would not speculate on high-rise units and I would not buy prestige properties. I think the prestige properties will get hit the most," he says.

He sees the best buying opportunities in Queensland and then Melbourne, and believes Perth is "very dangerous".