SSS – Oct 2021

G’day All,

What a great year 2021 has been for Aussie property!

Official cash rate is still at 0.1% – this means the velocity of money flowing through the economy is still considered too low. The RBA don’t anticipate needing to increase this until 2024, but it will all depend on what inflation, wages and unemployment does between now and then.

So when will mortgage rates rise?

CBA and Westpac are tipping they’ll rise a year earlier in 2023. This is because of the huge amounts of pandemic stimulus the government has pumped into the economy. Due to rolling lockdowns, people haven’t had the chance to travel or spend as they would normally. As a result, over $200 billion is estimated to be sitting in savings accounts that will eventually find its way into the economy and ultimately property (land) prices.

This will see inflation and wages increase meaning interest rates will have to rise in order to prevent the economy from overheating. We’ll be keeping an eye on inflation and wages growth going forward.  

What about the recent APRA restrictions? 

From November, banks must assess your serviceability with a 3% buffer (currently 2.5%) ie: if the bank’s standard variable rate is 3.5%, you’ll be assessed for ability to repay at 6.5% P&I.

APRA are also considering introducing debt-to-income (DTI) ratios capped at 6x, meaning for a person earning $100k gross, the max debt they can hold is $600,000. This isn’t in play yet, however if it is introduced, it will constrain diligent and responsible investors from expanding their wealth base.  

It also risks creating a bigger wealth gap between those with and without property. If for instance you owned two investment properties, your PAYG salary plus total rental income would equate to a higher lending cap and therefore ability to expand your asset base.

A person without assets would see their lending capped based on their salary amount only until rental income could be demonstrated.

Tax Update

Although still in draft state, a tax ruling permitting interest deductions for the construction component of lending for an investment property has been issued by the ATO. The land component of lending still cannot be claimed until the property is built and genuinely available for rent.  

For clients who have recently begun the building process or built within the last two years, it’ll be worthwhile discussing this with your accountant, or let us know if you’d like us to assist with your tax affairs if not already.

18.6-year land cycle

As touched on in previous updates, we’re now firmly into the second-half of the real-estate cycle. Key industries for this stage are commodities, agriculture and defence. When combined with high affordability as seen in the graph below (percentage of median income required to service a median mortgage), this broadly equates to the markets of Perth, Brisbane, Adelaide, Darwin and major regionals such as Toowoomba.

Source: RBA 2021

This is also a global phenomenon as property values in the US and UK are experiencing similar gains.

Going forward…

If you’re considering investing for the first time or looking to add to your portfolio, I’d suggest now and the next 24 months (circa late 2023) is the window of opportunity. We expect to enter the winners-curse phase from mid-2024 onwards, and although good purchasing may still be possible, extra diligence and prudence will be needed.  

Please drop us a line if you’d like to explore your lending and/or property investment options and begin setting your future-self up now.

Strategy

The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2 million portfolio at 80-90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (min 10-15 years) to achieve. The new property packages we recommend are considered investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.

SSS – Jul/Dec 2020

G’day All,

Well who would have thought!? With the official cash rate now at 0.1% (the rate that banks charge to lend to each other) and average home loan fixed rates between 2%-3%, there’s been a huge increase in real-estate lending across the country!

It’s also set to become much easier to get a loan as responsible lending laws are due to be watered down in early 2021! This together with all the government housing grants on offer plus stamp-duty concessions means property (land) prices will go higher. Vacancy rates are also extremely tight (1% or less) in all capitals and major regionals except Melbourne and Sydney.

As mentioned back in June 2020, we are now transitioning into the second half of the real-estate cycle marked by huge government stimulus and infrastructure spending on things like roads, rail, energy and renewables.

The economic drivers to follow for the next 5-7 years will be commodities, infrastructure and defence and I expect high growth pockets in WA, SA, QLD and the NT. Iron ore (Australia’s largest export) has just surpassed its previous price peak set back in 2014!

NSW and VIC (mainly Sydney and Melbourne) will likely stagnate given their impressive growth between 2013-19, and unless international arrivals and migration resume to record levels, we don’t expect that outlook to change. In fact, the outlook we had back in May 2018 is ringing true!  

As observed in June 2020, government and the RBA are doing everything they can to ensure the economy and house prices do not implode. This is a massive tail-wind that favours property owners.  

If you’re considering investing for the first time or looking to add to your portfolio, I’d suggest now and the next 12-24 months (until late 2022) is the perfect window of opportunity. Please drop us a line if you’d like to explore your lending and/or property investment options.

From the entire Defencewealth team, we wish you and your families a safe and enjoyable festive season and looking forward to 2021!

Strategy

The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2 million portfolio at 80-90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (min 10-15 years) to achieve. The new property packages we recommend are considered investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.

SSS – Apr/May 2018

G’day All,

Finance

-Official cash-rate left on hold at 1.5% for May. This is the longest period in history that the RBA has left the rate on hold. Underlying inflation is still <2%. There is an expectation that wages and inflation will begin to pick up at the end of the year resulting in a possible rate rise.

-APRA have lifted the 10% cap on property investment lending. In summary, banks may be more open to lending to investors and reducing interest rates, but……

-The Banking Royal Commission has ripped heavily into the way lenders assess borrower serviceability and expenses. In summary, getting investment finance now is probably going to get harder before it gets easier around early 2020. Try and have at least 15%-25% saved as a deposit before looking to invest.

Economy

-With global oil prices rising, Australian gas exports are soaring! This will bode well for QLD, NT and WA as demand builds over the next few years. Of note, the NT recently lifted the ban on onshore gas fracking so Darwin will be a market to watch as investment, projects and employment get off the ground.

Market

-Congratulations to our newest clients who are either underway or have recently completed construction of their investment properties! The LAND 400 announcement is a massive boon for the Ipswich economy and this is one of many projects that will support capital and rental growth in the south-east Queensland region.

https://www.qt.com.au/news/land-400-what-5b-defence-contract-means-ipswich/3360618/

Around the country:

-Sydney: Beginning to slow

-Melbourne: Possibly 12-18mths of growth left

-Hobart: Possibly 2-3 years growth left

-Adelaide: Recovery phase. Begin positioning now for $85billion in submarine and frigate projects

-Perth: Bottom of cycle. Expect solid pick-up to commence in 2020-21 as commodities also pick up

-Darwin: Bottom of cycle. Expect solid pick-up to commence in 2020-21 as commodities also pick up

-Gold Coast (Coomera/Pimpama): Approaching peak cycle. Consider accessing equity and investing in other markets.

-Toowoomba: Moving into recovery phase.

-Brisbane (western and northern corridors): Upswing markets due to population, infrastructure and affordability metrics.

Strategy

The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2 million portfolio at 80-90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (10-15 years) to achieve. The new property packages we recommend are considered investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.

Please get in touch if you’d like the team to review your lending or discuss any aspects of property investment!

Quote – Someone is sitting in the shade today because someone planted a tree a long time ago – Warren Buffet

SSS – Mar/Apr 2017

3-minute read:

Interest Rates

Whilst the official RBA cash rate remains on-hold at 1.5%, you can expect investor rates to rise throughout the year to around 5% (discounted). Your risk profile will determine whether to fix, remain variable or split. APRA have upped the ante on all investor lending and want to especially cap interest-only lending. Whilst getting a loan may become harder going forward, this is the natural real-estate and business cycle unfolding and is actually bullish.

Economy

There’s too much upside potential when you consider national commodity prices are increasing; Malcolm Turnbull talking up free-trade with India (the new China); QLD, NSW and VIC posting budget surpluses; national unemployment below 6% and property price growth in every capital and major regional city except Perth and Darwin. Whilst some markets are now super-hot like Sydney and Melbourne, they weren’t like this back in 2009-2013 when Perth and Darwin were all the rage. It really is peaks and troughs and the aim is to identify and get ahead of that economic growth curve as best we can whilst balancing the factors of cash-flow, capital growth and risk.

Investor Education – Part IVA Tax Avoidance

Word of caution to be weary of investment groups that promote the allocation of rent from an investment property to pay down your owner-occupier (non-deductible) debt and in return receive higher tax deductions because you’re also using borrowed funds (and claiming its interest) to repay the interest on the investment loan. Whilst the ATO can’t tell you how to spend your rental income, they will disallow tax deductions and impose severe penalties if an arrangement is deemed to fall within Part IVA. If unsure, please speak to your accountant or get in touch for a referral.

ATO clear on tax avoidance

Strategy
The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2million portfolio at 90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (10-15 years) to achieve. The new property packages we recommend are investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.

Quote

The best way to predict the future is to invent it – Alan Kay

From all of us at the Defencewealth Team, we wish you and your families a safe and happy Easter!

SSS – May/June 2016

G’day All,
Key investment topics we’ve been tracking over the last couple of months are as follows:

Interest Rates
The RBA cash rate was dropped in May to 1.75%. This was due to low inflation of less than 2%. Don’t forget that the world’s central banks will do whatever it takes to keep inflation going – including going to negative interest rates as is currently the case in the EU, Switzerland and Japan. Although it’s doubtful Australia will get to that stage, we are expecting another interest rate cut later this year to 1.5%. For this reason my lending will be kept at variable rates for the time being.

Hard assets such as property (land), gold and fine art are excellent stores of wealth in an inflationary environment. Land value though is also tied to its overlying economy which is why we remain focussed on residential property in strong growth areas. Be very weary of apartments as land content is significantly less and you will end up with more depreciating asset than appreciating.

Australian Market
Adelaide – The $50 billion submarine and frigate project announced in Adelaide will be a big boon for Adelaide land values in the future. Vacancy rates remain tight overall and we’re seeing good growth in the western suburbs. Well done to our FHB’s in Seaton and Semaphore that have recently built. We can also assist in sourcing investment-grade stock for those interested in the Adelaide market.

South-East Queensland – Still remains strong and is our prime investment location. Key areas are the northern Sunshine Coast corridor and Ipswich LGA mainly due to infrastructure and population growth (Ipswich now at 188,000). New home packages in Coomera and Pimpama are now breaching the $500,000 mark so congratulations to those who got on board early!

Rental Values
Although there’s been a drop nationwide in rents with some areas like Perth more impacted, there should be no real change in your net return as interest rates have also dropped. Regarding vacancy rates, latest SQM data has all capitals at now less than 3% with Perth the only exception at 4.9%.

ADF Super
The new superannuation scheme begins on the 1st July allowing members more direct control over their superannuation investments. Whilst seeking professional advice on whether to switch is highly recommended, current members will generally be better off by staying on the current defined benefits scheme (MSBS). This can be substantially bolstered with a separate 10-15 year property investment plan. More details on ADF Super here.

Quote
Being rich is having money; being wealthy is having time. – Margaret Bonnano

If you or someone you know is ready to start building genuine wealth through property then please get in touch! We can assist in all aspects of finance, asset selection and strategy!

Toowoomba Infrastructure Boom

Never underestimate the power of new infrastructure (both public and private) to boost adjoining residential property markets!

Courier Mail (Business) – May 26, 2014

 

Toowoomba Second Range Crossing

Toowoomba Second Range Crossing Source: Supplied

QUEENSLAND’S newest boom zone, the Toowoomba region, will now see billions of dollars more investment than anticipated six months ago, with experts predicting it would also spark more merger and acquisition activity locally.

Regional development body, Toowoomba and Surat Basin Enterprise, estimated that more than $11 billion in total development spending was going into the area – almost double estimates put out just six months ago.

“Proposed projects for the region, which include the Melbourne to Brisbane Inland Rail Project and a new Bunnings, totalled more than $5.8 billion, while projects currently underway totalled more than $3.5 billion,” according to the TBSE’s May Development Status Report of the Toowoomba Regional Council Area. “Projects approved and awaiting commencement totalled more than $2.1 billion.”

TBSE chief executive Shane Charles said the real development figure overall was much higher, given the $11B excluded “a vast number of developments under the $2 million construction cost threshold”.

“No other regional city, nor capital city for that matter, will be able to boast the amount of infrastructure development occurring,” Mr Charles said. “We will no doubt become the epicentre of infrastructure. I look forward to seeing some major growth in our region over the coming years.”

With $11B being spent in the Toowoomba and Surat Basin region over next few years, the area’s mostly family-owned companies could soon see a flood of offers, experts predict, and stand to make millions off strategic arrangements, partnerships, and takeovers as more investors’ heads are drawn to Queensland’s southwest.

Brisbane-based Interfinancial Corporate Finance, which has worked on an array of business sales, capital raising, valuations and structuring, expects the billions in development activity to lead to mergers and acquisitions in the region.

Interfinancial associate director Mark Steinhardt told The Courier-Mail that the key challenge for businesses in the region was how to fund enormous rates of growth that were occurring.

“Just normal working capital kind of issues can often cripple a small business. If you’re growing at 50 per cent or more a year, and many (in the Toowoomba region) are, how do you fund that for your receivables, pay staff wages etc, when creditors will only pay you in 40 or 60 days time?”

That same growth was what was attracting investors to commit to a region that “sometimes falls under the radar of companies focused on capital cities”.

 

Workers on an Easternwell Group mining project in the Surat Basin in Toowoomba, Queenslan

Workers on an Easternwell Group mining project in the Surat Basin in Toowoomba, Queensland. Source: Supplied

“Toowoomba is a hub for much of the production which happens West of Brisbane. In a typical year, over 50 per cent of the goods emanating to and from the Port of Brisbane are from Toowoomba and West,” he said.

 “The region supports a range of industries, including agriculture, manufacturing and mining services (amongst others). This makes it less prone to the boom and bust cycles of Queensland’s other major towns.”

As well input costs and reliability for employers was high because the area had a less transient workforce, he said, and the icing on the cake was the range of new projects across multiple industries.

“Now you’ve got big families like the Oswalds and the Wagners in Toowoomba that have really massive businesses and they’re not just working up there but coming down and doing work elsewhere. The good thing is they’ve got that family feel still and have been quietly developing over many decades.”

Major M & A transactions in last 5 years:

$35M – AP Eagers paid for Craig Black Group

$45.1M – Australian Food & Fibre paid for PrimeAg

$4.9M – Tox Free Solutions paid for Absolute Waste Services

$61.7M – ERM Power paid for 50% of Oakey Power Station

$592M – Transfield Services paid for Easternwell

$173M – Boral paid for Wagners Group Construction Materials Assets

$1M – Greencross paid for 49% of Vets Toowoomba

Size of deals not disclosed:

QIC for 25% of Ostwald Construction Materials

United Petroleum for Dalby Bio-Refinery

VTS IT for Downs MicroSystems

Source: Interfinancial