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How Karin Mackay

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REAL LIFE LOW INCOME TAX PITFALLS

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GAME PLANHOW TO BUILD A SOLID

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HOTSPOTSMOST UNDERSUPPLIED &

OVERSUPPLIED AREAS

CASE STUDIESMASTER INVESTOR SHOWS HOW

TO FAST-TRACK YOUR PORTFOLIO

DATAMOST COMPREHENSIVE PROPERTY

DATA, FULLY RESEARCHED

October 2014

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54 OCTOBER 2014 yourinvestmentpropertymag.com.au

STRATEGY | FINDING UNDERSUPPLIED SUBURBS

Finding undersupplied suburbsThe law of supply and demand dictates that price grows in areas where demand outpaces supply. So, how do you fi nd these markets? Mark Coburn explains

As a property investor you’ll naturally target suburbs with the best capital growth and rental yield prospects. There is a wealth of information out there to help

you identify the suburbs positioned at the sweet spot on the supply/demand spectrum. Yet most investors don’t know how to use this information or choose to ignore it in favour of a subjective feeling for what constitutes a ‘good’ investment.

In our experience, only one in every 250 properties on the market at any given time is truly ‘investment grade’. Therefore, you need to use data in an objective and consistent manner to zero in on the best opportunities.

Consider this simple example, based on a $500,000 property

the spectrum from low to high-grade investments.If it achieves 6% capital growth per annum and $500 per

week in rent, the property will be worth $1.6m and have returned $575,000 in rent after 20 years. But what if you picked a property that returned an extra 0.75% pa in capital growth and $50 per week in rent?

You’d be better off by over $300,000 (combined capital

long-term return.

Demand and supply indicatorsTo assess an area’s demand and supply situation, we use 40 statistical and fundamental data sets to determine whether suburbs are over or undersupplied. We start with statistical data and, when we’ve narrowed down the selection, we move on to fundamental factors such as population, economic activity, supply of dwellings, infrastructure, urban renewal… the list goes on. Everything is weighted based on relative importance to the supply/demand equation.

Below we introduce you to some of the statistical indicators we use to assess the area’s demand and supply situation and some of these are freely available from Australian property websites such as www.yourinvestmentpropertymag.com.au, while others are sourced from local research houses.



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55OCTOBER 2014 yourinvestmentpropertymag.com.au

Vendor discountingVendor discounting is the difference between the

asking price and the sale price for a property. Data on vendor discounting is available at the back of this magazine and online, as well as at www.domain.com.au for each suburb.

A large vendor discount (greater than 7%) indicates a buyer’s market where sellers are more willing to negotiate downwards on their original asking price. This could be a result of decreasing demand, an over supply of property or both. In this sort of market discounted prices can be found, although there is a risk to capital growth.

On the other hand a small vendor discount (less than 4%) indicates strong demand for properties in a suburb; in other words, a seller’s market. In essence, the cause is undersupply of properties relative to demand. This is a good indicator for capital growth, however it does not necessarily mean there will be great investment opportunities.

If the suburb is over heated – if prices have been rising consistently for some time – this could actually be a disincentive to future buyers in the short term.

Days on marketThe number of days on the market is a great

Three months (90 days) is the average time a property takes to sell, so ideally we look to suburbs that have been on the market for fewer. When demand is strong, 90 days would be considered a long time on the market. Days on market can be sourced through www.homepriceguide.com.au or www.yourinvestmentpropertymag.com.au.

Stock on market (%)This is the number of properties currently for sale in

a suburb as a percentage of the number of properties in that suburb. Not all suburbs are the same size; 50 properties for sale in a suburb would be considered high supply if there are only 1,000 properties in total, but in a suburb of 20,000 properties, 50 would indicate low supply. So we need to calculate the number of properties for sale as a percentage of properties in total. A low

(%) can be sourced through www.homepriceguide.com.au.

Vacancy ratesVacancy rate is the average time a property spends

vacant. A low vacancy rate indicates that there is either high demand for rental accommodation, low supply, or a combination of both. A vacancy rate of 3% is considered ‘normal’. If it reaches 4% or above, you should be concerned. A 2% vacancy rate is great, while 1% or lower means there may be a boom in rents imminently. One of the places you can source this data is research houses such as SQM Research (www.sqmresearch.com.au) and Real Estate Investar realestateinvestar.com.au. Your Investment Property also carries an extensive list at the back of the magazine.

Online search interest Before real estate websites existed, data on search interest

was only ever anecdotal. These days at www.realestate.com.au you can view search interest easily. What you are looking for is a high ratio of people searching for properties in a suburb against the

properties listed for sale in that suburb. A ratio of 30:1 searches vs listings indicates strong interest. To access this data, click on the ‘suburb data’ menu on the left and select a state and suburb.

Auction clearance rates Not all properties that go to auction actually sell – some

are passed in. So we look to auction clearance rates (the ratio of properties selling at auction vs those going to auction) as an indicator of demand.

A clearance rate of 80% or higher generally means there is strong bidding and therefore strong demand. Clearance rates below 60% indicate low demand and that the market is perhaps not suited to auctions. Auction clearance rates by suburb for the most recent month can be found at www.domain.com.au. Auction clearance rates for the past week can be found on www.realestate.com.au.

Sales volume rates History shows that there is a very strong correlation

between sales volumes and price growth in a suburb. The

then the prices will react. There is always a time lag between the two events occurring. This is also true whether the markets are rising or falling.

In a rising market, price rises are preceded by an increase in sales volumes, and conversely in a falling market, price falls are proceeded by a decrease in sales volumes (from the previous years). This allows an investor to buy into an area ahead of price growth by following the rising sales volumes.

Sales volumes can be sourced from RP Data (www.rpdata.com.au)

Vendor discounting rate 5%

Days on market 79

Stock on market 0.98%

Vacancy rates 1.8%

Online search interest ratio

57 (www.realestate.com.au)

Rental yields 6.1%

Sales volumes (last 4 Qtrs)

498, 628, 675, 791 (RP Data)

Putting theory into action SUBURBS IN UNDERSUPPLYBased on Stepping Stone’s™ analysis, units in Fortitude

Valley and Newstead in Brisbane are currently undersupplied and have all the indicators that tend to translate into upwards pressure on prices. Data in these case studies is sourced from Resolution Research unless otherwise stated.

Fortitude Valley units (QLD)Fortitude Valley units stand out in a statistical sense with low days on market, stock on market and vacancy rates as well as high online search interest. In addition, high rental yields of 6.1% are attracting investors seeking

investments, even with100% of capital borrowed given the prevailing interest rate environment.

Adding to the picture are positive fundamentals around population projections, employment growth and apartment approvals. The Australian Bureau of Statistics predicts suburb population growth from 5,545 people in 2016 to 16,330 people in 2036 (an increase of 10,790 new residents), translating into high demand for new dwellings.





Days on market 88


Vacancy rates 0.3%



Rental yields 5.45%


150, 172, 222, 355 (RP Data)


Days on market 137


Vacancy rates 1.87%



Rental yields 5.71%


654, 799, 906, 955 (RP Data)


Days on market 68


Vacancy rates 1.78%

Online search Interest ratio


Rental yields 5.06%


825, 886, 1013, 1092 (RP Data)


Days on market 139


Vacancy rates 6.55%

Online search interest ratio 12

Rental yields 5.95%

Sales volumes (last 4 Qtrs) 161, 158, 113, 104


Days on market 150


Vacancy rates 8.78%


Rental yields 4.51%



Days on market 204


Vacancy rates 7.77%


Rental yields 5.86%


Meanwhile, there have been approximately 20,000 jobs relocated to the area with companies including Energex, Macquarie Bank, Bank of Queensland and Tatts Lotto. We consider jobs, infrastructure and affordability to be the key drivers of capital gains because people prefer to live as close as reasonably practicable to where they work and key infrastructure nodes for as little a price as possible.

Beyond these statistical indicators, one of the key drivers in Fortitude Valley isat RNA Showgrounds and the Gasworks Precinct ($5.2bn worth of development is underway), which will deliver consistent demand in the area for the medium term.

North Lakes (QLD)The North Lakes region (Mango Hill, North Lakes &

beginning to point in favour of investors entering the market and capitalising on the array of new infrastructure spending, job creation and

the extension of the North

entry of Costco and Ikea, the business park which will employ 20,000 in years and the Moreton Bay rail link completion in 2016.

Aldinga Beach houses (SA)The Onkaparinga Shire is a leading area for population growth, which from major infrastructure spending (extension of train links to Seaford and a $400m upgrade of the southern expressway). The sales over the past four quarters validate the statistical evidence on offer and makes it an attractive opportunity for investors.

Pyrmont units (NSW)At the current time, Pyrmont offers investors an attractive opportunity. There is no land left in the area where units may be developed and demand for stock has been steadily increasing over the past 12 months whilst vacancy rates remain low.

Pyrmont is strongly in demand as it is in very close proximity to the Sydney

CBD, offers many transport options (ferry, bus and rail),

has many entertainment options within walking distance, and most apartment blocks offer views of Sydney Harbour. The development of Barangaroo will also offer even more employment within walking distance.

SUBURBS IN OVERSUPPLYFortitude Valley and Newstead have the right

combination of statistical and fundamental indicators to give us prospects. Contrast that situation with what

has taken place in the Gladstone units, Muswellbrook housing, Moranbah housing, Gracemere housing and Melbourne CBD units and you’ll see the difference between a sound supply/demand equation and a poor one.

Gladstone units (QLD)With $70bn worth of gas projects underway in the Gladstone area it became obvious that there would be an increase in demand for accommodation within the region. This resulted in the area increasing in value nicely in 2011-12. The developers then realisedthat there was a boom emerging and developing en-masse. As a result there

is now a large over-supply of stock in the market.

Muswellbrook houses (NSW)The Hunter region of NSW has suffered an oversupply of houses as a result of a downturn in the coal mining industry, as well as increased developer delivery into the market. This has resulted in rental yields and housing prices dropping as well as vacancy ratesincreasing dramatically since the 2010 boom. Investors would be well advised to

steer clear of this region for the time being.

Moranbah houses (QLD)The coal industry is the main employer of residents in the area and as the coal mining downsizes in the region, along with low commodity prices, the immediate outlook for property prices is bleak. Average days on market is 7-8 months with declining sales volumes. Property values are suffering losses of up to 40% in a 12 month period.


57OCTOBER 2014 yourinvestmentpropertymag.com.au

STRATEGY | BUYING DISTRESSED PROPERTY


Days on market 181


Vacancy rates 6.05%


Rental yields 5.29%



Days on market 115


Vacancy rates 4.21%


Rental yields 5.36%


Year Apartments approved

2006 799

2007 2315

2008 3240

2009 3868

2010 4640

2011 9560

2012 7529

Mark Coburn is a property investment advisor and the director of Stepping Stone™, a buyer’s agency and property investment advisory m: 0405 243 547

Gracemere houses (QLD)Gracemere is around 12km west of Rockhampton. Developers have attempted to capitalise on the investment success of Rockhampton in the past

have built far too much

demand. Building approvals in 2012/13 were almost

sales have now started to

to steer clear of this area for the time being.

Melbourne CBD units (VIC)There has been a nine-fold increase in the residential

building approvals in the Melbourne CBD over the past eight

In summary

the pr

decisions.


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