How can I consider investing in property is these uncertain times?
Chris Kogler has been a valuer since 1984 and has seen many property and investments cycles come and go. Today’s investment environment is perhaps the most uncertain and volatile of all ‘corrections’ since the 1980’s. When buying a new property vs second hand there are numerous factors that come into play.
Chris Kogler Says
“I have analysed historic property value trends in South East Queensland and this analysis shows that property value trends are cyclical and that various levels of market volatility apply to different market segments and sub-regions. Overall, maximizing capital returns from property require a long term investment perspective with acquisition and disposal strategies aimed at entering and exiting the market at times chosen to take advantage of the market volatility. Analysis indicates ‘hold’ periods would be in the 5-10 year time frame to maximize returns and minimize losses. Should any circumstances intervene to change the disposal strategy and timing particularly in the case where an asset is disposed of in the short term (i.e. less than 3 years) the risk of capital loss may rise significantly. These comments apply more to ‘new’ real estate product i.e. assets which have been acquired as newly built and (more commonly) been sold by a developer. My market research has shown that ‘new’ product attracts a price premium to ‘used’ or ‘re-sale’ product and that the difference in values generally widens in times of market stress. Market stress can occur when a market moves from a sellers market to a buyers market, finance becomes expensive or difficult to source, or the supply/demand equilibrium alters. The ‘gap’ between ‘new’ and ‘re-sale’ values can vary from market segment and/or region.
The price premium which exists with ‘new’ real estate product can be attributed to:
* Developers often fund expensive and more sophisticated marketing campaigns as compared to ‘local’ real estate agents. These campaigns can include well funded advertising, display houses or units, dedicated selling agents, purchasing incentives including rebates and ‘free’ inclusions.
* Greater tax incentives through depreciation.
* No immediate requirement for renovation or modernization expense.
* Most new product has a modern design and does not suffer from design obsolescence.
* New ‘managed’ product may have not proven the acumen of the manager’s performance over time. In addition, the management identity and personnel may change over time. Developers income projections are therefore unproven and may be optimistic.
* An asset may be purchased within an early stage of a staged development where the developer may continue to release new stages over time. Whilst prices may increase through further stages, this may not occur and an artificial market may develop in the project linked significantly to developer’s disposal strategy, which may include discounting to increased sales. This situation may also apply to other competing projects or estates in the same market segment either undertaken by the same developer or competing developers. The buyer is likely to have no influence over this process.
The (usually) lower price which applies to ‘re-sale’ product can be attributed to:
* The developer’s sophisticated marketing campaign has ceased and a sellers only option is to (a) sell the property themselves or (b) engage a local real estate agent, who is often supplied with a low or no marketing budget and represents numerous other vendors often with similarly listed (competing) property.
* There are no particularly advantageous tax incentives.
* The condition or presentation of the property may be less than ideal.
* The properties design or finishes may have become obsolete in some respects
* The performance of any manager may have been proven not to have met expectations.
For all of the above reasons the acquisition of new products needs to be carefully considered.
Such a consideration must focus not just on the various physical attributes of the property but also a thorough Risk Analysis of the property and the local and property market at the time.”