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The upcoming changes in real estate - and how investors can benefit.

Wednesday, February 11, 2009

Article by Terry Rider

 The upcoming changes in real estate - and how investors can benefit By Terry Ryder

Investors havent had to think too hard to make money until recently. For much of this decade, simply owning real estate somewhere was a formula for a capital growth. Not any more. Investors now have to work smarter. They cannot rely on a rising market to make money for them. They have to buy the right product in the right places. To achieve success in todays climate, investors need to understand the changes taking place in the Australian market. Buying patterns are changing and it's all about housing affordability, the cost of living and changes in lifestyles. These are some of the trends real estate buyers need to know about .

Change #1: A shift towards apartments

What it means: Capital growth on units, relative to houses, will improve The buying habits of first-home buyers have changed. Increasingly, they're buying units. Houses still dominate. But not as much as before. In 1997, 85% of first-time buyers opted for a standalone dwelling and only 15% bought a unit or townhouse. Last year 72% bought a house and 28% bought an attached dwelling, according to the latest ABS Australian Social Trends report. The market share of units has almost doubled. This most significant of real estate trends is happening for two reasons: affordability and lifestyle. Apartments are cheaper than houses. Buyers, particularly young ones seeking to be near work, cafes and nightlife, can live closer to the action more affordability by opting for a unit. Todays busy lifestyles are another factor. Young professionals with frantic careers don't want to waste time on lawns and house maintenance. Apartments are a practical alternative. This trend is likely to gather pace, with affordability such a big issue. Another influence may be the growing number of retirees, who often choose to downsize from a house to an apartment as they get older. A consequence is likely to be an adjustment in one of real estates dominant paradigms that  houses show better capital growth than apartments. Scott McGeever, Brisbane buyers agent and president of REBAA, says many first-home buyers can't afford houses but don't want to move 20km from the CBD.  So they have to re-align their needs and buy a unit instead,he says. Sometimes they can pick up good apartments under $300,000 within 5-10km of the City. People adopting this approach take the view they can buy their dream house later. It's an adjustment of expectations,  McGeever says. You can't have it all in the first purchase. There's a new wave of these buyers  mostly people in their late twenties or early thirties. Melbourne buyers agent Michael Ramsay says he has been advising clients to buy apartments for the past three years. Apartments are becoming popular with people who can't afford houses, he says. I would always buy a quality apartment in a good suburb, rather than a house in a poor street. I have bought 20 apartments for clients in the last 18 months and they have gone up 10%-plus in value.  Ramsay says it's been unusual for young people to buy an apartment as a first home. But the trend is moving back to the city, partly because of petrol prices, so an apartment closer to the action makes sense, he says. Research analyst Michael Matusik says the level of proposed apartments for Inner Brisbane is inadequate because the population is growing faster than expected, with around 7,000 new residents each year. New apartment prices are rising and re-sales show average gains around 10% last year,  Matusik says. The vacancy rate is under 2% and rents have been rising for several years. We expect residential sales across inner Brisbane to increase 30% over the next five years. Matusik says 11,800 dwellings sold across inner Brisbane in 2007-08 and 8,000 of them were apartments, a rise of 15% over 2006-07. Long-term rents have shown strong growth, he says. On average, rents for permanent tenanted units have risen 9% a year over the last five years. New one-bedroom units fetch $350-400 per week, while three-bedroom product commands $700-800 per week for non-riverfront and around $1,200 for riverfront. Furnished apartments attract a premium of $100 per week for one-bedroom product, up to $200-250 extra for three bedrooms. Perth analyst Gavin Hegney of Hegney Property Group says the growing preference for units over houses will be an ongoing trend and the best way to profit from it is to buy land suitable for unit development. Change #2: More people are using public transport What it means: Suburbs with rail will rise in popularity and price The high cost of fuel, road tolls and city parking is giving impetus to an investment trend of rising importance: buying homes near public transport nodes, particularly railway stations. Median prices in suburbs close to rail are already out-performing. State Governments have been actively promoting the development of mixed-use railway nodes, but the high cost of driving to work is the real catalyst. A July Newspoll found 20% of Melburnians were using public transport more often because of high petrol prices. According to Melbournes Metlink, travel by public transport is two-thirds cheaper than car travel, with a medium-sized car costing 75 cents a kilometre in petrol and maintenance, compared with 28 cents for the average train trip. Colliers International researched Sydney, Melbourne and Brisbane suburbs within 2km of train stations and found prices often rose faster than city averages. There was an average 22% increase in railway living house prices in Brisbane in 2007, with near-city Highgate Hill rising 64%. The most affordable rail suburbs were Wacol (median price $292,000) and Darra ($310,000, up 38%) in the Ipswich corridor in Brisbanes south-west. Unit prices in key rail suburbs rose as much as 95%. The average growth over the past five years in the top 10 suburbs ranged from 15% to 32% a year. The best performer was Milton where the median unit price increased from $177,000 in 2002 to $710,000 in 2007, an average annual growth rate of 32%. Generally, the median house price for Brisbane rail suburbs was $65,000 higher than suburbs which fell outside the 2km-to-rail zone. Unit prices were $16,000 higher. Colliers says the project growth in Brisbane's population will put more pressure on road networks and make homes close to rail attractive. The trend is expected to draw the most support from Sydney residents, who already use public transport more than other capital cities. Colliers says falling housing affordability in Sydney is driving demand for dwellings close to transport nodes. In Sydney, the median house price for suburbs close to rail networks was $540,000, $67,000 more than the median for houses outside the 2km zone. Sydney price growth was modest (6.6%) last year, but some suburbs performed much better. Sydney's top 10 rail suburbs were headed by Cheltenham, Beaconsfield, Kogarah Bay, Homebush, Haberfield, Pyrmont and Artarmon, all of which achieved growth above 30%. Units near rail were more affordable, with median prices ranging from $172,000 (Ambarvale) to $420,000 (Waverley). And units in rail suburbs can provide property investors with good yields annual rental returns range from 4.8% to 10.7% in the top 10 rail suburbs for units, with nine of the 10 yielding better than 5%. House price growth across the top10 Melbourne rail suburbs was consistently high in 2007 (44% to 57%), while average annual growth over the last five years ranged from 10% to 23%. Units in rail suburbs also achieved good growth between 37% and 57%, although average annual growth over five years was lower than houses between 7% and 11%. Pascoe Vale South achieved the highest 2007 growth - up 52% to $410,500. The increase in fuel costs will see even greater demand for the region's public transport, in particular outlying suburbs, Colliers says. Colliers also published a report on city parking which found the Sydney and Brisbane CBDs were among the most expensive places to park in the world. City workers who don't have a job-allocated parking space pay between $760 and $800 a month. Add fuel prices and road tolls and it's easy to see advantages in living close to suburban rail. Colliers Global CBD Parking Rates Survey found the Sydney CBD is the most expensive city in the Asia Pacific and third priciest in the world, with Brisbane ranked fifth in the world and Melbourne No.11. Louis Christopher of Adviser Edge says there�s evidence railway suburbs are more in demand but buyers need to be selective. �There�s a point where you can be too close to a railway line,� he says. �Buyers also need to be aware of crime rates � there�s evidence that people living too close to railway stations may experience a higher level of crime. �But generally the evidence suggests suburbs close to rail will out-perform. I can see it in my own area of Sydney. Pymble has similar standards of housing to St Ives, but Pymble is out-growing St Ives. Pymble has its own rail station.� (Pymble has a median house price of $1.2 million after big growth last year; St Ives has seen little price growth since 2004 and has a median house price of $975,000.) The gap between the have and have-not suburbs, in terms of public transport, may grow. A report by Dr Jago Dodson and Dr Neil Sipe of Griffith University says 34% of new residential growth to 2013 is vulnerable to petrol price increases because of poor public transport. �A public conversation must now be held about the sustainability of the contemporary Australia suburban model and its multiple vulnerabilities,� says Dodson. Griffith University publishes a VAMPIRE (Vulnerability Assessment for Mortgage Petrol and Inflation Risks and Expenses) index which identifies the relative degree of socio-economic stress in suburbs in Brisbane, Sydney, Melbourne, Adelaide and Perth. "In our earlier study (2006), areas of stress were largely in the outer suburban mortgage belts where car dependency is high," Dodson says. "In this study we have seen the number and geographical range of vulnerable households creep inwards as fuel costs and interest rates rise." He says those able to shift to public transport appear to have done so in increasing numbers. "Public transport use in Sydney steadily declined between 2000 and 2005, but the sharp rise in fuel costs forced commuters on to trains. Between 2005 and 2007 the number of train journeys jumped by 11 million,� he says. "Across our cities public transport is bursting at the seams during peak hour, which gives clear evidence people will use public transport when it becomes just too costly not to." ABS data shows major increases in public transport usage in our cities. The greatest increases in patronage have occurred in the bigger cities where many have greater distances to travel � while patronage has declined in smaller cities where traffic congestion is less of an issue. Between 1996 and 2006, adults using public transport to get to work or study rose from 23% to 26% in Sydney, from 13% to 18% in Melbourne and from 14% to 17.5% in Brisbane. But there was little change in Perth while patronage declined in Canberra and Hobart. More recent figures indicate patronage has continued to rise in the three biggest cities, particularly in Melbourne which offers the choice of train, tram and bus transport. According to Metlink, an extra 100,000 Melbourne residents are using public transport each day, compared with a year ago. The O-Bahn system, Adelaide�s main bus service, has seen passenger numbers rise from 7.4 million in 2004-05 to 8.2 million in 2007-08. In New South Wales, some commuters will get free buses in a strategy aimed at cutting the numbers of cars on the road. A free shuttle bus around the Parramatta CBD, running at 10-minute intervals, was launched by Parramatta Mayor Paul Barber in August. The service, costing $550,000 a year and supported by corporate sponsorship, is expected to be the prototype for services in other congested areas of Sydney. Hegney says Transit Oriented Developments will become more prevalent as State Governments seek to a greater return from their infrastructure. This may lead to �up-zoning� of residential property close to transport nodes � which means houses 500-800 metres from train stations may be re-zoned to allow higher-density residential.

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