In reply | ‘’What I wouldn’t buy: Five successful investors share their advice”
02/03/2017 John Hopkins, Executive Chairman
Domain recently published an article titled “What I wouldn’t buy: Five successful investors share their advice”. An associate of John Hopkins wrote to us to seek John’s views on comments made in the article. The following blog post provides an edit of John’s reply.
I have never met Steve McKnight, however my understanding is that he is a seasoned, experienced and successful property person. My understanding is that he, unlike many, has never been one of those property spruikers that has promised or stated things as fact that cannot be promised and or are not facts.
So, my comments in relation to this part of the article are purely comments about what Steve has been quoted to have said.
Firstly, I find it fascinating that the media and many others are negative of property that has been purchased ‘Off the Plan’; in other words, property purchased before it has been developed.
There is a suggestion that this is bad, or that somehow between the start of development and the completion there is a transformation that makes an Off the Plan purchase safe because it is now completed. Or in the reverse that it was necessarily dangerous to purchase before it was developed.
I cannot imagine any professional experienced property person, a valuer, a competent property estate agent (as distinct from a good sales agent, I really mean property competent) or an experienced property investment advisor ever saying property cannot be assessed and valued accurately before it is developed.
Whether it is commercial or residential, or most other categories of property, for decades, for centuries around the world, professionals have made assessments of the end property, assessments about value, assessments about the end improvements, about the suitability of the developed property for that particular location, likely demand of occupation and likely demand ownership. How would property development, the subdividing and the improvements on land with the completion of developments ever happen if it was impossible to make careful judgements before the start of development?
Developers would not develop and banks would not lend if it was not possible.
It is the same for buyers, residential buyers, commercial and other property buyers. Accurate and correct assessments can be made about property before it is developed.
So to say across the board that ‘Off the Plan’ purchasers are bad, is wrong, it is very wrong and would be laughed at by seasoned professionals. These statements are made either out of ignorance, vested interest or playing to popular thought or to obtaining media space or recognition.
Steve says that it is like a new car. The point he is making is that the new car will lose value the moment you drive it out of the show room or, that new property purchased off the plan will lose value the moment you settle.
Firstly, that is not a fact across the board by any means.
Secondly, it is important to say that getting access to quality property in a strong market is not easy and purchasing before a property is developed often gives access to quality.
Thirdly, by buying off the plan it is reasonable to say you can make certain you are purchasing the newest and best properties. The latest in design internally and externally, the best fixtures and fittings, the most up to date in landscaping and common facilities and owners corporation regulations.
And finally, for an investor, that new property offers the highest non cash tax deductions because of sections 40 and 43 of the taxation act through the depreciation of fixtures and fittings and what is referred to as the building allowance.
Respectfully to Steve, if the market is right (in terms of the general and particular markets the property or properties exist in), if the timing is reasonable (in relation to the economy and those property markets), if the development is appropriate (for the location and that market place) and if the specific properties (houses, townhouses or apartments) are quality developments produced by a team that is financially strong, experienced and acting with integrity, there in fact CAN BE great advantages and increases in value before finalisation.
Thousands and thousands of investors and owner occupiers throughout Australia and around the world have definitely had great success by purchasing off the plan over many, many, years past and will continue to do so in the years and markets to come.
To say that is not true is either a lie or it is a statement made by somebody, as I said above, without knowledge or with vested interests.
What is correct to say is, yes, some have purchased the wrong properties, or possibly purchased at the wrong time, or in the wrong market, or purchased property that is poorly conceived, developed or built or purchased from the wrong developers and have not got what they should have or what they wanted.
The answer is to know what you are doing, or take the correct competent advice.
Steve has also made the comment that scarcity drives value. I presume he correctly means value both in regard to capital and income, because they are equally important; definitely so for investors. For heritage type properties, in the right locations, scarcity can definitely be a driver of value. Our clients that purchased terraces in suburbs like South Melbourne or Paddington in Sydney have been the beneficiaries of scarcity value.
However those that bought apartments, and not particularly special apartments, in Kirribilli or Albert Park in Melbourne didn’t miss a beat. Scarcity is definitely one factor in the supply-demand relationship. But so is population increases in strong and independent economies, fashion changes - in regard to types of property or locations - and there are many more factors that add to demand for property.
Steve makes the point; ‘it is hard to see how a new property would outperform the general property market’.
It is crucial when talking about the performance of property markets to categorise into finite categories. To say it is hard to see how apartments would outperform the general market is way too generalised, especially when one adds in ease of ownership compared to some other categories of property or if new, as mentioned above, the benefits of Divisions 40 and 43 of the taxation act.
Also apartments are affordable in the best inner urban locations of ‘major metropolis’s’. Most investors could not afford houses in those quality locations.
Ask those that own apartments in central London, the inner districts of Paris, on Manhattan Island or next to the Ginza Strip in Tokyo. Or for that matter, in Elizabeth Bay, or Cremorne in Sydney, or East Melbourne, or Carlton in Melbourne what they think. Or in the future ask those that have purchased quality apartments in quality locations in Melbourne and Brisbane how they feel.
I can say without any fear of contradiction, if the past is any indication of the future they will be very happy with their actions.
In discussing the case for apartments I am not in any way suggesting they are the only category of residential property to invest in; I am discussing it because it has been suggested that they are bad investments. That is so wrong.
In regard to Steve’s comment about negative gearing, he is referring to the negative gearing of a property investment. I state that because we could purchase a business and negatively gear that purchase or we could purchase a portfolio of shares and negatively gear those purchases.
Secondly, it would be important to know if Steve is talking about negatively gearing costs before tax or after tax.
Gearing (leverage), that is, borrowing money to purchase an investment, or any asset for that matter, can be a worthwhile strategy if it is appropriate in regard to the particular investor and for the purchase of the right investments.
The same is absolutely correct with regard to negative gearing, which is where the costs of owning an investment, including interest, are greater than the income from that investment. In the case of property, this is rent. For certain investors this loss would be deductable by that tax payer against income from other sources of income in that particular tax year.
Gearing and negative gearing can be a very successful method of increasing returns on equity or capital.
Those returns are because the combining of capital growth, income growth and the devaluing of money, thanks to inflation, out strip the losses due to negative gearing whether pre or after tax, most likely over years into the future.
Millions and millions of property investors worldwide have safely enjoyed the benefits of this investment strategy.
The issue is the right investment for the right individual or entity, at the right time, acting as an investor and not a speculator or property trader.
I won’t address the issues here but if the suggestion is that positive gearing is the way to go, be wary; all that glitters is not gold. That is a strategy to be very careful with. However it is often presented as the opposite.
Mass-scale apartment developments
Respectfully to Marion Mays, whom from these accounts knows what she is doing, if the only reason to potentially avoid purchasing ‘Off the Plan’ apartments is because of long sunset clauses, I would make these comments.
Firstly, there could be hundreds of reasons not to purchase a particular off the plan apartment.
Macro, micro economic or property market issues, issues to do with the general or particular location of the proposed property, the funding of the project or the organisations involved - the developer most importantly, but also the architect, the builder and others.
It is important to understand the impact of particular sunset clauses – however if we know a particular development will be completed because we know the developer and the development, it is reasonable to accept a reasonable sunset clause.
The fact is most development financiers will not fund a development if there is not a reasonable sunset clause in the contract. Therefore there would not be a property to purchase at all without it. It is the particular circumstances that have to be considered and judged.
In regard to the last paragraph, some of the points sound reasonable but they really depend on the particular property and the particular investor. Marion says to avoid heritage property but how many investors have purchased Victorian houses in Kirribilli, Paddington, Albert Park, South Yarra or other similar locations. They have made millions and millions.
I agree avoid asbestos and flood plains. But I don’t think you need me to tell you that.
When discussing and investigating property, it is so important not to generalise. Further it is crucial not to be glib and to short cut important and often complicated research and due diligence processes.
Capital cities other than Melbourne, Sydney
I do know Michael Yardney and he is to be respected for his many involvements in property over many years.
It is a bit hard to say if Michael is referring to buying off the plan throughout Australia because he would of course know that many have made good money on apartments over the last six years in Sydney. Many have also purchased quality property in Melbourne in recent times, let’s say ten years, and in the right properties and locations these have done well; and that’s not even considering those that purchased at times earlier.
Michael is correct when he infers it is important to be careful. Docklands in Melbourne or the CBD are to be avoided. Brisbane offers opportunity and yet it is half the population of Sydney and Melbourne; therefore it is not as forgiving, so being much more careful about what and where is crucial here.
In Brisbane, just because New Farm and the right property in The Valley (Fortitude Valley) may have done very well from the perspective of income and capital growth, it does not mean all of Bowen Hills will be good. So compared to Sydney and Melbourne – which are both very forgiving, fundamentally because of the population sizes, population growth and the fact that they have strong and independent economies – it is crucial in Brisbane to be very much more discerning and careful.
If the reference is to off the plan purchases, I have discussed this above but to repeat; it is no different to being careful when buying an established property, if you know what you are doing.
An important point to make is that timing in regard to property markets is a very real consideration that has not been discussed in this article.
Michael is correct in regard to his comments about the other states and capital cities; Hobart, Adelaide, Darwin and to some degree Perth, they fundamentally do not have the populations or strong and independent economies that will support their property markets.
Rural properties, hotspots and (just) houses and Dime-a-dozen properties.
In regard to both of these sections I make the following comments.
Firstly, there are some statements that seem reasonable. For example, “steer clear of rural property”, “off the plan apartment purchases aren’t’ always a no go”, “make certain it is a quality build”, “have a balanced portfolio” and “keep away from rural property that depends on one industry”.
They are all possibly relevant issues but frankly each one needs a lot more in explanation, proof, and why or why not these issues matter, in regard to property investment decisions, is essential.
What really does concern me in regard to these two sections is that you can only know so much at the ages of Stephanie and Brenton.
Experiencing and learning and success in property investment is a long term activity and with great respect to both Stephanie and Brenton, it isn’t five years or ten. It is watching, learning and taking actions with both positive and negative results, for twenty years or more that would put an individual in a position to carefully advise on property selection and investment advice for individuals.
With property it is often that many individuals don’t know what they don’t know.
It surprises me that at every dinner party I go to everyone knows more about property than I do.
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