Property investors return

Darkest hour before the dawn

The last couple of years have not favoured property investment. Shrinking yields and limited capital growth prospects scared many investors away from the market, as did rising interest rates.

In its bid to curb inflation the RBA bumped up the cash rate by 100 basis points between August 2007 and March 2008, lessening the appeal of property compared to other asset classes even further.

It wasn’t always this way. According to QBE LMI’s April 2009 Housing Outlook, investor activity was strong in the last 6 months of 2007, with the total value of loans to investors up 20.8 per cent in year-on-year terms. Then it dropped off considerably and continued to weaken in 2008.

The RBA’s rate hikes combined with rising funding costs left investors with variable rates close to 10 per cent by mid 2008 – bad news for heavily geared borrowers.

These conditions saw investor activity plummet in the six months to June 2008, with activity down by 13.7 per cent compared to the previous year.

It’s a trend that continued into early this year. Investor finance dropped 32 per cent (seasonally adjusted) in January according to the ABS, compared to January 2008. Just $4.891 billion worth of investment loans were written compared to $7.237 billion at the start of 2008.

But the property cycle has turned, and with the gap between rental yields and interest rates closing, 2009 could be the start of the investor market recovery.

Louis Christopher of property analyst and research group Adviser Edge says property is undoubtedly a very attractive investment option again.

“The property market is now offering the highest rental yields since the 1990s,” he says.

A whopping 4 per cent reduction in the cash rate in the last eight months has helped ripen conditions for investment and according to Mr Christopher, positive gearing “is a realistic possibility for many properties at the moment”.

Supply and demand

Rising rents are one factor driving renewed investor interest. A severe under-supply of housing has pushed rental values up sharply over the last 12 to 18 months and the signs are that they will only continue to climb.

The National Housing Supply Council released its State of Supply Report in March. It estimates that Australia suffered an under-supply of 85,000 dwellings in 2008 and expects this figure to rise to 203,000 by 2013 if construction activity does not improve markedly. ABS data for January showed dwelling approvals were down 31.7 per cent on January 2008 levels.

The most recent data from the Real Estate Institute of Australia (REIA) reveals that vacancy rates remain tight across the nation, with most capital cities’ sitting below 2 per cent. Adelaide and Melbourne are the tightest markets at 1.2 per cent, with Sydney close behind at 1.4 per cent.

With interest rates likely to drop a further 50 basis points, Mr Christopher says the outlook for investors can only get better.

“Positive cash flow benefits could soon be a reality for many investors, based on the average Australian residential property price with a LVR of 90 per cent,” he says.

Opportunity knocks

Investors typically fall into two categories – both of which are prime markets for brokers.

The first is the regular Australian: usually an existing homeowner looking to capitalise on the equity they have built up in their own home. The second is the experienced investor.

Connective principal Mark Haron says there are obvious benefits for brokers in being proactive in tapping into their own client base.

“Brokers should make sure they know which clients have been investors in the past,” he says.

“Ask them when – not if – they are planning to get back in the market and speak about their finances so that when they’re ready to buy, their finances are ready too.”

How brokers market to this segment will depend on their resources and client base.

Cold calling can be an uncomfortable experience for both the broker and prospective client. But the personal approach can yield dividends.

Broaching the subject of investment opportunities as part of an overall mortgage heath check is one approach, via an e-based direct marketing campaign or through a newsletter for example.

Active marketing

The important thing is to make contact with existing and new prospects. Sydney-based broker Patrick Chidambaram says he has found that a percentage of his clients are always thinking about the investment market, it’s just a matter of making a connection.

“Most homeowners keep a close eye on the property market and are well aware of opportunities as they arise,” he says.

“I send out a quarterly e-newsletter which always prompts some level of enquiry depending on what the [daily] papers are saying at that time.”

According to Mr Chidambaram, straightforward articles addressing issues such as negative and positive gearing, how to tap into equity and ways to secure good tenants, are good triggers for prompting a response.

But the opportunities are not limited to a broker’s own client base. The current market is ripe for brokers to attract new business – and the broker proposition is a strong one for new and established investors alike.

Vincent Power, a mortgage finance strategist with Investors Direct in Melbourne, says brokers can offer investors better investment know-how and service than a bank – particularly for the experienced investor.

“Generally, banks don’t provide the expertise over a variety of areas that investors need. Banks normally talk interest rates and fees, which realistically are not the most important factor for the investor,” he says.

Investors are also unique in that they have a different set of requirements to owner-occupied borrowers, says Mr Power. That means they have a greater need for strategic finance advice.

“Investors look for results on a given set of criteria that will help them achieve their wealth building goals, and finance is an integral part of that. We provide strategies that allow investors to keep moving forward,” he says.

But there is more to the broker value proposition than choice of product alone.

Investors often like to move fast. Speed, prompt service and good communication is therefore where brokers can differentiate themselves from the banks, says Mark Haron.

“Investors tend to be quite time poor so brokers can do a lot of the running around and paperwork for them,” he says.

Mr Power agrees. He says brokers have a valuable competitive advantage in being able to move quickly.

“Compiling a large property portfolio requires dedication, education and the assistance of professionals who are in tune with investors’ needs,” he says.

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WAITING IN THE WINGS

Homeloans LTD’s head of credit Les McDonald gives his take on the burgeoning investor market

AT the moment the majority of investor applications we see are fully verified borrowers with LVRs of up to 90 per cent. There is not a lot of low doc investor activity as LVRs have been capped at around 60 per cent and providing this much equity is not really an option for investors.

Loan sizes (on an aggregated basis) are being capped at $1 million. There is not much appetite among lenders for deals above the $1 million mark apart from some blue-chip owner-occupied deals where generally the LVR is capped at 75 per cent.

Term loans with five years interest only are proving surprisingly popular. This gives the investor the option to lock in at some point in the future should fixed rates come down to, say, 6 per cent over a four year term.

Twelve months ago an investor could get a 95 per cent LVR pretty well anywhere – not so today. These days a premium client can be defined as a fully-verified sub 80 per cent LVR with no default. The rest [of borrowers] suffer the consequence of being in a higher risk category and it comes down to a lender’s tolerance of risk whether or not they are prepared to lend to this group.

Brokers have to be a little savvier when presenting non-standard applications to lenders. Show the borrower’s ability to repay by delivering a household budget, making sure a complete list of assets and liabilities is given and simply delivering documentation like pay slips and tax returns.”