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In this sector report, partnered by Citi, we review what has been contributing to the re-emergence of investors and what they’re looking for.
The booming property market and record-low interest rates have seen more borrowers look to enter the lucrative property market and make their money work harder for them. As well as first home buyers looking to secure low mortgage rates, investors have also been making a strong return into the property scene.
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The best time to invest in property is now; that’s what many investors will tell you, regardless of when you ask. But as property prices continue to escalate and mortgage rates are at record lows, now really does seem like a good time to take advantage of the market conditions and invest in property.
Just take a look at the most recent ABS data; over the June 2021 quarter, capital city housing values grew by an average of 6.7 per cent; the largest quarterly increase since the Australian Bureau of Statistics records began (in 2003) – and many economists are estimating that this will only continue. The general consensus seems to be that the year 2021 will finish up with property prices having risen by a whopping 20 per cent on 2020.
What’s driving investor demand?
The massive increase in property prices is attractive for those looking to make their money do more for them and invest in a (rapidly) appreciating asset. With wage growth relatively stagnant, and the central bank signalling that official interest rates will likely remain close to zero for the next three years, the interest rate environment is in a sweet spot for investors looking to access finance to purchase property.
Rather than parking cash into savings accounts – which currently have nominal interest rates of under 1 per cent – many Australians have been looking at using this cash as a deposit for a home loan, which themselves are at record-low rates. And it’s not just seasoned investors looking to take advantage; first home buyers are increasingly finding themselves priced out of their local markets (particularly in the expensive capital cities) and are looking further afield to make their first foray into market, but as investors rather than an owner-occupier.
When coupled with the property value increases, the environment seems right for investors to get into market now, before mortgage rates rise. Borrowers across the country have been busy doing just that.
Ever since investor lending curbs were rolled back by the prudential regulator in 2018, investors have been re-emerging en masse. The most recent Lending Indicators data from the Australian Bureau of Statistics shows that investor loan commitments have gone through an unbroken period of growth since October 2020 and almost doubled in value as at July 2021 (the most recent data available at the time of writing), compared to a year ago.
In fact, Matt Wood, head of mortgages distribution at Citi, tells The Adviser that the lender had seen an uptick in investor lending in the first half of 2021, compared to 2020, however this had reduced in recent months, possibly due to the impact of further lockdowns.
“The uptick in investor lending in the first half of 2021 reflected consumer confidence returning,” he explains.
“The recent lockdowns have dampened enthusiasm, but we believe investors are keeping a close eye on what’s happening so they can get back into the market when lockdown ceases.
“If we look at the lessons of 2020, we can assume that while strict lockdowns will impact the number of houses coming onto the market, the long-term impact on the property market will not be severe.
“The typical spring peak may be pushed back to summer, as Australians wait until the nation has reduced restrictions before either selling their home, or starting their next investment journey.”
Where are investors buying?
Historically, investors have usually flocked to the capital cities and holiday towns for investment buys; with apartments in CBDs and holiday rentals on coastal towns always in hot demand. Property in Sydney, Melbourne and the Gold Coast always sells well with investors. But the COVID-19 pandemic has changed appetites and the areas of greater return now are not necessarily what they once were.
According to the eighth Annual Property Investor Sentiment Survey of the Property Investment Professionals of Australia (PIPA) group – which gathered insights online from 786 property investors during August – while investors continue to tip metropolitan markets as offering the best investment prospects (at nearly 50 per cent), this choice is fading. Indeed, last year, this figure was up around 61 per cent in 2020 and has historically tended to be around that level.
Regional markets are instead growing in favour. A quarter of investors were looking at regional locations (up from 22 per cent), while interest in coastal locations has soared to 21 per cent from 12 per cent last year.
Sunshine State property winner
PIPA chairman Peter Koulizos revealed that this year’s survey showed that the majority of investors believed Queensland to be a “winner” for property investor activity this year.
“A staggering 58 per cent believe that the Sunshine State offers the best property investment prospects over the next year – up from 36 per cent last year,” Mr Koulizos says.
“New South Wales was second at 16 per cent (down from 21 per cent in 2020) and Victoria was third at 10 per cent, which is down significantly from 27 per cent last year.”
The number of investors who see Brisbane as the state capital with the best investment prospects has also escalated sharply when compared to last year’s results – up to 54 per cent compared to 36 per cent in 2020 – according to the survey results.
Mr Koulizos notes that South-East Queensland was the beneficiary of billions of dollars of major infrastructure projects that were set to transport the region, plus Brisbane was recently named the host of the 2032 Olympic Games.
Queensland has also been less impacted by extended lockdowns than the larger states of NSW and Victoria.
“All of these factors, as well as the affordability of property in Southeast Queensland and strong interstate migration, are some of the reasons why investors are so optimistic about market conditions there,” he says.
The latest ABS data echoes this data. It shows that increases in the value of new loan commitments to investors were strongest in Queensland (9.1 per cent). In real terms, new lending to investors in the state lifted by $1 billion between 2020 and 2021, the ABS stats show, hitting $1.6 billion in July 2021. The last time new lending to investors was up at this level in Queensland was pre-GFC in 2007.
Speaking of the trend, Loan Market Burleigh Heads broker Jodie Wolfenden, from Superior Wealth, notes that while investors had typically eyed the region for holiday homes, that had increased as investors anticipated the influx of people moving to the Sunshine State.
She told The Adviser’s Elite Broker podcast: “There’s always a lot of tourists coming, and they come to Surfer’s and see the beach and it’s sunny, and they go: ‘Oh, I want to live here. Let’s buy a property and then we can come and stay on holidays.’
“[But] COVID was a very defining time. More people were looking to move here… I’ve got clients living on islands which they have to get to with boats but because they can work from home, it’s great for them. So, it’s a real lifestyle decision. There are massive opportunities here [for investors].
“We’ve got some of the cheapest, historically low interest rates ever in our country. So, the opportunity for clients at the moment is massive. As we’ve all seen Australia wide, property is going crazy. Supply is off the charts. I don’t see demand slowing down anytime soon. So, clients are taking the opportunity to get into it, which is amazing from a business perspective. I love getting a client who was just your mom and dad buying a home, and then them coming back to me and them saying, ‘Is there any chance we can look at buying investments?’”
Indeed, Mr Wood outlines that while Citi predominantly lends in and around the major capital cities, investor interest is becoming more widespread as consumers are taking advantage of remote working opportunities to move to more regional areas.
“We are seeing a strong trend to purchase along the eastern seaboard as far north as Byron Bay and south as Ulladulla, or in larger regional hubs,” he says.
“This represents a shift for these locales, which were typically populated by owner occupiers previously.
“In a lot of these areas, investor interest is driven by high demand for rental properties. In some areas, rental returns have increased by up to 30 per cent.
“From what Citi is seeing, investors are predominantly looking to enter the market in the medium price range where demand is high and ongoing.”
Top tips for writing investor loans
As the data shows, opportunity abounds, if you know where to look. And investors are crying out for help for support and advice from qualified professionals to help them access the finance they need to purchase/refinance and to understand the market conditions.
The 2021 PIPA Annual Property Investor Sentiment Survey revealed that the vast majority (72 per cent) of respondents secured their last investment loan through a broker, a slight increase on last year’s figure of 71 per cent.
The same proportion of investors (17 per cent) secured their loan directly via a bank, with 4 per cent using a non-bank lender.
Only 2 per cent of investors said they hadn’t taken out a loan for their property purchases.
Additionally, 72 per cent of respondents stated that they intended to use a broker to finance their next investment loan.
While this figure is almost three-quarters of the respondents, it represents an 8 per cent decrease compared to the 2020 PIPA Annual Property Investor Sentiment Survey. However, investors continue to use and value the services of specialised professionals, PIPA noted.
More than half had sought property investment advice from qualified property investment advisers (QPIAs), with mortgage brokers coming in second place, at 46 per cent.
Buyer’s agents (45 per cent) and accountants (44 per cent) were also commonly sought after for help.
Overall, more than 80 per cent of all investors said they believed that more education is needed around the risks and benefits of investing in property.
This is a sentiment that Mr Wood echoes: “I would advise brokers looking to write investor loans to stay close to their clients. In turbulent economic times, as most of Australia battles pandemic-related lockdowns, clients are looking for market data and intelligence to guide their investment process.
“It’s a real opportunity for brokers to act as an informed helping hand, and I suggest reaching out to your aggregator or lender partners if you want access to more information.
“I also suggest brokers have one-on-one conversations with their BDMs to make sure they are accessing the right product and features to meet their investor client expectations and goals. For example, Citi’s free 60-day rate lock can be an important ingredient to ensure an investor obtains the rate that you have based your calculations on. Brokers can also protect a client’s cash flow by fixing all or part of the debt.
“Citi offers special pricing for investors, so we encourage brokers to contact their Citi BDM to discuss the individual circumstances of a particular deal. Our current offer in market is a two year, fixed-rate, principal and interest loan at 2.19 per cent and a two year, fixed-rate, interest-only loan at 2.39 per cent.”
For brokers looking to start helping investor clients for the first time, it’s also important they work closely with financial advisers and accountants to understand the borrower’s wealth strategy and direction, as Ms Wolfenden recommends.
“You’ve got to think, this is not just straightforward finance. It is structured. I quite often get clients come to me that are structured incorrectly when they’ve gone to try and do it themselves. For example, they go to a bank and the bank will tie them up in a neat little bundle, which will limit what they can do potentially moving forward. So, making sure or understanding what your client wants long-term and understanding their needs and wants, and making sure that we’re accommodating that for future investments,” Ms Wolfenden said.
“When you look at the entire situation, what is in the best interest of that customer? Is it going to give them the best outcome from a tax efficiency perspective, whilst they still have a very high and non-deductible home loan debt, for example?
“It is just about understanding their situation, giving the client options, and letting them make the decisions and working with their accountant to get the best outcome for them.”
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A word from Citi Citi is pleased to partner with The Adviser to bring this feature on investor loans to readers. We are navigating uncertain times in the property market. At the start of this year, record housing prices had us thinking the COVID-19 pandemic was a distant memory and our industry had, thankfully, escaped largely unscathed. The recent outbreak of the Delta variant however has left us with many questions once more. Will the spring season bring the volumes we typically expect? Where can investors unlock the most value? How can brokers best support customers as they ask difficult questions? We hope this feature will help you answer some of these questions and more, as you work with clients to help them meet their investment lending objectives. Matt Wood head of mortgages distribution Citi 
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