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Expert quantity surveyor with extensive experience in tax depreciation and property valuations across residential and commercial properties.

1000 Assets Report 2022: How investment properties are changing

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It’s exciting to be able to look back on a vast collation of information and draw meaningful conclusions.

Well… it is for data tragics like me, at least.

Our firm recently completed its 1000 Assets report for 2022. It’s a unique data source generated by analysing information from thousands of property depreciation schedules prepared by MCG Quantality Surveyors since 2016. In the process of doing these reports we collect a wide range of information about each owner and their property.

The report collates the data chronologically and divides it into subsets of 1000 properties each of which align very roughly to 12-month periods.

The study includes outcomes for each subset which paints a picture of behaviour at certain point in time. We’ve also tracked the outcomes to help identify trends over the past six years.

 

How investment assets are changing

In a previous article about this study, I discussed changes in the way investors are behaving toward their investment decisions, especially throughout the past two years. You can read about it by clicking this link.

In this article, I’d like to dissect how investment assets themselves are changing. This helps identify trends so investors make smarter decisions about what properties will find the widest appeal among both tenants and eventual buyers.

 

Investment property sizes are changing

The study revealed both investment houses and units are, on average, getting larger. Both have seen their floor areas increase by around 10 per cent since 2016.

Interestingly since 2019 the difference in size between units and houses has reduced. Houses were almost twice the size of units in 2019. Now, they are around 1.6 times the size of units on average.

There’s been demand in the market for larger properties overall (perhaps to deliver additional space for home offices etc.). That said, I suspect the shift away from small investor-only units and toward larger apartments which appeal to both tenants and owner occupiers is behind the change in relative size.

 

Post-purchase renovations remain popular

Around one-third of all investments receive some sort of renovation after purchase, with an average spend of $29,521 property. This indicates buyers are looking for ways to add equity and/or increase rental income.

This could slow somewhat in coming months as investors struggle with rising construction costs of course. While renovation should remain popular, the average spend could well change.

 

Townhouses gain popularity with investors

Townhouse have become dramatically more popular as an investment option over the past

five years. During this period, townhouses as a chosen investment type have grown by 59 per cent, while houses grew 28 per cent. At the same time, units fell as a chosen investment type by 51 per cent.

As a generalisation, townhouses tend deliver a good balance of capital growth potential and rental return. Their smaller land component and more compact design makes them more price accessible as compared to detached homes in the same location.

By the same measure, the average townhouse’s land component, size and design – as well as relative scarcity – in comparison to units delivers more potential for capital gains.

Townhouses are therefore proving popular with investors for sound financial reasons.

Another of the more telling outcomes is the swing toward cashflow-oriented investment options. This is illustrated by the rise in duplex investment.

In the last five years, while investment in units and granny flats has fallen as a proportion of all property types, the percentage of investors buying duplexes has doubled. Duplexes tend to offer high gross returns relative to houses. In addition, having a land component boosts their capital growth potential compared to units.

 

Unit prices have risen

While units are becoming less popular as an investment option, the average amount paid for a unit investment has grown in percentage terms by slightly more than the average paid for a house over the past five years.

This could be the result of the relative size increase for units as mentioned above. Also, after a period of oversupply in many cities, unit prices have now passed through the bottom of their cycle and are strengthening. Relative affordability could also be driving this end of the market as units offer investors a price-accessible entry to many locations.

 

The outcome

What does this tell us about the properties people are investing in nowadays?

Well, investors are being particularly savvy about where they spend their dollars. They want capital gains, most certainly, but cashflow also appears to be increasingly important. This could well reflect people becoming more conscious of their budgeting and ability to service loans and pay for repairs and maintenance. I suspect this will only increase in influence as cost-of-living escalations and rising interest rates play their part.

Also, renovations are helping improving the potential for assets to generate maximum rental income and enjoy capital gains.

1000 Assets Report 2022: How investors are changing

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After the trials of 2020/21, I expect ‘adaptable’ and ‘resilient’ to be emblazoned across the plinth of every monument to human endurance erected for years to come.

We’ve been served up challenges in all parts of life and, to our credit, have mostly found ways to alter our behaviours and make the best of each situation.

A great example of this is in the property investment space. Describing the way investor sentiment and motivation has shifted in recent years has been difficult to do via hard data… until now that is.

The quantity surveying business I run with Marty Sadlier sees our team producing thousands of depreciation schedules every year for investors across the nation. In the process of pulling together these reports, we collate an extraordinary amount of interesting data about our clients and the investment properties they own.

It spurred us on to create the 1000 Assets series. It’s a report that’s updated regularly to track trends in investment property markets.

Our 1000 Assets report for 2022 has just been released and it delivers a set of numbers like no other.

For this article, I’d like to talk about the study’s revelations around how investor attitudes are changing, and what they reveal about market direction in the future.

 

What is the 1000 Assets report?

We’ve collated data captured during the preparation of our client’s depreciation schedules into 1000-property subsets from 2016 onwards.

From there, we’ve analysed the numbers to monitor changing investment trends. The study includes outcomes for each individual subset, painting a picture of behaviour at certain points in time. We’ve also tracked the trends between subsets to see how investor thinking and property decisions have evolved over the past six years.

 

The 2022 report: Changing investor behaviour

We’ve identified a range of outcomes in the most recent 1000-asset dataset which runs from July 2021 to March 2022. Here are some of the revelations.

 

One-fifth of landlords live in their investment first

The numbers showed 20.2 per cent of landlords lived in their assets before they’re retained as investment properties. The average lived-in period was four years and four months.

A percentage of these landlords are ‘accidental investors’. They didn’t intend to own an investment property when they first bought a home but became one when they decided to keep the asset instead of selling it.

What’s interesting is this latest percentage is lower than the previous year’s result which saw around 25 per cent all investments lived in first.

My take is that this is a combination of improved education, and accessibility to remote buying opportunities. Put simply, people became more aware of the benefits of investing in real estate and were happy to keep their home and investment property dealings separate. They were also more easily able to seek opportunities outside of their local area. Many appear to have adopted a more purposeful approach to investing rather than simply falling into it by accident.

 

The distance between home and investment has increased

Investors are increasingly investing further and further from their home suburb.

We compared the 1000 asset dataset up to January 2020 against the dataset to November 2021. It showed the average distance between a landlord’s home and their investment property rose from 294 kilometres to 559 kilometres. In addition, the percentage investing greater than 1000 kilometres from home more than doubled during the period.

There’s no doubt the pandemic played its part in this outcome, but so has advanced technology and remote accessibility to experts. For example, plenty of Sydney and Melbourne investors have been keen to purchase in Queensland during the pandemic years and they weren’t letting shut border stop them.

 

Investors are becoming savvier about their strategies.

The figures show investors are improving their self-education and are seeking ways to maximise their returns.

For example, the time between buying an investment property and ordering a depreciation schedule in 2021 is half of what it was in 2016.

A focus on finances and ways to make their investments work harder for them is obviously behind this outcome. With some financial insecurity creeping into household budgets, landlords have been motivated to boost their post-tax incomes as much as possible.

 

There’s less appetite for new-build investment

Investors are shying away from new construction, most likely in response to increased labour and material costs, coupled with a sparsity of available contractors.

Our numbers to 2022 reveal 16.24 per cent of investors bought new-build assets as compared to 2016 when 23.9 per cent of investment properties were new. Given that cost increases look entrenched for the next few years, I don’t expect this trend to reverse anytime soon.

 

What’s this tell us?

Just this small part of the study tells us investors are becoming increasingly more strategic on where they’re buying, what they’re buying, and ways to maximise their returns.

It shows that distance is no longer a barrier to investing, and our ability as investors to remove emotion and focus on the numbers has improved. Investors have always been sensitive to price, so increased building costs have stymied new build investment in lieu of established housing as well.

 

No doubt we’ll continue to evolve and adapt as investors to changing environments. If we watch trends and track outcomes, we can stay ahead of the curve. This is foundational to making better decisions in the future.

The Top Five Reasons Why Your Construction Cost Estimate Is Likely to Blow Out

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With house prices sky-rocketing in the past twelve months, many people are now looking at other options for getting into the residential property market.

While house and land packages are still popular, increasingly people are looking at substantially renovating their own properties, or even buying old properties and renovating or rebuilding.

These are all great options, but like anything, they come with their own set of risks and challenges.

For the uninitiated renovator or first time developer, there’s a multitude of hidden costs that can derail even the most cautious planner.

It’s hard to calculate an accurate construction cost if you don’t know what to look for.

So what are the top five things to be aware of?

 

  1. Interest rate increases

We’ll put this at the top, not because it’s the most important – although in some instances it may be – but because it’s the most topical right now.

With the recent decision from the Reserve Bank to move the cash rate from 0.10% to 0.35%, the cost to borrow money is going to escalate.

The major banks have already moved to increase interest rates.

This may impact your construction cost for any number of reasons.

It will increase your cost of capital if you’re borrowing to fund the project.

It may increase your contractor prices depending on their level of debt funding.

And if you encounter any delays (which we talk about more below), it will have an impact on your holding costs.

Of course, the whole reasoning for the RBA to increase the cash rate is to put a handbrake on the economy and slow the rate of inflation.

Which may have the result of reducing other components of the construction cost.

It already appears to have slowed down the housing market boom, however at this stage the evidence is all anecdotal.

Only time will tell if the measures have the desired effect.

 

  1. Cost escalation on materials

We wrote in an earlier article about the many, often complicated, reasons for the rising costs of building materials.

To recap briefly,  the cost of timber and steel was already well on the rise during the pandemic, resulting largely from global logistical issues and shortages in the manufacturing sector.

This has since been compounded with the war in Ukraine generating economic sanctions on Russian oil. Not only that, the industry is further impacted by the fact that Russia is the largest exporter of soft timber globally.1 Sanctions on timber leads to higher prices on raw and finished materials.

Of course the rising prices at the petrol bowser has caused transport and logistics to become more expensive and concrete prices are spiking because the manufacturing process relies on cement, and making cement requires large amounts of energy in the heating process.

All these increases combined can have a substantial impact on the project cost. A good construction cost calculator needs to be flexible enough to allow for cost increases without producing an artificially inflated cashflow (in either direction) that shows the project to be unfeasible. Unless of course the numbers really don’t stack up.

 

  1. Inclement weather

It’s no surprise to anybody that’s we’ve experienced an unseasonably wet summer in many parts of the country.

According to the Bureau of Meteorology, this weather event has been part of the La Niña event that has impacted Australia for the past six months and is now said to be weakening.

La Niña means “little girl” in Spanish and simply refers to “a cold event”. In Australia, La Niña increases the chance of cooler daytime temperatures, reducing the risk of heatwaves and bushfires and tends to create wetter than normal conditions, increasing the frequency of tropical cyclones and flooding.

In addition to the devastating damage and flooding caused by the recent weather events, there has been significant stress placed on anyone trying to build or undertake a substantial renovation over the past six months. Not only has the ongoing weather caused extended construction delays, it has also had flow on effects for deliverability of materials, and supply issues for contractors with increased demand across the board.

All of this on top of an already struggling supply system as a result of two years of a global pandemic.

These delays almost inevitably lead to additional construction costs. If the house is not ready on time, you may have to live somewhere else for a period of time. You may have to store furniture or belongings, or even building materials.

If the property is an investment you may have additional holding costs and have an extended period without income.

 

  1. Delay on materials

If you’ve been to a grocery store recently it’s hard to miss the empty sections where your favourite grocery items used to be.

We’ve seen an improvement in the last couple of months but there are definitely still shelves with limited stock, largely due to issues with logistics and freight movements both into and around the country.

These logistics issues are not limited to grocery items. With restricted travel and border closures until very recently, this has had an impact on movement of raw materials leading to a backlog of deliveries which will take some time to overcome.

It’s a bit hard to finish a new build or even a renovation on time if you can’t get the garage door or floor finishes that you want, let alone the appliances that you had on special order from Germany, or even the marble tiles from Italy.

There’s an argument here for choosing locally made items as far as possible, but even then getting them shipped around the country in time can be problematic.

 

  1. Availability of contractors

I spoke to one person recently who is trying to book in repairs to their driveway following the floods. They’ve had an assessor attend after a four week wait, and it turns out the works are worse than thought. They had minimal inundation through their downstairs rumpus room which needs to be completely stripped. They tried to book in repairs only to find they can’t get a painter for another six months!

The national housing shortage is causing unprecedented demand for new housing stock, even before extensive repair work required to fix flooded houses, and contractors are proving difficult to pin down.

A shortage of skilled labour is not only causing delays on projects, but also leading to increased labour costs in a classic case of supply versus demand.

 

How can MCG help?

We write all this, not to scare you off building or renovating.

On the contrary, working on a new project can and should be an exciting time for all involved.

But you do need to be prepared with a realistic timeframe for the works, as well as a robust construction cost calculator to ensure you are forewarned and able to plan your cashflow.

That’s where MCG Quantity Surveyors can help.

MCG Quantity Surveyors are acutely aware of the current challenges faced by our clients when it comes to planning and assessing their property projects. We make it our priority to ensure our reports take into account all possible cost implications.

We may not be able to control rising prices or materials shortages, but we can definitely help you calculate your construction cost.

We think that’s a pretty important step.

Contact us now for an obligation free quote on 1300 795 170 or go to our website mcgqs.com.au for more information.

 

References

 

1 Merlehan, Adam  “The real reason why construction giants Condev and Probuild collapsed”  22 March 2022 <SmartCompany.com.au>

 

Interest Rate Rises and The Property Market, My Two Cents.

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The RBA has increased rates for the first time in more than 11 years. That’s significant because as the RBA says itself, many households have never experienced rising interest rates. They’re also going to go up further, likely in the next few months. Before we panic though, let’s get some context.

As a guide, if you have a $500,000 principal and interest home loan at a rate of 2.29% p.a. on a 30-year loan term, your repayments were $1,922 a month.

When the bank passes on this 0.25% increase, you’ll pay $1,987 a month. If we tweak it all the way to a 0.75% rate increase, it’s $2,119 a month. To put it another way, the homeowner will need to find another $197 a month or say $46 bucks a week.

I say context, because for most people it’s a manageable increase that’s well within their ability to negotiate with tweaks to discretional spending.

The RBA are beginning “the process of normalising monetary conditions.” That should be a reminder that interest rates are currently not normal, they’re historically low.

I don’t doubt that this new trajectory for rates will spook property buyers and cool some of the demand, but for those with capacity willing to ignore the herd, I believe there will be plenty of opportunities to buy well in the next 12 months and see capital growth.

Rates are going up because the economy is doing well. That’s a positive thing. Sticking with the positive narrative, many mortgage holders will have continued to pay the same interest rate as rates were dropping over the last few years. On top of this, and according to the AFR in late April, residential property borrowers have squirrelled away a record $232 billion in offset accounts – an increase of nearly 15 per cent, or $30 billion – in the past 12 months to reduce their interest payments and shorten loan terms.

The main driver of higher inflation has been global interruptions to supply chains and Russia’s invasion of Ukraine has resulted in sharp increases in the prices of oil and gas, base metals and many agricultural commodities. The outcome of this conflict and the economic impacts are hard to predict.

Nationally, strong demand is putting pressure on capacity and firms are struggling to hire and retain workers. These increases in costs are resulting in price increases being passed onto consumers.

Interest rate rises will likely be slow and measured over the next 12-24 months in my view. There’s no desperate desire to be back within the 2-3 per cent target band within the next few months. The RBA expects inflation to start moderating as some of the supply disruptions are resolved and/or as prices settle at a higher level. They state that for inflation to stay high, prices need to keep increasing at a fast rate, not only settle at a high level.

I feel for the households that will struggle with another kick to their cost-of-living pressures, but most people are not over-extended, and their serviceability has been tested well over and above where we’re likely to land. Despite what may be presented in the media, there’s not going to be a property price crash and the 4 horsemen of the apocalypse will have another gap year.

There’s No Silver Bullet for Rising Building Costs, but Having a Detailed Construction Cost Estimate is a Good First Step

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It’s been tough reading the news lately.

Recent coverage of the war in Ukraine and the devastating impact of the floods in Queensland and New South Wales has pushed reports of COVID cases and lockdowns down the rankings, at least for the time being.

It’s enough to make us yearn for the daily briefings from the State Premiers.

Almost, but not quite.

Far from the optimistic resolutions of 31 December, 2022 has gotten off to a rocky start on many fronts. With rising costs across the board, it seems nobody is being spared, least of all the development and construction sectors.

Fueled by ongoing low interest rates and government incentives, demand for housing and new developments continues unabated, running headlong into multiple supply issues.

It takes a steady hand and a firm grasp of economic factors to navigate the current volatility in the property industry.

Even then, there’s no guarantee.

The spate of construction companies under severe financial stress seems to be on the rise.

Unfortunately some sizable and respectable companies such as Probuild and Condev have already fallen victim to the headwinds threatening the sector, and the fallout is likely to be far-reaching.

As hard as it is to read about, it’s a lot worse for the people actually at the heart of these stories.

Faced with fixed cost contracts struck months ago now entering execution phase, it’s unlikely we’ve seen the end of the pressure on the sector.

In these uncertain times, having a robust and reliable detailed construction cost estimate is more important than ever.

So why are costs rising?

The cost of timber and steel was already well on the rise during the pandemic, resulting largely from global logistical issues and shortages in the manufacturing sector.

This has now been compounded with the war in Ukraine generating economic sanctions on Russian oil. Not only that, the industry is further impacted by the fact that Russia is the largest exporter of soft timber globally.1

We’re all bearing witness to rising prices at the petrol bowser with a full tank of petrol hitting the back pocket of everybody.

Transport and logistics becomes more expensive. Sanctions on timber leads to higher prices on raw and finished materials. Concrete prices are spiking because the manufacturing process relies on cement, and making cement requires large amounts of energy in the heating process.

The flow on effects are endless.

Why are construction companies going under?

The construction industry has always been competitive. More often than not, builders bear the risk of price movements and inclement weather via fixed price, lump sum contracts. With minimal profits, often less than 5%, already factored in, it doesn’t take much of a bump to move the project from black to red.

Bring on a La Nina weather event, or a war in Europe causing macro-economic ripples felt across the world, or a global pandemic causing supply shortages and transport delays, it appears to be a perfect storm.

Even with continued demand driven by low interest rates and government incentives, growing revenue streams are not converting to profitability in many cases, and supply issues and materials cost increases do not look to be abating quickly

How can MCG help?

We know that not every builder is operating on the scale of Probuild and Condev. But regardless of size, it’s just as important to know exactly what costs you’re up against and understand how quickly they can move.

With the help of a detailed construction estimate template we can work with you to determine your costs ahead of time and stress test for likely supply chain movements.

Or even the unlikely ones.

MCG Quantity Surveyors are acutely aware of the demanding and competitive nature of the construction industry. We make it our priority to ensure turn-around times are consistently met and that our clients are kept up to date with the status of projects and reports.

We may not be able to control rising prices or materials shortages, but we can definitely help get a firm handle on your detailed construction cost estimates.

We think that’s a pretty important step.

Contact us now for an obligation free quote on 1300 795 170 or go to our website mcgqs.com.au for more information.

 

References

 

1 Merlehan, Adam  “The real reason why construction giants Condev and Probuild collapsed”  22 March 2022 <SmartCompany.com.au>

 

The Commercial Property Wave of 2022

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I love a surfing analogy in a headline. Hell… anything that helps up my ‘cool quotient’ after all these years as a quantity surveyor is more than welcome.

So, the chance to waffle on about catching the rising swell of interest in commercial property investment suits me fine. Here’s why I say paddle hard and take the drop! Gnarly!

OK, enough already. I’m quickly moving from cool to fool.

But in all seriousness, I think there’s good reason why commercial property is primed to be an investment worthy of your time this year – and it includes a bonus in comparison to residential investment that not many people know about.

Read on and all will be revealed.

 

Why always residential?

Whenever we collectively discuss property investment in Australia, residential is almost always the primary topic of conversation.

This is fair enough I suppose. Most Aussie investors obviously own houses or units. It’s an easy way to enter the landlord space.

And while this long tradition of residential will continue to dominate, I’d like to give commercial its due. That’s because I truly believe commercial property investment will hit it straps this year.

 

Reasons to be commercial in 2022

When you break the current situation down, there’s myriad reasons why commercial investment will be the ‘new black’ for smart Aussie landlords.

 

Strong yields

After the extraordinary run of capital growth achieved across our largest residential markets in 2021, there are credible indications that 2022 will see growth attenuate. A rise in listing numbers, and some trepidation about interest rates, all feed into this narrative.

In these circumstances it’s not unusual to see investors turn to cashflow assets. The security of greater-than-residential incomes that commercial delivers help owners comfortably service loans and sleep soundly at night.

 

Positive cashflow

Hand in hand with high yields is the relative ease by which positive cashflow can be achieved via commercial rather than residential. Firstly, we remain in a low interest rate environment and despite indications there could be a rise this year, no one expects increases to be substantial. Low interest rates coupled with high relative yield quickly add up to neutral or positive cash flow – a gold standard for investors needing to hold their assets for the long term.

The other cashflow benefit in commercial is the nature of leases. Secure the right tenant under the right agreement, and you’ll be on a winner. Not only do leases tend to run for years at a time, but outgoings are generally paid by the tenant, not the landlords.

Wouldn’t you love these sorts of terms on your investment house or unit?

 

The pandemic filter

The pandemic fallout from the past two years has identified what the most flexible and resilient business models are.

Businesses capable of utilising adaptable space for their operations had a better chance of surviving and thriving. For example, hospitality establishments that could quickly switch from in situ dining to online and delivery-based production. There was also a rush on industrial assets with good storage facilities.

The point here is as we progress into 2022, there’s more certainty about what sorts of tenants can endure the tough times, and the types of properties they’re looking for. This is exactly the sort of commercial real estate you should be seeking.

 

Businesses reopening

Along with post-pandemic commercial resilience is the realisation that businesses are now looking to reopen after a long period of hibernation. Sure, not all have survived, but those that had the wherewithal to weather shutdowns are well positioned to start operations once more. As activity increases, so too will demand for well-placed commercial property.

 

The one commercial advantage no one talks about…

There is another substantial upside commercial property has over residential.

Legislation introduced in May 2017 brought about changes to depreciation benefits for residential property investors.

For residential properties purchased after 7.30 pm on 9 May 2017 (how specific is that!), depreciation deductions can only be applied to items of Plant and Equipment (P&E) that have not been “previously used”. So removable items like drapes, blinds, air conditioners and carpets that are not new can no longer be depreciated for tax purposes.

This change has removed an advantageous chunk of tax depreciation for many residential landlords.

But the rule change does not apply to commercial assets. Their second-hand P&E is still depreciable. I think this element will convince some well-informed investors to steer away from the residential space and look toward commercial property.

 

Mark my words, we are heading into a golden age for commercial assets. Just be certain when investing that you take advantage of all the deductibles to maximise your net cashflow. It could mean the difference between holding the asset long term with plenty of buffer or stressing out about those monthly mortgage repayments.

The Cause of Our Deepening Rental Crisis

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While I’m a generally upbeat person, there are some aspects of the Australian residential investment market that are cause for concern. Worse still is that some of the struggles we see in the rental market can be remedied, but they’re founded in a common misconception about real estate investors.

I think we’re in the habit of penalising property investors in this country, but few realise the fallout will have a wider reach, particularly for those who can’t afford to purchase.

 

Vacancy plummets

A recent study by SQM Research revealed rental vacancy rates have plummeted to a 16-year low. Our own research via the MCG rental loss index is showing vacancies as tight as ever.

Most commentators say a ‘balanced rental market’ has a vacancy rate between two and three percent. This is the point at which demand and supply are evenly matched, so rents tend to remain stable.

But the SQM numbers show the vacancy rate across our combined capital cities is currently 1.3 per cent, which is a 0.3 per cent downturn from December 2021, and a 0.7 per cent fall across the year.

In fact, apart from Sydney (2.1 per cent), Melbourne (2.7 per cent) and Brisbane (1.1 per cent),  every other capital city has a rate below 1.0 per cent.

This screams of a lack of supply and runaway demand across these major centres.

So, why has supply dried up, particularly during this period of record capital growth?

 

Conspiring forces

The misconception I mentioned earlier is that investors are viewed as an easy target politically and socially. They’re often seen as wealthy real estate hoarders, whose vast millions are simply being used to lock out first homeowners.

But this is plainly untrue. A quick online search reveals that of Australia’s 2.2 million investors, most are average income earners. A large number (around a quarter by my calculations) are simply investors because they kept their first home as an asset rather than selling before moving. There’s also few (less than 10 per cent) who own more than two investment properties. Surveys likewise tell us most are simply seeking an easier retirement – not a private plane and house in the Bahamas.

Yet time and again they’re seen as cash cows or whipping boys, depending on which side of politics you sit.

But the numbers tell us we need to encourage more investment, not less. Despite this, here are some issues turning investors away from residential property.

 

Tax impacts

Legislation introduced in 2017 brought about changes to depreciation benefits for residential property investors.

For residential properties purchased after 7.30 pm on 9 May 2017, depreciation deductions can only be applied to Plant and Equipment (P&E) items deemed “not previously used”. So removeable items like blinds, carpets and air conditioners which aren’t new can no longer be depreciated for tax purposes.

This change has removed a huge advantageous chunk of tax deductions for residential investors. In response they’re turning toward other assets, such as commercial property.

Add to this that there’s a good chance Labor will win the next federal election, and they have previously shown interest in changing negative gearing and Capital Gains tax rules. I know of quite a few investors who are considering an exit from the market if those two incentives are amended.

 

Finance woes

Another concern for investors is borrowing money for property purchases.

The free flow of available credit has a direct effect on levels of property investment. For example, after the Royal Commission into Banking and Finance, rules were implemented that made it tougher to qualify for a loan. The end result was a softer property market.

Despite this, the Australian Prudential Regulation Authority (APRA) recently put a shot across borrower’s bows. They increased the loan tolerance buffer from 2.5 per cent to 3.0 per cent. This means unless your numbers show you’re able to service a loan at an interest rate three per cent higher than what you are actually applying for, you could well be knocked back.

This reduces funds available for investing, and hence lowers activity – particularly as investors are already charged a higher interest rate than homeowners (despite them being a comparably better risk).

The big worry is that APRA will implement further restrictive lending directives, particularly for investors. This could occur via such things as higher LVRs, for example. All this feeds into a reduced appetite for investing and falling supply of rental properties.

Then there’s rising interest rates. A ramp up in inflation both here and overseas is translating into a looming interest rate hike – perhaps even as soon as mid 2022. Higher rates mean a lower net return on your investment.

 

Legislation

There seems to be a national push toward reframing tenancy legislation, so it’s weighted more in favour of the tenant than the landlord.

2021 rule changes in both Victoria and New South Wales gave tenants more power in the relationship. Changes included elements such as an ‘as of right approval’ to make alterations to the leased property, limits around rent increases on periodic leases, and a reduction in break-free fees. There’re also rules making it easier for tenants to have pets.

Probably toughest of all is that landlords in Victoria need to provide a reason for ending a tenant’s lease after their first fixed term.

 

The problem, as I see it, is that penalising landlords simply makes residential property a less attractive asset class. Some might be cheering (i.e., first homeowners) and I’m all for people being able to buy a home, but few seem to have thought about the fallout for renters.

A huge swathe of the Aussie population rents – for whatever reason. It might be affordability, that they’re transient workers, or even as a lifestyle choice. These people need rental properties, and there are few social housing options that can successfully fill the void. Australian landlords provide most of the shelter for these renters.

So why do we keep punishing landlords? Instead, we should be encouraging investment to increase supply, improve availability and create further competition.

Mark my words, the rental crisis isn’t going away anytime soon, and could get even worse if we don’t start addressing investor inequities.

Why You Need to Understand Your Commercial Construction Cost Well Before You Break Ground

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If you’ve been paying attention to your superannuation or share portfolio balance over the past few weeks you’ve probably noticed the Australian stock market has had a bumpy ride.

There’s many reasons for that, but one worth noting in relation to the property market is the current volatility in iron ore, steel and lumber costs.

We typically think of the property sector and the stock market to be mutually exclusive investment decisions (unless of course you’re investing in listed property trusts, and that’s a whole other topic).

The purpose of this article is not to talk about the stock market. There are plenty of resources and more qualified commentators to discuss that topic.

But whilst you might have noticed the fluctuations in the ASX, the follow on impact of these rising prices on the construction industry and commercial construction cost is sometimes a little harder to fathom.

In a recent article in the Australian Financial Review back on the 1st December 20211 , Rich Lister Harry Triguboff was quoted as saying “The building costs are going up a lot…It’s not a matter of the labour force asking  for a 5 per cent increase. Iron Ore prices have come down, but steel has gone up. And it’s going up by a lot, not by 2 per cent – [but by] 10-20 per cent. It’s going up a great deal.

The same article noted property leaders, Dexus CEO Darren Steinberg and Lendlease CEO Tony Lombardo, addressing the rising costs of lumber and steel.

“This is going to put price increases on construction,” Mr Steinberg said.

Unfortunately recent media coverage of building companies struggling with solvency issues only highlights the difficulties in the development sector as a result of increasing commercial construction costs.

The other challenges of staff shortages and logistics delays that are being felt across all sectors as a result of COVID have only served to exacerbate the issues.

It’s more important than ever for anyone operating in the development space to have clear feasibility analyses and a robust commercial construction cost breakdown.

It’s not just the current cost of materials that need to be considered.

With heavy speculation that interest rate increases are becoming inevitable, it’s likely that the cost of capital will soon increase.

Not only that, there is current volatility in the retail, housing and commercial office sectors.

Return to work options and the ongoing debate regarding the take up of commercial office space has valuers scrambling to determine the correct metrics on which to base their assessments.

Retailers face a constant battle of staff shortages and COVID outbreaks impacting consumer demand.

It’s not all bad news though.

The housing market continues its strong trajectory, strengthened by opening boarders and the low interest rate environment.

Whilst it appears to have come slightly off the boil, demand is still strong and looks set to continue for some time yet.

So what does all this mean for commercial construction cost?

Developers can’t afford to get their budgeting wrong.

Whether it’s office, housing, retail, industrial.

There’s too much riding on it.

Before a project budget or feasibility for a proposed development is even considered, it is imperative that a preliminary cost plan be completed.

This report will typically be based on cost allocations per square metre of the Gross Floor Area (GFA) of the development. This is largely due to the preliminary nature of the design and documentation at this point.

The Preliminary Cost Plan will establish a working budget for each project element (substructure, columns, external walls, internal walls, floor finishes etc). The Plan forms a valuable assessment tool in the design decision-making process.

MCG Quantity Surveyors are acutely aware of the demanding and competitive nature of the construction industry. We make it our priority to ensure turn around times are consistently met and that our clients are kept up to date with the status of projects and reports.

We may not be able to control the stock market, but we can definitely help get a firm handle on your commercial construction costs.

We think that’s a pretty important step.

Contact us now for an obligation free quote on 1300 795 170 or go to our website mcgqs.com.au for more information.

 

 

References

 

1 Bleby, Michael “Rising costs a risk for developers and builders: Triguboff” 1 December 2021 <afr.com

My 2022 Hot Tips

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While the provocative title of this blog may have some readers intrigued, I want to put your mind at ease. My hairstyle isn’t changing. I won’t be peroxiding my crewcut in some vain attempt to start an 80s synth cover band.

No… the tips I want to show you relate to the property market, so apologies if you’re hoping to glimpse me dressed as the singer from A Flock of Seagulls.

Instead, I’d like to jump aboard the prediction train and share a few thoughts on what I believe will play out in 2022’s property markets.

While I have the utmost respect for most qualified commentators, there is something of a new perspective I can bring to this chat. I spend plenty of time interviewing and discusses property investment with a range of others in the field such as buyers’ agents, investment advisors and valuers. By combining their collective musings with my own analysis, I’ve come up with a few opinions about the coming 12-months I believe are worthy of consideration.

 

The big picture

While 2021 was a standout year for anyone who owned a home and was looking to sell or refinance, the sorts of growth rates we’ve seen in the past 12 months are, simply, unsustainable.

That’s why, toward the tail end of 2021, activity and prices tapered in our two biggest markets – Sydney and Melbourne. Given the sheer volume of transactions these two metropolises contribute to the analysis, there’s little chance Australia’s overall property value growth metrics will persist.

I believe many owners who held off selling last year will now list their property before the market softens further.

Don’t get me wrong – value growth will continue, but the rate of growth will trend lower on a monthly basis.

Of course, some locations will still do well. Brisbane seems to be the great beacon of gains heading into 2022. It’s lifestyle appeal, planned and current infrastructure projects, and future Olympic Games have placed it firmly in the crosshairs of investors. Brisbane also remains relatively affordable compared to the southern capitals, so it’s the pick location for me this year.

 

Worth tracking

As mentioned above, I believe listings will be a must-watch metric this year.

Most of the market strength in late 2020 and throughout 2021 was a response to the lack of available listings. As listings rise this year, there will be more choice for buyers and prices can be expected to attenuate in response.

The next thing to keep track of is the finance sphere. Not to flex my multi-syllabic vocabulary too much, but macroprudential policies will be a key piece in the puzzle. APRA, the RBA and major lenders will implement changes this year in response to rising inflation, and a lack of housing affordability. I suspect investors will be punished via tougher lending criteria and higher interest rates. So, stay up to date with your financial arrangements and be ready to strike if an opportunity presents.

When it comes to choosing the right asset, the consensus is to act with care in 2022. During booms like last year’s, gains seemed inevitable no matter what you bought. This year, however, fundamentals will be key.

For starters, houses will outperform units in terms of capital gains and rental growth. Homes, or more specifically their land component, are finite and unique. If you can buy a house in your choice market, then that would be the way to go.

This leads me to issue a warning on ‘secondary stock’. Anyone who bought late last year in an attempt to speculate on a property that didn’t have great fundamentals – e.g. inner-city investor units – could be in strife. If you’ve purchased believing the markets will continue rising in value like a newly launched crypto currency, you could be in for some hurt. As markets soften, expect these secondary-quality properties to be the first impacted by the downturn.

I say that knowing we’re about to see the return of overseas students and skilled workers who traditionally prop up these sorts of markets. But even with those arrivals, I’d be very cautious about taking a tilt at property by buying seemingly ‘cheap’ investor stock. There’s more downside risk over the next 12-months, and beyond, for this type of housing.

Also, commercial property will grow further in appeal. This might surprise anyone who noticed how the pandemic decimated the business sector. But rather than destroying all operations, COVID seems to have filtered out the pack. It’s helped identify the types of tenants and buildings that are most adaptive, flexible and tenacious. As a result, good commercial assets with strong tenancies are in hot demand. They’re providing attractive yields in a low interest rate environment, so what’s not to love about that?

 

In a nutshell, expect 2022 be a little more subdued, especially in our bigger markets. My fervent hope is that the pandemic buggers off and we can get back to the usual state of affairs. As we wait for this to happen, take a more conservative approach when investing in 2022 to ensure your long-term plans stay on track.

Set your project up for success with a reliable construction cost estimate

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Imagine you are building your dream house.

The one you’ve been thinking about for as long as you can remember.

The whole family is on board.

You know how many bedrooms and bathrooms it needs to put an end to shared rooms and bunk beds.

You’ve included a butler’s pantry, and a walk-in robe, and a kitchen that would have Gordon Ramsay excited.

You have vision boards and colour schemes and finishes charts.

You can picture long family lunches and cosy movie nights.

It’s a done deal as far as you’re concerned.

How important is to you to come in on budget?

How reliable is your estimate of the construction cost?

Imagine now that you get halfway through the build and find out that you’re going to be 20% over on costs because there’s a problem with supply.

Your fittings are legitimately on a slow boat from China.

And there’s no contingency factored into the pricing.

It’s not unheard of, especially in the current climate.

And it’s entirely possible it will get worse before it gets better.

 

What if the stakes are even higher?

Now imagine that project wasn’t actually your house, but a multi-million dollar construction project.

With many stakeholders, all with a vested interest in the project being on time and on budget.

It wouldn’t be the first time that the cost of construction for a commercial project has gone over budget.

In fact, it doesn’t take much research to find a long history of significant projects that have been either over budget or over time, or more often than not, both.

Take for example the Sydney Opera House, arguably one of the more famous projects in Australia, if not the world.

According to a recent article by Macquarie University1, the Opera House was delivered  in 1973, 10 years late and at a cost of $102million instead of the estimated $7million.

That’s $95 million over budget, in 1975 dollars.

Or $700,000,000 over budget, in 2021 dollars.

I guess in this case it was worth it.

But Opera Houses don’t get built every day.

Spare a thought for the Catholic Church.

They had to wait 100 years for the southern spires to be finally installed on St Mary’s Cathedral in Sydney’s CBD in 20002.

I can’t even imagine what that budget over-run was, but it would not have been cheap. I certainly don’t envy to person who came up with their construction cost estimates.

On the bright side, I guess they wouldn’t have been around for the final report.

In more recent times, you don’t have to live in Sydney to have heard about the financial difficulties of the light rail project completed in 2019. Following lengthy media speculation and multiple contradictory reports, the Auditor-General’s department announced its findings on the light rail.

The original budgeted cost of $1.6bn was a mere $1.5bn short of the final actual cost of $3.1bn3.

Ouch.

 

How to mitigate budget risk

Now I don’t mean to undersell the complexity of these projects. These are major infrastructure developments with a myriad of obstacles and hurdles to overcome.

But irrespective of whether we’re talking about a residential home, a billion dollar investment, or any project in between, one thing remains true.

The importance of reliable cost estimates for construction cannot be over-stated.

That’s where MCG Quantity Surveyors come in. We will establish a working budget for all project elements extending from structure to finishes, and form a valuable assessment tool in the design decision-making process.

We will make sure that sufficient realistic contingency is included to overcome unexpected cost blowouts.

This detailed reporting on the cost of building a house, commercial or industrial building will take into account the projects completed design and documentation, including the completed architectural specifications, structural constraints, schedules of finishes and services designs/specifications.

If that sounds of interest, we would love to chat to you about your project.

It might not be on the scale of the Sydney Opera House, but we know that for you, it’s just as important.

 

References

1&2 Yiannakis, Michael, 2021 “Budget Blowouts and Broken Promises”, Macquarie University, accessed 17 November 2021, <https://www.mcgqs.com.au/lighthouse.mq.edu.au>

3Rabe,Tom & O’Sullivan, Matt, 2020, “NSW Government failed to update public on true cost of light rail”, accessed 18 November 2021, <smh.com.au>

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