Category: Information

My 2023 Outlook

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Oh my gosh, is that the time already? I just looked up from my harried work desk and realised…. 2022 is coming to an end!

It feels like this year has progressed far faster than the previous few. Perhaps it’s the PTSD of pandemic shutdowns when we had too much time on our hands. Now it’s all work fast, hit targets and don’t take a backward step because you never know what the future might bring!

Anyway, with 2023 coming down the turnpike, I want to share my thoughts on the year ahead. I feel a bit like a lousy property market Santa Claus, not so much delivering on your wishes, but rather saying you had better not cry because this is simply the way things are.

On that cheery note, here are my expectations about 2023’s property markets.

 

The big picture

First up, some sobering news. I expect property values more broadly to continue softening through until the middle of 2023. Confidence among buyers isn’t great at present so they will remain cautious about making offers and moving forward on purchases.

Of course, all eyes will be on inflation to see how effective the interest rate rises have been. Moves to increase the cash rate in 2022 will reveal their full impact in the 2023 numbers. While our domestic inflation figure remains elevated, there are signs that costs are pulling back overseas – so that’s some good news at least.

Market sentiment is likely to turn positive very quickly once the RBA suggests potential interest rate cuts in the future (probably somewhere towards the end of 2023 based on current metrics). Investors with their fingers on the pulse will do well if they acquire property before that occurs.

Underlying fundamentals are suggesting to me that property values will rise again come late 2023/early 2024.

 

The influences

I’m not talking about my incredible Instagram and Tik Tok accounts. That would be influencers, not influences.

Here are some key levers that I believe will drive property market direction in 2023.

The first is international immigration which should ramp up demand for housing. Look at the prime minister’s bullish announcement during the Jobs and Skills Summit in 2022 and you’ll get the idea. Add to that figure the natural egress from students, long-stay holiday makers and family immigrants, and we could potentially see 180,000 to 200,000 more people coming to our shores each year.

Now, consider the decrease in construction activity that we’ve seen going into the end of this year. Supply of new housing is tightening as a result.

Guess what happens when demand rises and supply falls? That’s right – values increase.

We’re already under tight accommodation conditions. We’ve seen extreme levels of rental vacancy in 2022 particularly in and around capital city CBDs. I’d expect tenants in these locations who’re looking for a rental will continue to struggle .

I also believe affordability will be a key market driver this year. We’ve seen huge interstate migration to more affordable locations such as south-east Queensland and with borrowing capacities eroded by interest rate and serviceability changes, I’d expect a lot of investor interest to shift from Sydney and Melbourne to other capitals and regional centres.

 

Piquing my interest

I think there are a couple of key sectors worth watching this year.

Commercial property will continue to steam along in 2023. The yield-chasing investor is well and truly looking at assets which offset the cost of rising interest rates. Well-chosen commercial is delivering this to its owners.

In the residential space, cash flow properties such as dual living, duplex, communal living and boarding houses will grow in popularity too.

As I mentioned, housing affordability – be it buying or renting – will continue to be the hot-button topic. Government moves to boost housing supply via public-private partnerships sound promising, but the logistics will be challenging. Particularly because construction costs and demand for contractors remain strong (despite a recent slowing in activity). In short, I don’t expect a silver-bullet solution coming from any government.

What I hope will be a surprise this year is politicians leaning away from anti-landlord legislation and towards incentivising mum-and-dad investors. This would seem like a no-brainer way to help boost rental supply. My hope is they see the light and start engaging more with investors to help bring about a solution.

 

My final takeaways

So, looking at the year ahead, I think among the most surprising things is that despite some doom and gloom predictions about the economy and property markets, the fundamentals remain impressive. We’ve got a relatively robust economy at the moment, growing wages, low unemployment, record low rental vacancies, immigration set to rise and all while most homeowners are well ahead on their mortgages.

Heading into early 2023, there will be great buying opportunities in the property market, so for those with the available funds and cashflow, now presents a good time to get active.

Spotting investor danger zones with the MCG Landlord Win/Loss Index

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Numbers are cool… well, at least I think so.

There is so much to be learned by running some well sourced digits. I love to revel in the trends and roll about in the algorithms. Stories unfold and revelations abound so you can make sound decisions and potentially profit from the pointers delivered by data and analysis.
The thrill I get from this should surprise no one who’s met a quantity surveyor. Our stock-in-trade is looking at spreadsheets of figures to help clients minimise tax or accurately assess building contracts and insurance figures.
But I like to expand my interest beyond the basics of my profession and see what else can be unearthed, and that’s led me to create a new index which should prove invaluable to anyone with a keen interest in avoiding investment danger zones.

The seed of an idea

The MCG Landlord Win/Loss Index is an up-until-recently-unknown dataset which reveals a whole range of information useful for keen property investors.
I’ve noticed how much more important household income has become to Australians throughout the past year. Given my usual job involves helping property investors maximise their annual income by reducing tax, I was delighted to take on the challenging of building the index.
The Win/Loss index identifies suburbs across Australia where landlords lose the most amount of rental income on average per month.
‘Oh Mike, what a depressing index!’ I hear some of you say. ‘Couldn’t you create something a little more upbeat?’
While I appreciate the feedback, you’re missing the point.
You see, across all property markets, there’s normally some form of rental vacancy. There might be that rare outback centre where there’s only a few rental properties on offer meaning vacancies are pretty much zero – but chances are your property investment will be empty and seeking a tenant at some stage, regardless of where you invest.
Up until now the property industry has been devoted to the idea of simply looking at rental vacancy rates as a measure of rental demand and investor risk. This metric is fine, but it does miss on one crucial front.
You see, it doesn’t measure the real dollar pain felt by average investors within each suburb. So, there was an opening to create a comparison index.

The details

The MCG Landlord Win/Loss Index calculates the average rent lost per investment property in every suburb across Australia. To reduce anomalies, it excludes any suburb with less than 50 properties occupied or available for rental.
The index uses total rental listings greater than 21 days for each suburb, multiplied by each suburb’s aggregated median rent to assess the total rental lost per suburb. This figure is then divided by the total number of rental properties in the suburb to deliver an average loss per rental property for each suburb on a monthly basis.
It levels the field so you can compare all suburbs on a dollar basis.
I also added a risk index which groups suburbs into even sets from one to 10 depending on their ranking in the list overall.

The outcome

Here’s my national top 10 loss leaders for March 2021:
Picture1 300x127 - MCG Quantity Surveyors
There are a number of ways the index can be used.
Firstly, it identifies those areas where tenants are in a stronger position to negotiate on rental terms because vacancies are causing the most financial pain for landlords.
As you can see from the table above, a Caufield East landlord is losing an average of $765.37 per month per property due to vacancy. The reason Caufield East has a large average monthly loss is that the rent figure here is relatively high, and oversupply is causing properties to become vacant at this elevated rental amount.
Compare this to somewhere like North Gosford NSW where landlords are only losing $4 on average per property per month.
If I’m a cash flow motivated investor, I know which suburb I’d rather invest in.
This handy index can also help buyers weight up the cost-benefit of cash flow vs. capital growth too. For example, if you are a high-income earner and can afford to cover vacancy losses, you might still choose to go with Caufield East because the property has excellent capital growth potential.
Of course, watching how the index trends over the coming months will also reveal new information. For example, we’ll be able to spot trends such as suburbs with least risk of rental losses, or locations where investor are at most risk of falling income.

The upside

It’s not all news about losses either. By applying the same measures in reverse, I have been able to identify regions where investors are keeping their income losses to a minimum. Here are the March results for those with minimal vacancy-driven rent loss:
Picture2 300x123 - MCG Quantity Surveyors

These are the nation’s ‘safe haven’ regions and should be a top research priority for those looking to keep their losses to a minimum.
You might be able to tell, I’m a bit excited about these new numbers. They’re another useful tool for investors looking to identify prime investment hotspots.
Not a bad set of numbers I reckon, even if I do day do myself.
To keep track of the index as it evolves, check out: https://rentlossindex.com.au/

My 2021 Predictions – thoughts on what 2021 will deliver

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Profound predictions, bold statements and audacious utterings are not something normally associated with the button-down persona of quantity surveyors.

But I’m about to buck the trend.

Perhaps I’ve been I’m emboldened by this year of challenge. Maybe I’ve gone lockdown stir crazy. Possibly, it’s just the end of the year and it’s time to pop on the Hawaiian shirt, grab a festive morning mimosa and let fly.

Don’t stop me… I’m on a roll.

Here are my thoughts on what 2021 will deliver Australia’s property markets.

  1. More building

There’s been a substantive move toward new-property investment in the past few years, and this will only pick up the pace in 2021.

Now there’s been plenty of stimulus reasons for this. First homeowner grants and various building boosts are part of the equation. Yes – I realise these things don’t apply to ‘investors’ but in many instances, these newly built properties will become investment assets (more of that in another blog).

In 2021 this new-home trend will continue. Government stimulus to assist the construction industry post-pandemic isn’t going away. In addition, once these homes do become investment properties, the depreciation benefits each year are more than enough to pay for cabanossi, Jatz crackers and brie at your EOFY celebration (yes, that’s a thing).

  1. Attached housing changes

We’re all well versed in the challenges faced by new unit construction throughout the past five year. Oversupply issues in many capital cities coupled with bad press around structural concerns all hurt the industry.

But throw in a pandemic – which included swathes of lockdown time within your tiny apartment’s four walls – and you can see how stir-crazy residents are growing weary of units.

Buyers are already looking toward larger units, but there’s a noticeable increase in those acquiring townhouses as well.

Even if it’s a purchase for investment, the popularity of space can’t be denied. Tenants need room too, and they’re willing to pay for it.

Investors also seem to be growing weary of large unit developments based on our analysis at MCG. Smaller, boutique style projects with a bit of individualistic flare will continue to play a major role in our markets.

  1. No ‘mass exodus to the regions’

Shock! Horror! I’m taking a contrarian position and make no apologies for it.

Despite the column inches written on how we’re all fleeing the city in search of low-density regional centres, I just don’t see it happening on a broad scale over the long term.

Yes – I understand the arguments. You can mostly work from anywhere with an internet connection. Why wouldn’t you enjoy the beach or bush? It’s time to escape the city.

But facts remain – we all want to be within a reasonable commute of our CBDs. That’s where the action is! They’re the major financial, services and social interaction hubs of our states and territories.

I expect that while inner-CBD and higher density suburbs will suffer a little in 2021, it won’t be distant regionals that benefit most. Instead, it’ll be lifestyle centres within a short train ride of the big smoke. Think Sydney’s Northern Beaches (post -Christmas lockdown of course).

  1. Lending will drive gains

We are living in the era of a 0.1 per cent cash rate. Make no mistake… our children will talk of this moment with their offspring. Money has never been so cheap – but interest rates aren’t the only consideration.

Early in 2021, there will be serious discussion about stimulating the economy by making the process of securing a loan less arduous.

In the wake of the Royal Commission, APRA edicts and responsible lending laws it’s been a nightmare for loan applicants who, in many cases, could easily afford the repayments.

But political will to see the economy grow will compel the powers that be to ease up on lending guidelines well before June 2021.

And when it becomes easier to get a loan at these historic low rates, most markets will move.

  1. Infrastructure boomtime

Again, post-pandemic Australia will be all about growth and ‘Build! Build! Build!’ will be its mantra.

Across major capitals you’ll see extraordinary projects designed to both improve lifestyle and increase employment. From transport to entertainment venues to commercial precincts, dollars will be spent.

The flow on from more money in the pockets of working Aussies always end up being a property uptick.

We are coming off a fairly low base in 2020, so the effect will be magnified in 2021.

  1. First homebuyers are in force

After being relegated to the real estate wilderness for so many years, first homebuyers are making their presence felt now, and will continue to do so throughout 2021.

It should be no surprise that I’m all for investors. They’re an extremely well-educated cohort who, on the whole, seek to become smarter about the market and the benefits of participating in real estate ownership.

But in 2020, they stood back as uncertainty rained down, and that vacuum was filled by first homebuyers.

Government grants and improved affordability in certain locations have seen first timers step into the market like never before, and their influence will continue into 2021. Expect to see more housing produced to cater to this group, and for home ownership to become an ever-increasing badge of success among the young, particularly in the lower and mid-level property sectors.

Despite some concerns around easing government economic assistance and the efficacy of the vaccine rollout, I remain as upbeat as a Christmas elf about 2021. Stock levels are tight, confidence is rising and there’s political appetite for economic growth.

With all this in offer, I have no doubt we’re in for a great year.

Now… back to that mimosa.

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating. You can visit them at www.mcgqs.com.au/ Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at https://www.mcgqs.com.au/

3 Things to Be Aware of BEFORE Investing in Brisbane

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By Melinda Jennison – Managing Director of Streamline Property Buyers

Australia is not one property market.  National news headlines often make predictions about property price movements.  In most cases these headlines apply to the major capital city markets, and not all of the property markets around Australia. 

Brisbane is a very different property market to the major capital cities of Sydney and Melbourne.  Property investors appear to be drawn to Brisbane for the attractive gross rental yields, and because the Brisbane market is more affordable.

However, there are 3 important things that property investors need to be aware of BEFORE purchasing an investment property in Brisbane.  Let’s explore these in detail.

  1. Brisbane Flood Risk is Real and it is Costly

The Brisbane River winds through the City with broad flood plains spanning along its riverbanks.  Over many years, magnificent architectural developments have sprouted along the Brisbane River.  New residential housing estates have also been built in low lying areas, previously left untouched. 

Brisbane has experienced a number of significant flood events in its history.  In the 1980’s the construction of the Wivenhoe Dam was completed.  This new Dam was prompted by the failure of the nearby Somerset Dam to cope with flood waters in 1974, when the city of Brisbane was inundated.

Many assumed that the existence of the Wivenhoe Dam made Brisbane a flood-proof city.  Developers rapidly built projects along the river-front.  Many prestigious homes were also built along the river-front following the completion of the Wivenhoe Dam.

Then in early 2011, the Brisbane River once again became a raging river due to relentless rain.  Many looked on in disbelief and shock as the grim reality once again shredded the City causing widespread devastation and ruin.

Property Investors often underestimate the costs associated with owning a property that may have been impacted by flood waters in the past.  They also often fail to understand the additional costs associated with owning a flood impacted property.

Here are some reasons why you need to complete flood checks before you buy an investment property in Brisbane:

  • It is easier than ever to check for flood risk on a property. Buyers and tenants all have access to this information.
  • Demand for flood impacted properties is lower than flood-free properties.  Yes – you might be able to negotiate a better price when you buy, but the same will apply when you go to sell.
  • Previous Flood Damage can cause moisture readings in the frame to be elevated, increasing the risk of mould growth over time, resulting in costly repairs.
  • Flood is often an exclusion under landlord insurance policies.  If it is included, the insurance premiums will be higher, reducing net yield.
  • The cost of Contents insurance for Tenants can be higher, therefore making an investment less appealing for tenants.
  • Brisbane is not flood-proof.  If a home has previously been inundated with flood waters, it is possible that it could happen again.

For an in-depth review of previous flood events in Brisbane and for information on how you can check flood risk on any property in Brisbane, tune in to Episode 5 on the Brisbane Property Podcast which tells you everything you need to know.

  • Brisbane Offers Attractive Yields, but these may come at the compromise of long-term capital growth

Property investors are often attracted to the gross rental yields that Brisbane offers.  Whilst the median gross rental yield for houses is 4.2%, and 5.2% for units (Corelogic – July 2020), there are many opportunities where yields can be much higher.

High yielding assets are often added to a property portfolio where other growth assets may be negatively geared.  This has the effect of balancing out a portfolio.  When investors focus solely on high yielding assets, the historical data for Brisbane confirms that the long term growth may be compromised.

In-house research performed by our team, based on the 10 year change in median property values for houses across Greater Brisbane (according to Corelogic data up to June 2020) confirms the following.

  • There is a strong negative correlation between the 10 year change in Median Values and the Gross Rental Yield based on suburb data.

What does this mean?  Basically, it confirms that a high rental yield comes at the compromise of Capital Growth in Brisbane.  Conversely, high capital growth comes at the compromise of high rental yield.  This is what the data over the last 10 years confirms.

Of course, past performance is no guarantee of future performance.  It is important to look at the supply and demand metrics that exist now and how they may influence the prospects for growth in rental income and asset value in the future.

  • Suburbs in Ipswich and Logan Shires offer the highest rental yields in Greater Brisbane, compared with suburbs in other Shires such as Moreton, Brisbane City and Redlands. 

Our research confirms that the median gross rental yields as at June 2020 for houses in the Brisbane City Shire are 3.5%.  In Moreton the median value is 4.4% and in the Ipswich and Local Shires the median value is 5.1%. 

Brisbane Property Investors are urged to look at the long term trends when making investment decisions, rather than on short term fluctuations in market prices.  Property is an asset class where most investors are in it for the longer term, so decisions need to reflect the position of an investor in 10 or 20 years’ time.

  • Not all Bayside suburbs in Brisbane are Desirable

The coastline along Brisbane’s eastern suburbs adjoins Moreton Bay, which is dotted with islands shielding those locations from the Pacific Ocean.  This means that the mainland eastern suburbs in Brisbane do not have desirable beach front living that many coastal suburbs in Sydney and Melbourne enjoy.  

This is an important consideration for property investors, because the local area’s desirability needs to be considered in line with any good investment strategy.

As an example, some coastal locations are located on muddy flats.  For investors who are not local to Brisbane, they may not be aware that at low tide this can mean a distinct and pungent smell.  Property Investors would not be aware of this if they were located interstate, and therefore local knowledge is imperative to help investors to understand what makes an investment grade location for property investment.

These 3 things are just some of the factors that Property Investors needs to consider when looking to expand their portfolio into Brisbane.  Whilst the Brisbane property market might present with challenges that are different to other property markets around Australia, there is still ample opportunity for property investors to position themselves in a quality asset in Brisbane.  A thorough process of due diligence before selecting a suitable investment location and property is necessary to avoid the risks.  A step by step guide of 9 Property Due Diligence Checks before you Buy will ensure you don’t make a mistake.

For further information about investing in the Brisbane Property Market, contact Streamline Property Buyers – the local area specialists.

HOW TO AVOID SELLING THE WRONG PROPERTY EVEN THOUGH IT FEELS RIGHT

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By Good Deeds Property Buyers

Should I sell my investment property now the boom is over?

APRA & The Royal Commission into Banking and now COVID have impacted the lending practices of the major banks in Australia and many would-be buyers are surprised to find that their access to funds has been severely curtailed. Now that money is harder to come by it’s critical that borrowing capacity is not tied up in poor-performing assets. Has all this got you asking: “should I sell my investment property now?”

The answer to that question will depend on a number of factors. Do you need the money? Will cash flow be tight when the interest-only period expires? Are you jumpy because all the headlines are screaming “prices are falling”? How important is this property in terms of your long term wealth creation goals? Is it a quality asset?

In reality, it’s the answer to the last two questions that make all the difference. It’s a common misconception that all property goes up in value yet it’s simply not the case. Some lose money, some make modest gains and some are excellent investments. Performance varies dramatically between locations and even within an individual suburb, there can be a great disparity. What clouds the issue even further is the fact that there is no universally accepted framework for measuring performance.

Don’t sell the wrong property.

Most people decide to invest in property because they want to accumulate wealth and ultimately experience financial freedom. Yet this dream won’t eventuate if they hold a property that doesn’t perform. The consequences of a poor performer could include limiting your ability to buy or upgrade your family home. The opportunity cost of having your money tied up in a property that is not growing in value cannot be underestimated. When pondering the question, “should I sell my investment property now?” it’s important to evaluate each property in your portfolio on its own merits in order to avoid selling the one you should keep.

It’s actually easier to sell the wrong property than it is to sell the one you should be selling. The rationales all seem quite logical on the surface:

“I’m selling this one because it’s made money and can’t possibly go up too much more.” Well, this might be true if you bought in a “hotspot” but won’t necessarily be true if you bought in a blue-chip area.

“I’m not selling this one because I’ll make a loss.” It sounds like you made a mistake buying this one, might be time to cut your losses.

“I’m selling this one because it’s the easiest one to sell.” Alarm bells should be ringing here. Good assets are easier to sell than bad ones, which means you’ll offload the good one and keep the dud. Is that what you really want, long term?

“I’m not selling this one because I want to wait until it grows in value, it’s got to go up eventually.” I’ve got two words for you: opportunity cost. What else could you be doing with that money while you’re waiting (hoping) for the market to do you a favour?

“I’m selling this one because it’s not positively geared.” Whether something is positively geared or not depends on a number of factors, not the least being the amount of money you owe. The risk isn’t so much in the amount of money you owe, it’s in the quality of the asset. High yielding properties are usually very risky assets.

I’d like to know how to choose the right property to sell.

OK, so I’ve tackled a number of justifications people use for selling the wrong property. Why do we do this to ourselves? Well, it seems the answer might be in our brains and there’s even a name for it.

The disposition effect.

According to Wikipedia the disposition effect is:

The effect was identified and named by Hersh Shefrin and Meir Statman in 1985. In their study, Shefrin and Statman noted that “people dislike incurring losses much more than they enjoy making gains, and people are willing to gamble in the domain of losses.” Consequently, “investors will hold onto stocks that have lost value…and will be eager to sell stocks that have risen in value.” The researchers coined the term “disposition effect” to describe this tendency of holding on to losing stocks too long and to sell off well-performing stocks too readily. Shefrin colloquially described this as a “predisposition toward get-evenitis.”

We often see the same thing with property investors. Firstly, we humans hate to make a loss. If we sell a lemon, we actually incur the loss whereas if we hold on to it we can fool ourselves that it will come good one day. Instead, we sell the property that has performed well! We feel good about the gain and pat ourselves on the back for our savvy investment decisions.

We also hate to be wrong and selling a dud is a pretty tough admission that we made a mistake. Other people might realise we failed and that just compounds our sense of shame. Of course, we’ll avoid anything that causes us to feel regret!

How can we choose better?

You’ve already taken the first step – it’s awareness. Resisting the disposition effect won’t be easy, it will require self-control. Now that you know we have a bias towards selling the wrong property, the next step is to identify whether you have any lemons in your property portfolio and then develop a framework for prioritising which one/s to sell first. You can download our decision-making framework, click here – it’s yours for free.

Depreciation and the Instant Asset Write-off – Economic Stimulus Package 2020

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Here’s what you need to know about the changes to depreciation allowances and the instant asset write-off changes as part of the Governments $17.6 billion coronavirus economic stimulus plan.

What has changed?

  1. The instant asset write-off – The turnover cap and the asset value threshold have increased

The Government has committed $700 million to increase the instant asset write-off threshold from $30,000 to $150,000. On top of this, access to the write-off now includes businesses with aggregated annual turnover of less than $500 million. The cap was previously $50 million. As at the date of writing, this initiative will run until June 30 2020, but it would be an easy thing for the Government to extend

Using the simplified depreciation rules, assets costing less than the instant asset write-off threshold are written off in the year they are first used, or installed ready-for-use. This threshold applies to each asset irrespective of whether the asset is purchased new or second-hand.

  • Accelerated depreciation deductions – Anything over the threshold gets a 50% boost

Costed out at $3.2 billion, the Government has announced a time limited 15-month investment incentive which will run until the 30th of June 2021. Businesses with a turnover of less than $500 million will be able to deduct an additional 50 per cent of the asset cost in the year of purchase.

Most of the assets Quantity Surveyors see will be under the individual $150,000 threshold anyway, so it’s likely we won’t encounter this too much, but it will happen with some major plant items in large facilities such as air condition and the like. A typical 20% depreciation rate would equate to 70% under this measure.

The efficacy of the instant asset write-off is well proven and it’s a sensible decision to encourage business investment.

These measures are part of a larger package to provide support to individuals and businesses across Austalia.

Case Studies – Estimating costs of our very own Australian Solar Farms

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In May 2019, Giles Parkinson titled an article “It’s not easy to build a solar farm in Australia any more”.

This was published on the Renew Economy website on the 16th of May 2019.

Mr. Parkinson goes on to state that albeit in the past, the powers to be believed it was easier to build a solar farm than a wind farm. Why the belief was that they were quicker to build, fewer hassles around the development application process and much fewer objections from neighbours.

“In Queensland, a rule from left field, or more specifically from the Electrical Trades Union, means that no one is too sure when the next solar farm might begin construction. The new rules introduced this week by the Queensland Labor government, at the urging of the ETU, mean that only licensed electricians can do much of the installation work, and it has stunned the industry”, notes Mr. Parkinson.

In addition to the opinions expressed by Mr. Parkinson, it seems that contractors used to build these solar farms are feeling the pressure. Or at worst, collapsed them. In recent months we have seen the collapse of RCR Tomlinson, one of the country’s biggest engineering and contracting firms in the solar farm industry.

Likewise, Tempo Australia has felt the pressure and suspended shares from trade due to cost blowouts on a farm under construction in Victoria.

Given that prediction by the Clean Energy Council of 50% renewable targets, it is going to be a hard push without these major players completing these farms.

Mr. Parkinson goes on to note that Ekistica recently illustrated the marginal loss factor of the four energy sources (Fossil, Solar, Hydro and Wind).

The graph shows how many of the fuels are sitting around 95% to 98% of their output gets paid. Whereas solar is struggling to stay above the 90% mark.

Image 1 - MCG Quantity Surveyors

This output rating is provided by the Australian Energy Market Operator (AEMO). The Marginal loss factor is the amount of output that gets credited to receive revenue. Meaning, in 2019, solar is currently rating at 0.9. This means that the average solar farm is getting credit for around 90% of it output.

“One solar farm, in Broken Hill, has been marked down to 0.75, which means only 75 percent of its output gets paid”, said Mr. Parkinson.

CEO of the AEMO, Audry Zibelman, says that the AEMO is doing all that they can, citing a cultural shift yet to be embraced as a major roadblock.

But for many frustrated solar farm developers, it is not fast enough. “What we are going to see is a pause,” said Morgan Stanley analyst Rob Koh.

On the ARENA website (Australian Renewable Energy Agency) it states that the cost of a Large Scale Solar (LSS) farm in Australian to construct has dramatically fallen over the years.

“The cost of large-scale solar PV has fallen dramatically in recent years from $135 per megawatt-hour (MWh) in 2015 to an expected $44.50 – $61.50 per MWh in 2020.”

This reduction was driven by a combination of international and local improvements and is expected to continue. International cost drivers include the cost of manufacturing, and local costs include the cost of finance and construction.

A megawatt is a unit for measuring the power that is equivalent to one million watts. One megawatt is equivalent to the energy produced by 10 automobile engines. A megawatt-hour (Mwh) is equal to 1,000 Kilowatt-hours (Kwh). It is equal to 1,000 kilowatts of electricity used continuously for one hour.

Case Study 1 –

MCG Quantity Surveyors were recently commissioned to provide feasibility costing on a Large Scale Solar Farm in QLD. The total cost of the development came to $14,000,000.

The five-megawatt, 16,000-panel farm produces electricity that is fed back into the grid.

This Solar farm project costs total – $2.80 per watt.

Case Study 2 –

MCG Quantity Surveyors were recently commissioned to provide feasibility costing on a Large Scale Solar Farm in NSW. The total cost of the development came to $9,848,025.

The five-megawatt, 16,000-panel farm produces electricity that is fed back into the grid.

This Solar farm project costs total – $1.96 per watt.

Interestingly, FG Advisory has recently provided a report to the Victorian Greenhouse Advisory to indicate the average cost per watt for the construction of Large Scale Solar farms. They average the cost to be $2.41 per watt.

Image 2 - MCG Quantity Surveyors

In addition to this, the finding was based on reviewing 13 Large Scale Solar Farms, already constructed, they found the average to be $2.41 per watt.

Image 3 - MCG Quantity Surveyors

Written by Marty Sadlier
Founding Director and Owner at MCG Quantity Surveyors

Bushfires & Floods – The cost of a Natural Disaster to home owners

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Australian Research

In 2000, the Construction Data division of Reed Business Information Systems (Reed) surveyed 1000 randomly selected homeowners. They concluded that:

  • 87% of homes were under-insured by any amount
  • The average level of under-insurance was 34%

In 2002, the Insurance Council of Australia conducted a survey of seven companies sharing 80% of the home building insurance market. The survey suggested that:

  • 5% of homes were under-insured by 10% or more, and
  • 5% of home buildings were under-insured by 30% or more

In 2003, the Royal Automobile Club of Victoria (RACV) found that consumers do not increase the sum insured following improvements to their homes. The survey found:

  • 24% of consumers did not increase the level of cover after renovations costing between $20,000 and $40,000.

In 2003, bush fires caused death, injury and destruction of property in the ACT. A total of 488 homes in and around Canberra were destroyed.

However, many insured homeowners found that their building insurance policies did not meet the full cost of rebuilding their home and associated expenses. They found, they were underinsured.

The Insurance Disaster Response Organisation reported that structures destroyed in the ACT bushfires were underinsured, on average, by 40% of the replacement cost.

Respondents to ASIC’s ACT bushfire survey were asked how the sum insured under their home building policy was initially calculated. The results found:

  • 51% estimated the sum insured themselves
  • 23% reported using information from an insurer to help them
  • 80% saying they believed they were adequately insured

 

Queensland Floods

On the 11th January 2011, the then premier of Queensland, Anna Bligh, declared three quarters of Queensland a disaster zone as the State was affected by one of the most severe flooding events in its history.

About 15,000 properties were affected by significant flooding, with 5,000 businesses affected. In Ipswich a further 3,000 homes and businesses have been flooded. The Local Government Association of Queensland estimates that 70,000 to 90,000 km of council roads have been damaged (councils are responsible for 80% of roads).

IBIS World also expects approximately $1 billion to $2 billion in additional spending on commercial and institutional premises would be needed in the following 2 years of the event. The damage to these buildings was partly contained by greater use of concrete and steel, as distinct from the timber and plasterboard of most residential housing.

However the Reconstruction cost was estimated at some $10 billion. (Jan 2011 IBIS World)

The Queensland floods were followed by the 2011 Victorian floods which saw more than fifty communities in western and central Victoria also grapple with significant flooding.

 

Victorian Floods

It was recorded that high intensity rainfall between the 12th –14th January 2011 caused major flooding across much of the western and central parts of Victoria.

This, along with follow-up heavy rainfall from events such as Tropical Low Yasi, caused repeated flash flooding in affected areas in early February in many of the communities affected by January’s floods.

As at the 18th January, more than:

  • 51 communities had been affected by the floods
  • Over 1,730 properties had been flooded
  • Over 17,000 homes lost their electricity supply.
  • 51,700 hectares of pasture and 41,200 hectares of field crops flooded
  • 6,106 sheep were estimated to have been killed

The Department of Primary Industries later calculated a damage bill of up to $2 billion.

 

New South Wales Bushfires

The New South Wales Rural Fire Service notes that the 2012-2013 Christmas period witnessed large parts of NSW  affected by bush fires brought on by searing temperatures and wild winds.

The RFS has confirmed 33 properties and more than 50 sheds have been destroyed, as well as machinery and there have been extensive stock losses in the bush fire west of Coonabarabran, which also damaged the Siding Spring Observatory. The fire in the Warrumbungle National Park in the north-west of the state had burnt out nearly 40,000 hectares and has a 100-kilometre-wide front.

More than 170 fires continued to burn across the state at that time

In Tasmania, a Victorian fire fighter had died while fighting bush fires that have destroyed about 170 properties.

Recent Disasters Table

Recent Natural Disaster Total Cost
QLD Cyclone YASI  $            1,412,239,000.00
QLD Flooding  $            2,387,624,000.00
SW QLD Border Flooding  $               131,432,000.00
NSW & VIC Flooding  $               131,890,000.00
VIC Flooding  $               126,495,000.00
VIC Christmas Day Storms  $               728,640,000.00
VIC Severe Storms  $               487,615,000.00
WA Perth Bushfires  $                 35,128,000.00
WA Margaret River Bushfires  $                 53,450,000.00
Tasmanian Bushfires  $                 86,700,000.00
NSW bushfires (Coonabarabran region)  $                 12,000,000.00
Total  $            5,593,213,000.00

 

What sort of tax deductions will a swimming pool give you?

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Swimming pools and depreciation – What sort of tax deductions will a swimming pool give you?

It’s not unheard of for an investment property to have a swimming pool, certainly a shared one as part of the common areas of a larger unit development is very common. However, residential houses with swimming pools aren’t terribly common due to the costs of maintenance, compliance issues with fences and the like. I’ve never heard of an investor installing one for a tenant, but certainly, plenty of investors buy properties with one already in place. This is especially the case when the investor has a view to occupying the property themselves down the track.
So, if you are looking to purchase or have purchased an investment property with a swimming pool, what sort of deductions are you looking at?

You’re going to hate me, (presumably we’ve not already met for you to hold that opinion already), but there are a lot of variables here. Let’s look at the most obvious one, that being the breakup between the plant and equipment component and the structure component.
Within a swimming pool, there are only a few items that are listed as plant and equipment within the legislation.
These are mostly, but not limited to;
• Swimming Pool Chlorinators & Filtration Assets
• Heaters (electric, gas or solar)
• Cleaners

Yes, there’s also swimming pool covers and potential spa pumps and the like but it’s mostly going to be the filter and any automated cleaner devices.
The good news is that these items depreciate at much faster rates to the pool itself, anywhere from 10% to 28.6% under the diminishing value method in general.
The bad news is that since 2017, to claim these plant items you either need to buy the property as brand new or add these assets to the rental property yourself. Consequently, most investors aren’t likely to be able to claim the assets at all. Still, for the sake of argument, we’ll analyse the deductions on them anyway.

The good news is that MOST of the value of a pool is in the division 43 capital improvement category. So, if it’s a concrete pool, it’s all the concreting as well as the pool fencing, tiling etc. It’s the highest component of total value, but we’re talking a flat percentage of 2.5% per annum for 40 years from the date of installation. What’s positive though is that you don’t have to build the pool yourself or buy it in a brand-new property. The changes to plant items in 2017 don’t impact structural deductions so it’s fine to claim if it was installed after the cut-off date for division 43 allowances.

Enough legislation I’m sure you’re thinking, show me the deductions!

Swimming pools 300x57 - MCG Quantity Surveyors

Swimming pools - MCG Quantity Surveyors

Of course, this is contingent on the value of the pool, but I’ve gone with a pretty standard concrete construction here at $50,000 in total, with some limited plant items. As you can see though, over $3,400 worth of deductions within the first full year alone if you purchase a new property with a pool or install it into your rental property yourself, which is nothing to sneeze at. If this property was one year old at the time of purchase, the deductions would drop to $2,236 as per the division 43 deductions only.

I hope that provides a guide as to the potential deductions, but as always, the decision to install one or buy a property with one in place should not be made on the deductions alone. There are several key considerations both positive and negative when you own a property with a pool. Still, if you do put one in, drinks at yours this summer?

Deductions & Depreciation for all – Why the kids are doing OK

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Like any good analytical thinker, I love to hypothesise.
Some think it’s a character flaw, whereas I – and those of my quantity surveying ilk – enjoy nothing more than ingesting data, extrapolating the assumptions and producing a conclusion.

I was thinking about the recent federal election and the discussions put forward pre-poll day about who gets what benefits from which particular political party. It got me wondering about how we all make gross generalisations on which particular demographic gains most from depreciation tax breaks in the real estate sector.

Like most pundits, I always assumed those property owners who earn the most money – i.e. aged 45+ and on a high average income – were the mob reeling in the best benefits courtesy of the ATO.
It seems logical, doesn’t it? If you’re at the higher marginal tax rates, surely any hand back of taxable income you receive via government rules is working in your favour?
Well, like any decent political thriller, it turns out the truth is more complex than it may first appear.

I ran some numbers and here’s what they told me:

Depreciation for all
Firstly, I checked with the ABS to find out the average salary of several age groups as at May 2018 and looked at the tax applied to those incomes as per ATO guidelines.

ALL EMPLOYEES, Average weekly total cash earnings, Number of employees – Age category, May 2018

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For the sake of the argument, I’m obviously excluding all those annoying extras that one might apply in deductions for work and other investments. Forget the nuances people, this is pure analytics of the highest order!
As you can see, it’s a reasonable spread of incomes across the age brackets from $19,952 to $80,298.
The next step was to study the average financial advantage to each age bracket of owning an investment, as opposed to not having an investment, based on the first year’s average depreciation.
For the sake of consistency, I chose a brand-new investment unit as the lynchpin investment. Units of this type are a popular and effective option for many buyers who use depreciation to their advantage.

I looked at average annual wage less the depreciation benefit from owning this hypothetical unit in the first year alone, and then calculated the resultant tax payable for each age group.

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Finally, I observed the difference in tax payable (or ‘the advantage’) between those with the investment and those without an investment property in the first year across each age group.

Blog 3 - MCG Quantity Surveyors


Blowing up the beliefs
The outcome was pretty revealing. My figures showed preconceptions around depreciation only benefiting high-income earners are not true. Whether you’re an average 22-year-old or an average 45-year-old, if you buy a brand-new unit, you’re still going to save the same dollar amount in tax each year.

Here’s another golden nugget of positivity for the youngsters:
• Based on these average figures, if you are 20 years old or under, own no investment property and earn an average wage, you will pay tax.
• If you are that same person, but hold one investment property, you will pay no tax.

That’s right – in your early years, an investment property makes you a ‘tax-free’ entity. Not a bad start for the young whippersnappers!
This outcome stems from the interrelationship between Australian tax rates and the nation’s average incomes.
So, as you can see, the idea depreciation only benefits the wealthiest of investors by age is patently untrue.

Now, who among you would have expected me to uncover this sort of egalitarianism when the exercise began? Certainly, among my crew, the expectations were that ATO rules meant wealthy 50-year-olds make a fortune at the expense of the younger cohort. But it turns out, everyone is on a pretty even keel.

So, at the next family barbeque when your anti-investment Uncle Bill raises an eyebrow about “fat cat baby boomer investors” who make fast money from depreciations, consider batting away his wayward generalisations with a little MCGQS science. And while you’re at it, ask your younger cousin Bella why she hasn’t considered getting into the market herself.
Turns out the young do enjoy a raft of advantages – plenty of time, enviable good looks and comparable tax breaks.

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