ANALYSIS: Time to enter Sydney market?

Is now the time to enter the Sydney property market? This in depth analysis examines the market from every angle to provide valuable insight into the state of the Sydney property market.

SYDNEY REAL ESTATE AS AN INVESTMENT:
Sydney property is proven as a safe, secure and profitable investment. However, not all property in Sydney performs to the same levels.
The question of timing does come into it, as well as several other critical factors. Firstly, let us see what, in fact, Sydney property can offer investors:
• Opportunity to achieve Capital Gains, with historical growth of between
184% for houses, and 222% for apartments over the past 20 years.
• Just 10 % deposit, with delayed stamp duty, is all that is needed to enter the market "off the plan".
• Sydney is the "first choice" in real estate terms for much of the international money that flows into Australia.
• There is a huge supply of quality tenants.
• There is fair landlord/tenant legislation - the "empty apartment" concept is virtually unheard of in Sydney.
• There are exceptional tax benefits.
• You can "add value" as the property ages, increasing dramatically the market price.
• It is entirely possible to achieve returns of 20, 30 or more per cent per annum, as a return on your capital outplayed.
• You don't have to watch it every day. There are very good property managers in Sydney.
• Rental management fees are very reasonable in Sydney, amongst the lowest in Australia.
• It is very difficult for new developments to come on stream in Sydney, meaning the specter of "oversupply" in a short period of time does not loom.
• Virtually all banks accept Sydney property for security.
• Real Estate is a necessity, people need shelter, and they need someone to provide it.
• There is enormous past, current and continuing demand in Sydney. Sydney is regarded as one of the leading real estate cities in the world.
• The Sydney prices are currently very affordable on a world scale, particularly if considered with prices in London, New York, Hong Kong, Singapore and Tokyo.

INTRODUCTION
Many people are unsure as to the correct timing to enter the Sydney
Real Estate market.
Do they rush in now, or do they wait? What has been the market correction in
prices?
When will the next upturn start? Will it be next month, next year, or in 5 years?
The "bulls" say that high occupancy rates, a critical shortage of new supply, high
rentals, a correction in prices, low interest rates, and a shortage of land in prime
areas, combined with a rising population and Sydney’s International “safehaven"
status and lower Aussie dollar all point to a strong rebound shortly to
occur.
The "bears" point out that prices have fallen in many suburbs in the past few
years, rents are at all time high and may not keep going up, prime property is
still expensive, and can Sydney sustain affordable real estate?
This Report will address many of these questions, to enable investors
considering entering the market to ultimately come to their own conclusion and
final decision.
HISTORY OF THE SYDNEY MARKET
To understand the Sydney market it is important to understand the past cycles
as well as the shortage of land, and the population growth that will fuel the
forthcoming price rises to be seen in Sydney.
Let's turn first to the previous cycles in the Sydney market.
According to the data supplied by Residex and analyzed by the Citylife Property
Group the Sydney apartment market has seen the following property cycles:
- A fairly level period between 1981 to 1986 showed growth of 18%.
- This was followed by a boom of 72% between 1987 to 1989.
- All good things must come to an end, and after the boom prices moved
barely 2.5% to December 1991.
- A recovery started around January 1992 where prices moved 14.1% through
to 1994.
- The market stagnated through 1995 to 1996 with just 7.5% growth.
- Between January 1997 in December 2004 a second boom occurred with
prices for apartments moving up a massive 107%.
- Since January 2005 through to December 2008 the Sydney market for
houses and apartments has been very flat with barely 4.5% growth being
achieved during that time.
Some analysts argue that the stagnant period from 2005 was as a result of the
natural downturn that occurs after a boom as occurred between 1997 to 2004.
This natural stagnant period was compounded by rising interest rates through
that period.
Any recovery was then stopped dead by the financial crisis in 2008.
However, rising rents, stagnant prices meaning improved affordability, combined
with lower interest rates will certainly in our view mean an upturn commencing
soon in both Sydney houses and Sydney apartments.
We confidently expect the upturn to commence in 2010.
TIMING IS IMPORTANT, BUT LOCATION IS CRITICAL.
Choosing the correct location is critical to the success of real estate investments
in Sydney.
In the last 6 months many things have changed. Some of the questions you
need to ask, and to think about, are:-
Sydney prices have been reported as being very slow over the past few years.
And if so, when will the next upturn begin? Traditionally, Sydney is a very strong
and predictable market.
Sydney has traditionally "led the way" in Australian property trends, with the
other cities tending to follow a few years later. However, in the last 5 years,
Perth was the standout performer.
It has become fairly obvious now that Sydney's markets over the past 6 months
have become two tiers.
The affluent harbourside and inner-city suburbs, and those in the outer western
suburbs.
Some property advisers are suggesting that investors consider the outer western
suburbs, as there has been no growth in those areas for many years. In fact
there has been negative growth. Our research tends not to support this theory.
Here is why.
Outer western suburbs
This area has felt the impact of rising interest rates and prices have fallen over
recent years. There are currently many buyers looking to purchase in this area,
but seem to be mostly bargain hunters, not necessarily true investors. There is
nothing in principle wrong with being a bargain hunter as such. But by putting
very low offers in on a number of properties, and hoping that one will bite means
often not buying anything at all. Investors were doing a similar thing in
Melbourne six to seven years ago, although very few sellers left their properties
go at these rock bottom prices. Many of those bargain hunters in Melbourne
have yet to purchase a property, and have missed substantial growth in the
Melbourne market over the past couple of years as the market recovered, and
those who held on were vindicated.
Affluent harbourside and inner-city suburbs
A stronger economy, enormous shortage of new supply, and strong demand into
these prime areas, supported by heavy migration and an affordable property
should see prices rises and a strong recovery here.
Several inner city areas in Sydney offer strong potential for long term growth.
Areas such as parts of Alexandria, Waterloo, Green Square, and even Redfern
are in many places still underdeveloped, and set for a strong population,
restaurant and residential explosion. Several of these areas are earmarked by
the City of Sydney (N.S.W. Government) for a complete redevelopment, using a
combination of Government and private funds. These are the types of areas
investors will reap good gains by getting in early, and holding for the mid to long
term.
Prices offered in these areas for brand new property will not be much more than
in established places away from the City, in secondary investment locations,
such as Parramatta.
The area from the city centre to about 8 km alp has always been hugely popular
in Sydney and has enormous underlying demand. Yet the planning authorities
have not facilitated that development.
Developers state that building approvals and permits can take two or three times
longer than it actually takes to build a new building. Approvals are hard to come
by, and development finance since the financial crisis even harder.
Simply put this means there will be a shortage of new developments being seen
in the prime areas close to the city over the next few years. Prime residential
areas near the Harbour and City such as Mosman, Neutral Bay and Kirribilli
hardly ever see a new development.
FINANCING IS VITAL
To maximise returns, consider the benefits of leverage.
Choose an "investors loan" whereby the principal repayments are flexible, to
mean the rent covers much of the Bank interest, and you get another 30% to
45% of any shortfall back in the way of tax relief, turning a "paper loss" into a
real cash flow positive investment.
Small movements in the market will then amplify your returns. And if the market
does not move?
You can recoup your down payment in tax benefits, have a built in equity
cushion, and will have the rents meeting most of the interest expenses, and get
tax benefits to cover the outlays.
THERE'S PROFIT IN NEW
There's additional profit to be made by buying brand new, or "off-the-plans".
As well as the obvious benefits of locking in at today's prices on a low deposit in
a rising market, there are the additional benefits of high tax deductions, new
appliances, the latest in construction and building methods, the latest internet
technology incorporated in each apartment, new facilities and designs etc.
In depreciation benefits alone, the tax office will allow you to claim the whole
construction cost of the apartment in tax benefits, as well as every single item
inside in the way of fixtures and fittings. Always buy a property built after 1985
to get this benefit, although the newer the better. (The worst property to buy in
our view is one between 4 to 5 years old, where you have lost a substantial
amount of the tax benefits, the property is starting to show wear and tear, and
you are competing with brand new properties.)
If there is a long completion, your funds may be used for other investments in
the meantime. And you have plenty of time to sort out financing. Tenants tend
to flock to new properties.
Some analysts rate all these factors, plus the fact you only require 10% deposit
initially, as being worth around $60-$100,000. In other words, if you are
comparing an older property with a brand new off plan property, unless you are
able to buy the older property in the same location at $100,000 less, it makes
better investment sense to buy the new one.
HOUSE or APARTMENT?
If choosing between a house in an outer or "new" suburb, or a more expensive,
but better located apartment, as a general rule go for the apartment, especially
in the larger cities, such as Sydney. Our data shows that capital growth between
apartments and houses in Sydney does not differentiate much depending upon
the cycle, and that apartments are growing rapidly in popularity.
The maintenance on apartments will be less. Management will be easier. Rentals
will be higher.
If you can find it at a reasonable price, buy prime locations.
THE "SECRET" Ingredients
Many investors looking at Sydney are not aware of two critical but often
overlooked facts that almost guarantee investment success.
Professional property investors know about this, and continue to invest, while
others sit on the side lines ‘watching’ the market.
Investors make up approx 25% -30% of the market in Sydney. Foreign buyers
account for around 10%-20%.
Around 60%-70% of all properties are in fact then purchased by "owners".
That is, people intending to live in them. Not buying for investment.
Not buying to rent them out. But for their own use.
This is the first secret ingredient for investment success and overlooked by many
novice investors.
Because, while no one can guarantee prices will rise at 10%, or even 5% a year
forever, these "owner occupiers" protect the investor.
That is, in a downturn, they do not rush to sell, as this is their own "home".
This provides a natural "buffer" against panic selling, such as occurs in the stock
market.
This 70% home ownership rate has hardly varied for the past 50 years, and
means, investors have a huge pool of tenants to select from.
In addition, 1/3 of all owners do not have mortgages at all. "Mortgage
stress" is simply not applicable, and is often a sensationalist term used by many
in the media.
That is not to say mortgage stress does not exist, but investors need to carefully
evaluate what it means, and who is affected, rather than making blanket
assumptions.
Make prudent decisions based on facts rather than "friends" opinions, or press
reports. Take the long-term view, buy to hold rather than buy to sell.
The second factor is the shortage of supply.
Many potential investors have “heard” that there is a shortage of supply, but
have little idea of either the impact or how they can benefit.
Supply and demand dictates. A shortage of supply, but heavy demand, means
one thing only: Rising prices.
When interest rates started to move up through to mid-2008, many developers
pulled out of the market. They stopped building. In the meantime migration
continued at record rates.
This low level of supply coming through to the Sydney market was well below
underlying demand, and then the double whammy hit with the financial crisis.
Planning construction then dropped to a 50 year low in Sydney resulting in an
enormous stock and supply shortage of housing with estimates by BIS- shrapnel
stating that there is 1.5 years shortage as at June 2009.
This well documented shortage of supply has meant increasing rentals, and will
also result in increasing prices.
Our research that show us that apartments in Sydney over the past 20 years
and (to end of December 08)have out-performed Sydney houses,(222%
compared to 184%) which is contrary to some people's perception that houses
outperform apartments.
Factors expecting to influence the forthcoming Sydney upturn
Here then in summary are the main factors that we expect to influence the
Sydney property market over the next few years:
1. Shortage of supply
The current shortage of new supply coming to the market in Sydney cannot
be alleviated overnight, or for many years. Demand is huge.
There have been years of under building in New South Wales, and
particularly in Sydney, and it will be many years before even properties
approved today are built, offering little relief for tenants, and in fact, little
relief for investors looking to buy. With current figures showing NSW is
undersupplied by around 30-40,000 dwellings,(the highest anywhere in
Australia)and this figure expected to double to a record 70,000 within the
next 2 to 3 years, there is a strong shortage of new property.
With New South Wales being the most highly affected by this shortage, and
with estimates now showing that within three years New South Wales,
could be short by over 160,000 dwellings, the situation does look
catastrophic for tenants, but excellent for investors able to move into the
right areas.
2. Rising rents
With occupancy rates in excess of 98% throughout most of Sydney, and
still rising, rents especially in inner-city and more affluent areas, will keep
rising. This will bring further interest from investors, as rising rents equals
higher yields, but will also cause many would-be tenants to re-evaluate
their situation over the next few years, when they decide “not to waste so
much money on rent, we may as well buy ".
3. Regeneration
Many inner areas in Sydney are set for future regeneration. This is the
Governments belated attempts to help alleviate supply shortages and rising
rents. These areas are within three to seven km of the city centre where
previously well-known warehouse areas are close to universities, parks,
beaches and the city and harbour, and yet have never featured many
residential properties. Even with the billions of dollars being earmarked by
the local government authorities for the regeneration of these areas, highrise
will still be greatly restricted. Most residential apartments will still only
be mid rise, which will offset any chance of oversupply.
4. Affordable prices
Due to the stagnant period that commenced in 2005, combined with the
financial crisis keeping prices down, a very real opportunity not seen for
decades in Sydney exists right now to acquire an affordable property.
This situation was simply unheard of in Sydney previously. And will not be
seen again for some time. Sydney property prices today represent
tomorrow’s bargains.
5. Guaranteed tenants
Occupancy rates are increasing, population is rising, there is little new
supply, employment is still high, and so tenant demand from young
professionals wanting to live near the city is virtually guaranteed in Sydney
in the foreseeable future.
6. Share market doldrums
Whilst this is not a view shared by everybody, it can be an enormous factor
in property price growth, as money leaves the share market and moves
into property. It is certainly something not to be overlooked.
7. Time delay to bring new developments to market
In Sydney it is difficult and time consuming to get new projects up and
running and to the market. The oversupply factor seldom seems relevant to
Sydney. In addition, after the slowing market in Sydney in 2003, many
developers simply put their plans for new projects on hold, and have been
very slow in coming back in.
8. Population growth
The implications for investors? Australia has had over 400,000 new
migrants arriving each year for the past 2 years, and Sydney gets by far
the greatest number.
Population growth fuels price rises.
CONCLUSION
Overall, one can reasonably say that it is a fantastic time to enter Sydney
property market. Values are as safe now as they've ever been. And in fact with
the shortage of supply, rising rents, and high occupancy rates, and
underperformance in Sydney, there seems every likelihood of rising prices.
If history is any guide we may well see surging prices over the next few years.
Location is important though, and investors would be well advised to heed
caution about just jumping into any Sydney property investment (especially out
in the West) just for the sake of "being in the market."