The internet goes a long way in taking the tedium out of calculating ROI and the market has much potential, writes Ashwin Segkar
CALCULATING THE potential return on property investment was once a laborious task. However, the internet is making this important process much easier, helping buyers find their ideal property and assess its investment appeal.
Property consultant Aussie Property (www.aussieproperty.com) offers a broad array of tools to aid potential investors. These include a taxation calculator, foreign currency loan comparison, future value calculator, renovation assessor, stamp duty calculator, investment return analysis, affordability calculator, rental yield calculator, loan calculator and property growth calculator.
One of the most important metrics to consider is yield - the percentage return on the value of the property after expenses (excluding finance/loan costs) but before tax. Loan costs are generally excluded so that the calculation reflects the performance of the property rather than the quality of the loan.
A standard approach to calculating yield is to total the expected annual rental income and then subtract annual expenses including rates, insurance, maintenance, corporate fees, management fees and two weeks of rental vacancy. This figure is then divided by the value of the property to determine the yield. Although an important measurement, yield does not take into account the capital gain growth of a property or the tax advantages that investing in it may provide.
Investors need to talk to a tax planner and property forecaster to fully appreciate these elements of their investment decision.
Tax is an important factor affecting the performance of an investment and Australia has appreciably high rates of property tax by Organisation for Economic Co-operation and Development standards. This has been a contentious political issue recently, with Treasurer Peter Costello repeatedly imploring state governments to reduce their steep tax rates. However, few concessions have been made.
The Australian Taxation Office or a qualified accountant can advise investors of their state and federal tax obligations. Foreign investors should also consult the Foreign Investment Review Board (www.firb.gov.au) to understand any limitations on their investment in Australia. The board advises that most foreign investments in residential real estate and some in commercial real estate will require approval.
The department will usually make a decision in 30 to 40 days, although it reserves the right to extend this a further 90 days if required.
HIGH YIELD OPPORTUNITY
According to market analyst BIS Shrapnel, Australian commercial property is on the cusp of a major upswing. Chief economist Frank Gelber expected a 50 per cent rise in effective rents over the next two years and a firming of yields by about 1 per cent.
'We're on the threshold of a significant upswing especially in the mining towns of Brisbane and Perth. All available stock has dried up and they are not building enough for demand,' Mr Gelber said.
'We had a boom in minerals investment in the late 90s, especially in the base metals such as copper, metal, zinc and gold. However, we under-invested in iron ore, coal, gas and aluminium, and CBD [central business district] office space is being snapped up now that companies are undertaking that much needed investment.' He believed that Brisbane and Perth would be strong performers, but that most other Australian centres would also exhibit strong growth.
'Over the next few years all the major markets around Australia, with the exception of Adelaide and Canberra, will see incentives disappear and effective rates rise. Sydney will probably be slowest into the upswing,' Mr Gerber said.
ENTERING THE MARKET
Ray White Real Estate, a key Australian property agent, lists more than 20 commercial properties for sale in Perth and 200 across Queensland.
Comprising cafes, office space and commercial units, this class of property is touted by BIS Shrapnel to outperform all others in the medium term.
However, it can be difficult to invest successfully in this sector. Paul Clitheroe, one of Australia's leading wealth creation advisers, in his recent book Making Money cautioned that direct investment in commercial property was not for new investors.
'There are so many ways to go wrong in commercial property and being a novice is one of the main ones. This is a major investment sector and has been the source of extraordinary wealth for some people, but it is not a traditional area of direct investment for the average small investor,' he wrote.
For those who wish to avoid the risk of direct investment, listed and unlisted property trusts offer a reasonable alternative. These funds usually invest in office blocks shopping complexes, industrial and residential estates, hotels and apartment buildings.
ANALYSTS SAY WAIT AND SEE
Although growth in capital gain is expected to be low over the next few years, opportunity for some moderate gain still exists in Queensland and New South Wales. BIS Shrapnel market analyst Robert Mellor advised potential buyers to wait 18 months to re-assess the market before making a purchase.
Meanwhile, rents are being driven up nationwide as more people enter the market. Real Estate Institute of Australia president Tony Brasier said recent data confirmed this trend.
'Vacancy rates are continuing to decline around the country, down to a low of 1.4 per cent in Perth, 1.5 per cent in Brisbane, 1.7 per cent in Adelaide, 1.8 per cent in Melbourne and Canberra, 2 per cent in Sydney, 2.2 per cent in Hobart and 3.3 per cent in Darwin.
'Moderate annual increases in median house rents were similar in Melbourne, Brisbane, Adelaide, Canberra and Hobart while annual increases in median rents for other dwellings were higher than the corresponding annual increases in median house rents in Sydney, Brisbane, Adelaide, Perth, Canberra and Hobart.'
The Australian property market offers investors the potential of solid medium- and long-term returns.
However, with the slowing of the residential market and the complexity of the commercial market, shrewd buying is more important now than it has ever been.
Foreign investors need to source accurate, independent information and find a reliable local agent if they are to successfully capitalise on the emerging opportunities.
