In his regular Switzer column John McGrath gave his thoughts on following the ‘smart money’.
Here’s what he had to say:
Just over 40 per cent of the wealth held by Australian millionaires is in real estate and it’s been that way for almost 20 years*. What does that say to you?
To me, it says the smartest people in our country have more faith in property as an asset class than anything else and that’s a great message for everyday investors to take on board.
Many years ago I wrote a book called ‘You Don’t Have to be Born Brilliant’. It’s about my ideas on how to achieve success in life and the same ideology applies to personal wealth.
You don’t have to be a company CEO or have the natural intelligence of Bill Gates to create wealth.
What you can do though, is look at what the best and brightest are doing and simply follow the same path.
In Australia, that means investing in property.
You can be sure that people in the top echelons of Australian business don’t make personal investment choices on a whim.
These are seriously smart, educated and savvy businesspeople who are making a conscious choice to invest a large part of their wealth in property.
Right now, this ‘smart money’ is pouring back into property. High net worth upgraders, wealthy Chinese and ex-pats are all competing for trophy homes.
Banking and financial services executives are once again receiving bonuses and investing that cash in property – as they have always done.
High net worths tend to invest a lot of money in their principal place of residence – not only because they want a beautiful home, but also because they want the bulk of their money in an asset that is capital gains exempt.
So we typically see a lot of smart money going into prestige property.
While the lower and middle markets in major cities like Sydney and Melbourne have been in recovery for more than 18 months; the prestige sector is only at green shoots stage.
Understandably, it was always going to take prestige property longer to recover from the GFC. But things are starting to change now.
In Sydney, the number of properties selling at or above $5M increased by 13 per cent in FY14. In Brisbane, the number of properties selling at or above $3M was up 36 per cent.
With increased demand comes increased pressure on prices, with RP Data informing us in its latest national report that property prices in Australia’s most expensive suburbs are marginally outpacing growth in the lower to mid brackets.
So what’s the smart money doing?
Locals are upgrading. We are seeing more families and executive couples in Sydney upgrading as their incomes, businesses and share portfolios improve and their confidence increases.
Ex-pats are planning. Ex-pats aren’t buying now because they’re about to come home.
They’re buying now because they want to capitalise on Australia’s prestige property recovery and the great capital growth that will come with it. (The prestige sector tends to recover quickly once it gets on a roll.) Smart thinking.
Foreigners are investing. We are hearing a lot about wealthy Chinese families moving to major cities like Sydney and spending tens of millions of dollars on their principal place of residence.
They have confidence in our real estate market and are willing to park big money in their new homes. We’re also seeing Chinese families buying prestige properties for their adult children who are here studying on a temporary visa – which allows them to purchase one established property to live in.
It’s the changing face of student accommodation in this country and once again, smart thinking.
Latest figures from Australia’s largest mortgage broker, AFG show 38 per cent of new loans are going to investors.
The exciting thing to me is that most of these borrowers are ordinary Australians out there taking action to shore up their financial futures.
Very few people achieve real wealth – or even just a level of financial comfort, off income alone.
You have to invest and real estate is one of the safest, most reliable asset classes around – and also the easiest to understand.
I’ve seen many surveys and analyses that show the difference between the performance of shares and property over the long term is pretty on par.
But property doesn’t have the highs and lows that shares do. The value of a property does not turn on a dime because this year’s profits are a bit low.
There isn’t the volatility, which means there isn’t as much stress, so property makes a lot of sense.
*17th Annual World Wealth Report by Capgemini.