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Is 2011 the right time to invest in real estate?

If you haven’t given yourself a New Year’s resolution yet, here’s one for you….

Take advantage of this current stage of the property cycle; buy the right property in the right location and you’ll do very well in the long term.

The good news is that Santa has brought us one of the presents at the top of our wish list – confirmation that we are going to have a great year in the property markets of Australia. 

Let me make things clear- I don’t mean we’re going to have a property boom. I see 2011 as a very different year to 2010 and in fact 2009. But then every year I have been investing, and that’s been since the early 1970’s, has been different.

And before you call me an eternal optimist – you know, someone who says it is always a good time to buy property- I’d like to suggest that I’m a realist. I can see the market for what it is and I have enough on the ground experience and knowledge from my team at Metropole throughout Australia to know what’s happening in the various markets. And I have enough perspective, gained from buying, selling and investing through seven property cycles to interpret what the information means.

What I see are 5 green lights to selectively invest in now, in the early part of 2011….

1. A stable Australian economy
The Australian economy’s vital signs are healthy and it is performing much better than almost every other developed nation. Ultimately, indicators like strong employment levels, wage and productivity growth and manageable inflation drive prosperity and the demand for goods in Australia, including property.

But watch out – every year there is one “X factor”, one unknown, that pops up and surprises us and the economy.

Three years ago it was the subprime crisis overseas and its effects on the world financial markets. In 2009 the Australian government’s financial stimulus, comprising of deep interest rate cuts and fiscal stimulus, had our markets surprised on the upside and gave them resilience at a time when almost everyone was expecting a recession.

Last year successive interest rate rises caused our property markets to stall. No one predicted this at the beginning of the year (even though I was amongst those who saw it coming by mid year.)

By definition (being an unknown X factor), I have no idea what will crop up this year. Something always crops up to surprise us – so be ready!

2. Increased Demand but a Lack of Dwelling Supply – but not everywhere
A lot has been written about the remarkable growth in immigration levels over the last few years plus a baby boom that have boosted demand for housing. And while it’s often said that there is a shortage of dwellings around Australia, that’s not exactly correct.

While there are definitely some areas where there’s more demand than supply, like in some of the lifestyle inner suburbs of Melbourne, Sydney and Brisbane, there are many areas where there is no housing shortage.

Just look at the outer suburbs. There’s still plenty of land to house all the families who want to live there, plus more. While affordability may be an issue for some in these suburbs, there’s clearly no shortage of supply and there are many builders who can whip up new homes if the demand picked up.

We’re also heading for an oversupply of apartments in the CBD’s of Melbourne, Brisbane and to a lesser extent Sydney. Just open the Saturday papers and you’ll see what I mean. There will be too many off the plan developments coming in stream in our CBD’s in the next few years. And this will be accompanied by a falling demand as we have fewer overseas students coming to Australia.

But in the inner and middle ring suburbs of many of our capital cities, a shortage of supply and continuing demand, plus the increasing cost of development (including higher land costs, infrastructure costs and building costs) means that the value of new dwellings will have to rise substantially soon. This will of course have a positive impact on established property prices.

3. Demographics
Our population is fragmenting, with more people living alone; which means we need more dwellings just to house the same number of people. At the same time we are living longer. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers, pushing up property values and rentals.

4. Rents will strengthen in 2011
With around 160,000 new households being formed each year and affordability of housing decreasing it means more people will become tenants. However with demand for rental properties outstripping supply, at a time of record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts all mean residential rents will rise even further over the next few years. The rental boom has only just begun.

5. Steady Interest Rates
Last year saw 5 interest rate rises and even though it is likely that there will be further interest rate rises this year, unless the economy runs ahead of itself (which will in turn be good for property) the RBA is likely to be more conservative with interest rate increases this year.

All this makes 2011 a great time to buy properties, because we are now in the buyers’ market stage of the property cycle.

The funny thing about buyers’ markets is that this is the time when buyers aren’t buying. But it is the time when sophisticated investors but good properties and set themselves up for the next stage of the property cycle.

But as you’ve heard me say before… you have to be careful because not all properties will perform well.

Our property markets will be fragmented and patchy. Some suburbs will outperform while others will underperform. Some houses within those suburbs will increase in value and some will be duds.

As interest rates increase, affordability will be one of the key issues that limits property price growth in some suburbs in 2011.

Our markets are currently fragmented and is likely to lead to a 3 tiered market; especially in Melbourne, Sydney and Brisbane.

The more expensive properties in the top end, more prestigious suburbs which have always been more volatile are likely to decrease in value over the first half of the year. But these are not what I’d have ever called investment grade properties.

Similarly the outer suburbs, which are usually where home owners are more interest rate sensitive, and where many are currently struggling to meet their mortgage payments, are areas where prices are likely to languish. And of course a glut of off the plan properties coming on stream in the CBD’s will mean potential problems there.

On the other hand those who own properties in the inner and middle ring suburbs suburbs of our capital cities, which have exhibited strong capital growth over the last few years, are sitting on a heap of equity and won’t really be worried about affordability.

So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively.

We’re moving into the next phase of the property cycle – one of increased risk for many investors (because they won’t be carried by rising markets), yet one of great opportunity for those who know how to play the game.

If you want to grow your own significant property portfolio, you need to own properties that provide wealth-producing rates of returns. This means buying a property below its intrinsic value, in an area that outperforms the average over the long term and one to which you can add value so you can create some capital growth. This could be through renovations, refurbishment or redevelopment.

To be successful you need to buy a property below its intrinsic value, in an area that has always exhibited strong long term capital growth and add value to your property.

This is not hard to do. You just have to have up to date information on values and do your research. Buying an established property “with a twist”, below its intrinsic value is a great strategy in today’s market.

What do I mean by “with a twist”?

One that you can add value to through renovation, or with a hidden opportunity that others have missed.

What this means is that to be a successful property investor and to take advantage of the opportunities this changing market will present over the next few years, it is very likely you are going to need to take a different approach to the one you took over the last few years.

Some readers will definitely need to do different things to protect their current property portfolio.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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