What are property investors up to?
A long-term study by MCG Quantity Surveyors is helping define investor trends which will flag the property market’s bounce back after COVID-19.
The report also took a pre-COVID snapshot of ‘normal market’ trends in place prior to the crisis.
We found property investors were pivoting in interesting ways prior to the outbreak.
Investors across the nation were tracking a defined path and a return to these trends will indicate were heading back to a more normal state of affairs.
Some major moves identified and quantified in the report include:
Changes across the four years of the study:
- An increasing in interest for new/off-the-plan investments over existing property,
- A major rise in investors choosing townhouses as an investment,
- An increase in the average number of units per development project,
- A notable increase in investors building bigger, more expensive houses,
- The amount paid for a detached house investment grew by around double that paid for a unit over the past four years.
Data from April 2019 and December 2019:
- Almost half of all investments analysed were renovated after purchase, with an average spend of approximately $37,500
- Around 1 in 4 investors lived in their asset before renting it out. The average length of pre-rental habitation was four years, two-and-a-half months.
- The average size of a detached house investment is almost double that of a unit.
- The average construction cost of a newly-built, detached house investment is $353,473.
Four-year trends (January 2016 to December 2019)
We’ve observed a dramatic increase in investors with new assets among the analysis.
The trend since January 2016 indicates investors are increasingly moving toward new/off -the-plan units and townhouses, and new/house-and-land package holdings rather than investing in existing homes.
Units have become less popular as investments.
There’s been a fall in unit assessments under the analysis with a material move toward townhouses and detached homes over the last four years.
The average “units per development” has risen. Across the four-years of the study, the average number of units per development included in the survey has risen by over 17.5% nationally.
Investors are building bigger, more expensive houses. While unit sizes have reduced and seen substantially less price growth among the cohort.
Investors are becoming savvier. Investors are looking for tax breaks, with many ordering their depreciation schedules much sooner after purchasing.
Despite this, Australian investors who’ve delayed ordering a schedule have potentially missed out on $2.9 billion in deductions.
The level of property tax deductions is rising nationally. Across the analysis, average total depreciation deductions have gone up 23.72% over the last four years, most likely reflecting the rise in average floor areas, fitout quality and improved investor awareness of depreciation allowances.
The amount paid for a detached house investment in the data has grown by around double that paid for a unit over the past four years.
Townhouses have provided the most tax-effective investment type Townhouses have provided, on average, the highest total deductions as compared to detached houses and units.
This appears to be due to the increased level of fit out and finish in townhouse investments.
Across Australia’s most populous states of New South Wales, Victoria and Queensland, some significant moves across the analysed information over the past four years included:
- A strong rise in investment properties that were lived-in by their owners first (up 21.34%);
- A substantial drop in post-purchase renovations above $35,000 (down 63.2%);
- A substantial drop in the average number of units per unit development project (down 17.32%).
New South Wales
- A large rise in investment properties that were lived-in by their owners first (up 16.5% compared to four years ago);
- A significant increase in the average spend on post-purchase renovations (up 102%);
- A substantial rise in the average number of units per unit development project (up 44.46%).
- A substantial rise in overall post-purchase renovations occurred (up 22.32%) but owners are spending less with the incidence of postpurchase renovation above $35,000 down 21.94% over the four years;
- Bucking the national trend, a decrease in the number of units within a development, (down -18.04%);
- A strong rise in the average unit purchase price (up 11.09%).
New house construction is a popular option for investors seeking tax deductions as it provides substantial deprecation opportunities.
Because new-house investors are among the most avid users of depreciation schedules, a large sample of this property type was able to be collected within our data.
Anecdotal discussions from market observers indicated rising materials prices and locational effects have seen the cost of building a new property increase – and our study supported this, with the average cost of building an investment having risen 32.51 per cent compared to four years ago in the analysis.
The average build cost of houses nationally rose from $266,747 four years ago, to reach $353,473 in the latest data set.
The data revealed building prices that had increased substantially more than national GDP over the same period which reflected a cumulative growth of around 10 per cent since January 2016.
It seems ongoing demand for both materials and labour is being reflected in these gains and indicates the residential construction sector appears strong.
Across the three primary states, the average cost per square metre of building an investment house from most to least expensive was:
This outcome indicates location comes into play when considering construction costs.
The modest rise in construction costs in Queensland and Victoria are in stark contrast to NSW with its substantial gain.
This result seems to reflect a greater overall demand for labour and materials, and an increase in the standard of new-property fitout and finish in Sydney as opposed to the more subdued performance of Brisbane.
“Because new-house investors are among the most avid user of depreciation schedules, a large sample of this property type was able to be collected within our data”. Said Mike Mortlock.
As part of preparing depreciation schedules, MCG gathered data on the types of properties investors are acquiring i.e. houses, townhouses, units, duplexes and granny flats.
In addition, metrics gathered for each type included purchase prices, gross floor areas (GFA) and deductible allowances.
The number of newly built investments for all property types among the analysed cohort rose nationally over the past four years.
The level of investment in new property went up 107.53 per cent compared to the dataset from four years ago.
In addition, there appears to have been a shift in property-type buying habits with investors turning away from houses and units and gaining interest in townhouses among the analysis.
This is, in part, driven by affordability as investors seek holdings within high- growth, blue-chip locations at accessible price points.
Townhouses offer a balance with a yield that tends to exceed that of a detached home while including a larger land component than a unit – a fundamental which improves capital growth opportunity.
There was also a rise in investors seeking property based on the level of available deductions according to the analysis.
The research has revealed investors were spending more to purchase investment properties across all property types.
The study showed a substantially greater rise in house purchase prices (21.33 per cent) as compared to units (10.3 per cent) among the analysis over the past four years.
In addition, suspicions that investment properties are getting larger appear true.
Gross floor area (GFA) is a key measure analysed in the preparation of depreciation schedules and this analytic rose nationally for houses and granny flats over the period among the assets assessed.
GFA for houses rose 12.61 per cent while the figure for granny flats rose 5.98 per cent.
By comparison, GFA for units was down 0.36 per cent and the townhouse GFA was 3.57 per cent lower.
Interestingly, the average buildings cost per square metres rose 3.94 per cent nationally over the four-year period, after being negative 3.73 per cent on the three-year measure.
“This appears to be part of the affordability drive, as investors seek holdings within high-growth, blue-chip locations at accessible price points”. Said Mike Mortlock.
Occupying & investor behaviour
A 2018 analysis by MCG revealed almost one-in-four investors (23 per cent) had once lived in their investment property as a principal place of residence, with owners living in their former home for four years and 11 months on average before moving out and instead retaining their property as an investment.
So it’s possible that the majority of these ‘accidental investors’ became landlords by circumstance, rather than planning.
Our current study re-enforces this percentage with the most recent 1000 assets data set revealing 25.7 per cent of investments were lived in first by their landlords, with the average occupancy being four years, two-and-a-half months.
The percentage of NSW investments lived in first by landlords was 31.5% between April 2019 and December 2019.
In Victoria it was 21.3% and Queensland 16% for the same period.
As an addendum, the instance of people living in their property prior to renting it out increased nationally by 14.73% over the last four years of the analysis.
In the unit investment sector, we’ve also noted a trend toward increasingly larger unit developments too, with the concept of vertical communities becoming entrenched.
The average number of units per development rose 17.63 per cent across the years analysed.
This reflects an increase from an average of 61.53 units per project in 2016, to 72.38 units in 2019.
Couple this with the slight fall in average unit GFA of 0.36 per cent and it appears there’s a concerted effort by developers to yield more investments per project, normally in an effort to improve profit margins.
Missed tax deductions due to inaction were at epidemic proportions.
By our assessment, investors who’ve delayed commissioning a depreciation report have, on average, lost around $20,537 in depreciable benefits.
If this were extrapolated across the nation’s total investor numbers, then Aussie landlords have missed out on approximately $2.9 billion in deductions by failing to employ depreciation schedules as part of their tax plan.
That said, the benefits of depreciation schedules are starting to gain awareness with landlords.
Our data shows the amount of time between settlement and ordering a schedule has fallen over the past four years by 24.16 per cent.
“The benefits of depreciation schedules are starting to gain awareness with landlords”. Said Mike Mortlock.
Renovating / Improvements
The rise in property prices from 2012 to 2017 in Sydney and Melbourne prompted many in the latter phase of the cycle to choose renovation as a way to gain equity.
As such, there’s been notable increase in investors who sought relatively affordable homes of modest quality in good locations, and then carried out renovations to improve both equity and rental income.
There’s also a realisation that comprehensive renovation work is beneficial to investment return – including the added advantage of increased deprecation benefits.
The most recent 1000 assets dataset revealed that almost half (45.3 per cent) of all investments receive some form of post-purchase improvement.
Our analysis also demonstrated the average amount property owners spent on renovations nationally rose – up 62.88 per cent across the four years of the information gathered.
By state, NSW property owners spend more on post-purchase renovation work than landlords in Victoria and Queensland.
NSW has seen the most substantial growth in spending, while Queensland’s average renovation spend has fallen.
“By state, NSW property owners spend more on post-purchase renovation work than landlords in Victoria and Queensland”. Said Mike Mortlock.
There is no doubt the property investor population is better informed than ever about the benefits and risks associated with real estate ownership.
This year’s report has revealed a progression of intelligence among the cohort, an ability to flex their strategies to allow for market and economic forces, and a continued drive to build portfolios for long-term financial security.
Among the many tools at the investors disposal is the ability to minimise tax through professionally prepared depreciation schedules.
Fortunately, awareness of this vital utility is growing, so savvy investors can keep more of their hard-won gains and bring the dream of retirement a little closer than might have been the case half a decade ago.
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