On Tuesday, 6th December 2016, the BRICKX Property Team held its regular buying strategy meeting to review the current state of the market. The meeting was also designed to better understand what macro and micro economic influences continue to play out or have changed since last time we met in September, and also consider the buying options and approach for the first half of 2017.
Tim Lawless (Head of Research at CoreLogic), Nerida Conisbee (Chief Economist at realestate.com) and our property buyers discussed how the slowing down of foreign investment (largely from China) was unlikely to cause widespread impact across the Australian housing market, despite this being one of a number of drivers contributing towards growth over the last few years. A lot of the foreign buying had been in high rise apartment blocks in Melbourne and Brisbane, and these types of investments are already showing weakness as some buyers are opting to default and not settle. It is worth noting that these concerns are largely limited to Melbourne and Brisbane high rise large apartment blocks which BRICKX does not offer. This trend is generally not occurring in Sydney due to ongoing undersupply.
During the meeting, the team also discussed the significant reduction in listings in the second half of 2016 which certainly made buying even more difficult, not just for BRICKX, but for the entire market. According to the CoreLogic Capital City index, both Sydney and Melbourne prices were generally up 5% since July, and lack of supply and ongoing record demand has been one of the drivers behind this. The BRICKX buying team did well to acquire the quality properties in Double Bay and Bondi Beach in what was an extremely competitive period where we also missed out on several other properties which became too expensive, but at the right price would have been great opportunities for our investors.
The increase in property prices within Sydney and Melbourne over the last 12 months has accelerated ahead of the rate of increase in rents, and as such, rental yields have been reduced, with the average Sydney yield now sitting at around 2.3% – and in Melbourne, even lower.
Affordability continues to be a key theme in the Australian housing market and the recent rate of growth is unlikely to be sustained for an indefinite period. The Sydney market continues to be undersupplied in quality property which is seen as a driver for solid continued growth, especially in desirable suburbs. The amount of new housing within Sydney coming onto the market or being approved is still significantly less than the demand for housing in Sydney. In Melbourne, the number of units coming onto the market (especially in the CBD) will likely cause some weakness in those specific types of properties.
At these meetings we also conduct a review of the capital cities, and you are able to hear Nerida’s update on these in this webinar. In summary, Adelaide is presenting some higher yield growth opportunities which are accessible for lower price points (especially within 1-3km of the CBD). Brisbane is still seen as a key growth market which within the house sector (outside of CBD units) represents great opportunities. Perth looks like it is hitting the bottom of the market, and we’ll continue to monitor it over the coming months ahead of considering a property there for BRICKX investors. (Note, due to Stamp Duty and Landholder duties within SA and QLD, BRICKX is currently unable to purchase properties in these states or operate a platform on which investors can sell their Bricks. We are currently working with both revenue offices to explore a solution).
Our Property Team will continue to look for quality opportunities within Sydney and Melbourne, however, more than ever over the last few years, having specific suburb knowledge and understanding the key factors at play will give the BRICKX team a clear advantage in selecting the right properties.
So post our discussion on the economic factors and changes within the housing market, what does our strategy for the start of 2017 look like?
When forming our strategy, not only do we work with our Property Team, but we also listen to the feedback from our highly engaged BRICKX investors. In October we asked our investors what types of properties they wanted to invest in, the locations, whether they favoured yield options or capital growth, etc.
Taking all of this into account, there was a strong preference for more Melbourne opportunities and our investors also signalled they wanted to be able to buy into houses.
Location
We continue to look at opportunities in Sydney and Melbourne. We’ll also consider Adelaide once we have clearance from Revenue SA.
In addition to considering blue chip suburbs, the Property Team will widen its search to include options where gentrification continues and housing prices are potentially lower, looking at properties that would likely be appealing now or in the future to first home buyers.
In Sydney, these types of suburbs with large young populations like Glebe, Newtown and Camperdown are attractive. They are near universities so excellent locations for students looking to rent close to campus. These areas are also close to Royal Prince Alfred Hospital and a larger medical precinct so are popular places for medical staff to live – especially when doing shift work and the proximity to work matters. These areas are also sought after due to the lively bar and restaurant scenes nearby!
Other inner west suburbs of Sydney are also being considered. Locations like Birchgrove, Balmain, Rozelle, Drummoyne and Gladesville provide an inner-city lifestyle with a community/village feel.
The Lower North Shore of Sydney is another area of interest. A water-view apartment in Manly or Balgowlah is always going to be highly desirable for investors, with predictable strong ongoing tenant demand.
In Melbourne, suburbs like North Melbourne, Fitzroy, Brunswick, Northcote and Coburg were all discussed as gentrifying areas that would fit the profile for BRICKX.
Other themes discussed, which have been added to the investment criteria, include smaller renovation projects and also the potential to expand beyond just residential. Currently, the properties on BRICKX are renovated to a high standard with a modern fit out but having this criteria at the point of acquisition does limit the opportunities that BRICKX can consider, and in a market with short supply, being able to expand the brief gives us more options. We will now also consider properties which may require small renovations/works to improve the property and a view to increasing the potential rental income. When BRICKX brings this type of opportunity to the Platform, we’ll raise funds for any renovation as part of the funds raised when selling down the initial Bricks, and it will form part of the initial Brick Price.
Our investors also told us they would like us to look at opportunities outside of just residential, and we will subsequently also be considering retail opportunities. As with all our acquisitions, we will ensure these are good opportunities in great suburbs and as a result are often scarce in supply.
The investment criteria for Q1 2017 (which is used as a guideline for selecting properties to BRICKX – newly added criteria in bold).
- Value range $400k-2.0m
- Target yields 2.5% – 4.5% depending on location
- Mostly residential, but will also be considering retail opportunities
- Strong capital growth potential, or stable capital growth potential but in a defensive suburb (defensive against downturn)
- Suburbs which offer good value to first home buyers
- Newly renovated/good condition property
- Properties which require small/cosmetic renovations
- Buying the norm for the area (if a suburb is predominantly units, then choose a unit)
- Avoid large unit blocks where rents can be under pressure from other void units in the same block
- Avoid off-the-plan or large new developments
- Avoid properties which have additions that add to the running costs (i.e. a swimming pool)
- Healthy strata budgets
2016 was a fantastic launch year for BRICKX and its investors, and as BRICKX continues to grow, we look forward to offering many more properties in 2017.
It’s an exciting time to be part of BRICKX!
For more information on the buying strategy and to hear Nerida Conisbee’s views on the 2016 trends and forecasts for 2017 capital cities, please view the webinar here.
The opinions and beliefs expressed by the authors and forum participants as part of this communication do not necessarily reflect the opinions and beliefs of BrickX, BrickX Financial Services or other entities within the BrickX group.
