Introduction
On Wednesday, 7th June 2017, 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 economic influences continue to play out or have changed since last time we met in March 2017 and also to consider the buying options and approach for the upcoming quarter.
Present at the meeting was Tim Lawless (Head of Research at CoreLogic), Nerida Conisbee (Chief Economist at realestate.com), the BRICKX Buying Team (David McMillan, Nicholas Morrison, Ramon Mitchell from Property Performance Advisory) and the BRICKX Investment Committee.
Key themes and topics discussed in the meeting were:
- Capital city overviews
- Oversupply of units in Melbourne and Brisbane
- Housing affordability
- The role the banks are playing in trying to cool the investment market
- Ongoing undersupply issues
- The BRICKX Q3 buying mandate
Buying Team Interview
Further to the meeting, we hosted a Facebook Live event with the BRICKX Buying Team. They walked us through their data-driven, top down approach to understanding capital city dynamics and how they subsequently choose properties. You can view the interview here:
Capital city overviews
During the meeting and subsequent Facebook Live event, we discussed some of the trends the team is seeing at an economic and ground level in the capital cities. Whilst the overviews are general views and observations, it’s worth noting that individual suburbs may perform differently depending on the local fundamentals. The BRICKX Buying Team continues to identify individual opportunities that fit the BRICKX investment mandate.
Sydney
- Continue to see prices at new highs with an ongoing shortage in supply being the key driver
- Continue to monitor affordability cautiously
- Auction clearance rates continue to be at healthy levels
- Strong regional performance including Wollongong and the Northern Beaches
Melbourne
- Some areas continue to show value
- Unit market oversupply is slowly tapering off and the market is absorbing this, however, the Buying Team are monitoring construction in areas that may have future supply issues
- Continue to monitor affordability cautiously
- Auction clearance rates continue to be at healthy levels
Brisbane
- Unit market struggling to absorb oncoming supply with vacancy rates rising which will put downward pressure on yields
- House market has performed well and continues to show value in some areas
Adelaide
- Strong fundamentals with highest amount of Government project and infrastructure spend per person than any other capital city
- Property is the most affordable it has been for 8 years
- Most diversified capital city with no one industry accounting for more than 8% of GSP (Gross State Product)
- Housing market is building momentum
Perth
- Continue to see a downward trend in the property cycle
- Continued oversupply of property, creating higher vacancy rates and concern about ongoing mortgage defaults
- Belief that the bottom of the market may be 6 – 18 months away
Hobart
- Showing continued signs of increasing activity in the market
- Although a relatively small population, some suburbs that fit the BRICKX investment criteria may represent good opportunities
Oversupply of units in Melbourne and Brisbane
We’ve covered in previous meetings that we are observing a large number of units completing construction and coming to market in Melbourne and Brisbane. This large supply is causing downward price pressures on this particular asset type, however, it is having different effects in the two markets.
An historic undersupply of property in Melbourne could provide an opportunity for first home buyers to enter the market. With significant ongoing population growth in Melbourne, and construction past its peak, the belief is this oversupply of units in Melbourne will be relatively short lived.
In Brisbane, the fundamentals of property undersupply and strong population growth aren’t there, with the latest CoreLogic Pain & Gain report, for the December quarter 2016, showing circa 21% of Brisbane unit sales are at a loss to purchase price.
BRICKX will continue to monitor both markets for signs of recovery. We are reminded that local knowledge including individual suburb profiling and expertise is more important than ever with oversupply concerns being constrained to specific geographic areas.
Housing affordability and first home buyers
There have been recent changes at Federal and State levels which aim to assist first home buyers to enter the property market. These measures include the removal of stamp duty below certain purchase price thresholds and tax incentivised voluntary contributions to superannuation for the purpose of saving more quickly. Whilst these benefits might be considered fringe, the continued focus on housing affordability at Government level, along with separate bank actions aimed at cooling investor activity, should raise hope and possibilities amongst first home buyers.
The role of banks in trying to cool the market
Over the past few months the major banks have introduced a number of rate rises independently of an RBA rate change. These rate changes have largely been targeted at investor loans with a declining appetite from the banks to offer interest only loans. The regulator, APRA, continues to put pressure on the banks to remain responsible in their lending, resulting in a tightening of criteria in assessing individuals for mortgages. Tim Lawless reported already seeing a slight slowing down in investor interest in some areas believed to have been caused by increased difficulty in accessing financing and rate increases, impacting investor yields. Whilst there may be a cooling in investor demand, at the time of writing, auction clearance rates remain very high with undersupply still driving a strong market.
Ongoing undersupply issues
BRICKX considers housing supply one of the key criteria in identifying suburbs and ultimately selecting properties for the Platform. We continue to seek out locations where we believe an ongoing undersupply and maintaining/growing of demand may cause properties to outperform. In Sydney, there is still considered to be undersupply and limited large scale construction within well-established suburbs, leading us to believe this undersupply will continue.
In Melbourne, we have already addressed the large number of units coming to market but there is still considered to be a shortage of desirable housing within close proximity to the CBD. This is where BRICKX will continue to focus its efforts in looking for new properties.
We discussed continuing to monitor each market individually, recognising each capital city has areas of oversupply and areas of undersupply. The Buying Team believes there are still opportunities in each capital city.
The Q3 buying strategy and mandate
The Q3 strategy has largely adopted the previous mandate but expanded the mandate to allow for:
- Additional expansions into new capital cities
- Considering opportunities with small scale remedial work/renovations (to enhance possible rent achieved and potentially improve property value)
In such a competitive market, existing relationships, networks and specific suburb knowledge should help the BRICKX Buying Team select what they believe to be the right properties.
BRICKX continues to leverage the feedback from our members, and the surveys in which many of you continually participate in, help drive us to finding properties that fit within your own preferences.
The investment criteria for Q3 2017
(which is used as a guideline for selecting properties to BRICKX).
- Value range $400k – $2-million
- Gross target yields 2.5% – 4.5% depending on location
- Consider opportunities in all capital cities
- Mostly residential but will also be considering retail opportunities
- Opportunities with small scale remedial work/renovations to enhance possible rent achieved and potentially improve capital value
- 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
- 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
- Healthy strata budgets
It’s shaping up to be an exciting Q3 for BRICKX.
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.
