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The Greater Metropolis

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Knowing the drill of Melbourne property market

Melbourne is the capital and most populous city in the state of Victoria, and has been ranked the world’s most liveable city since 2011 (and among the top three since 2002), according to the Economist Intelligence Unit (EIU). Hence, this factor adds interest to the growing residential property market in the beautiful city.

Metropole Property Strategist director Michael Yardney saids “The Melbourne residential property market has performed very strongly over the couple of years driven by strong population growth, rising wages, incomes and business profit, lower interest rates, a rising stock market and rising consumer confidence.” This, he added, has led to strong property growth over the last 12 months and particularly strong growth over the last 10 years.

Yardney also stated, “In most cities in Australia, there was a property boom after the global financial crisis of 2008 – 2009. This boom peaked in late 2010 when the Reserve Bank of Australia raised interest rates. The market then bottomed out during the second quarter of 2012 and since then the current cycle has seen dwelling prices increase to different degrees in each of our eight capital cities.”

The Certified Practising Valuer of Build Capital (Property Advisory Solutions), Stuart Biggs on the other hand said, “Property prices are generating momentum for 2015 with a modest level of optimism on the back of reported growth of 7.8% in 2014. In order to discuss the strength of the property market its best to understand how property transacts and the psyche of the Melbourne market. The Melbourne property market is unusual in the sense that 80-90% of residential (existing) stock is sold via public auction, in the front yard or on the Street and typically a Saturday morning after experiencing a 4-5 week advertising campaign.”

Spec Property, is one of the sustainable developers in Melbourne. Its International Manager, Robert Evans commented on the property market by saying, “The Melbourne property market is undoubtedly one of the most robust and mature residential property markets in the world. Residential property is supported by the mantle of Melbourne enjoying a number of very important fundamental attributes, having been voted one of the world’s most liveable cities every year for the past decade, Melbourne is an obvious choice for people who want to live an enjoyable and priviledged lifestyle.”

“Growth in population of over 120,000 people per annum, with most of these are moving from other parts of Australia, plus the fact that Melbourne is an international education and culture hub provides an underpinning of demand for both owner-occupier and investors alike. Projections of a population of over 6 million people in 20 years means another 1.5 million people will need to be housed,” Evans added.

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PROPERTY INVESTMENT HOTSPOTS

When asked about Melbourne’s property investment, Biggs said “Location, location, location: It’s an old saying in Australia but it rings true, you need to buy in a location which is well located to shops, transport and where possible lifestyle attributes (e.g beach, park land or entertain facilities.) Australians are lifestyle buyers and you need to think like an Australian.”

“Do NOT buy in the CITY,” advised Biggs. This is because, according to him, there’s a massive oversupply of condominiums within this market and capital growth is predicted to be flat over the next 5 years with higher than normal vacancy rates.

Biggs also highlighted some eastern areas that are believed to have strong demand such as McKinnon, Bentleigh, Glen Waverley, and Box Hill which are being acquired Asian families which are paying above market to enter these areas. This is generally inflating the market by 10% and more for these area’s as they’re generally within school zones, Asian retail and community stores as well as good transport linkages.

Yardney expressed his opinions on the Melbourne’s property investment hotspots by saying, “Some of the strongest property sub markets in Melbourne are in the inner and middle ring south-eastern suburbs where landed property is highly sought after by locals with high and rising disposable incomes. They’re looking for proximity to amenities, transport and lifestyle. Access to good private and public schools also drives property values in certain suburbs.”

FOREIGN INVESTORS MUST-KNOW

In conformity with Biggs, “International purchaser are legally allowed to purchase property within Australia without having permanent residency provided they apply to the Foreign Investment Review Board (FIRB) as seek formal approval which typically takes 10 – 15 days. New property (newly built without prior occupancy) and vacant land area approved without any visa while existing or second hand property require an approved visa. These applications are processed online via www.firb.gov.au”

Biggs added that “The Australian government has proposed new foreign investment fees ($5,000-$10,000 [RM13,953-RM27,906]) as a measure to raise funds to support FIRB with the required resources to sufficiently monitor foreign investment within Australian borders.”

The CEO of Real Estate Institute of Australia, Amanda Lynch said “What is important is that the revenue gained from these penalties will provide the Australian Taxation Office with more resources to ensure all investors are complying with the regulations.”

“Of concern, however, is that the Options Paper also proposes an application fee of $5,000 for properties under $1M, $10,000 for properties valued between $1-2M and $10,000 increments for each additional $1M in value. These fees will be used to finance increased compliance, which is what the industry has been calling for but it also means that properties over $1M will attract a fee of approximately 1%,” she added.

In addition to that, Yardney indicated, “Foreigners can only buy new or off-the-plan residential properties in Australia. They are not able to buy established residential properties.”

WORD TO THE WISE

“While there are many new developments currently being built to accommodate the strong requirements of foreign investors, particularly from Asia, to invest in Melbourne residential real estate, I would be very cautious at this stage of the property cycle,” said Yardney.

Yardney thoughtfully clarified, “As you can see from the graph provided by the chief economist of Domain, Dr. Andrew Wilson, Melbourne has reached the mature stage of its property cycle and capital growth will now be more subdued. This means careful property selection will be critical. ”

The problem is, as stated by Yardney, many of the new apartment buildings are being targeted at Asian investors, who don’t fully understand what makes a good investment in Australia.

Yardney foresees, “This significant oversupply looming in the Melbourne high-rise apartment market will mean there will be minimal, if any, capital growth and rental growth for the next five or six years. In fact many investors will find that their properties will not be worth their contract price on completion of the project.”

He said, “My suggestion is that rather than invest in the central business, investors should look for smaller more boutique new apartment buildings in the inner and middle ring Melbourne suburbs where there is not an oversupply of properties. These could include the suburbs of Bentleigh, Caulfield and Moonee Ponds.”

Yardney’s point of view is also agreed by Biggs, as he opined “Buy into a boutique development, typically with no more than 100 as when this property is completed there will be less stock to complete with from a sale and rental perspective.”

Biggs’ strategy for the investors is to “Hold for five years. Melbourne is not considered a flip and run investment market as I’ve come to understand from the market here in Malaysia. High stamp duty costs and selling cost reduce the benefit while the general condominium and landed properties are not generating 20% returns per year growth which negates the benefit of selling prior to settlement.”

“Seek finance approval before signing any contract to confirm you’re eligible for Australian finance. Australian banks will lend 80% Loan to Value Ratio (LVR) on all property within no decrease LVR ratio on the amount being purchased,” warned Biggs.

He also pointed out to “Investigate the Foreign Capital Gains tax which applies – When the property is sold then the capital gain or loss will need to be calculated. Capital loss will carry forward. In case of capital gain the amount they will pay tax on is:

Sale Price

Less costs associated with sale

Less costs associated with purchase

Add back depreciation claimed in the preceding income tax years

Less negative gearing loss carried forward from the preceding years

Any remaining gain will be subject to Australian non-resident tax. There is no capital gain 50% discount available for non-residents for investment properties purchased after 8th May 2012.”

Evans also opined, “Residential apartments in good locations – not the CBD where massive 60-80 storey towers will be built for sub-standard quality housing, but mid -sized projects in city fringe locations are the best bet, along with growth suburbs such as Doncaster will be good for rental returns and capital growth. Houses in new estates – 30-50 km from the CBD offer a cheap entry to the market but offer poor returns and growth – this is where the cheapest of everything – i.e rents and affordability will always live – (Not a good choice).”

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CONCLUSION

Biggs described the benefits of investing in Melbourne’s property as “It’s a multicultural population of 4.5M people with a clean and safe lifestyle for university students through to families. Access to some of the world’s best restaurants, cafes, bars, sporting entertainment, stable government and transport infrastructure which are why it’s been voted the most liveable city in the world for 4 years running.”

However, Biggs said “The cost of living is high – This includes renting/buying property, food, utilities and petrol prices. For those working these costs is generally proportional to income however university students and pensioners are the hardest hit in these areas.”

Likewise, Yardney disclosed “Overall Australian property values will increase in the medium to long-term, driven by our strong population growth and the wealth of the nation. Its economy is robust and with population growth in the order of 1.8% per annum, this means Melbourne’s population will increase by around 10% over the next five years.”

“At the same time its population will be wealthy, because Melbourne is home to many service industry and I.T. related jobs. A growing population who can afford to buy property, but who all want to live in many of the same locations is conducive to a buoyant property market,” he concluded.

Evans concluded, “Melbourne offers very good long term investment options – there is little fluctuation in prices – they only rise generally – they don’t fall dramatically, the saying is get rich slowly. Annual growth in good suburbs is consistently 6-8% compounding. Values have tended to double on average every 10 years.”

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