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Issue 27 > February 2017

Editorial

Welcome to the six-monthly edition of The Buyers’ Advocate. In this edition I cover a variety of topics including asset selection, property management, and building and maintenance matters.

Purchasing real estate, whether for lifestyle or investment purposes, is rarely a straightforward task. Buyers require a wide-ranging skill set to effectively navigate each stage of the process.

It is preferable to avoid finding out the hard way a major project is being planned close to your property. These types of nasty surprises are not only costly, they cause an instant and ongoing rise in the stress levels of buyers.

In this edition I explain why it is important for all buyers to check the surrounds before committing to a contract of sale. This is especially important in Melbourne as there are several major infrastructure projects occurring over the next few years.

Many property investors take the rental routine inspection for granted – “She’ll be right mate, the property manager has got that one covered’’. Unfortunately, eventually these property investors are in for a rude shock. In this edition I put the cold hard facts on the table about the routine inspection.

As a buyers’ advocate, one of the first things that comes to mind when a client is interested in purchasing a brick home is the possibility that it may have rising damp. I have included an article on this difficult-to-detect building fault. Not being aware of it has cost unsuspecting buyers many thousands of dollars.

The difference between the optimum investment purchase and a lesser purchase is substantial in many ways. In this edition I explain exactly what these differences are. This article will hit home the importance of seeking independent advice before making any investment property purchase.

As usual in this edition included is my regular article, Market Snapshot. This gives an up-to-date review of the Melbourne property market. I explain how the market performed in the second half of 2016 and give my opinion on what will happen in the first half of 2017.

Finally, if there is a topic that any of my readers would like covered in the next edition, feel free to contact me.

Regards

 

Peter

 

In this issue:


It Pays to Check the Surrounds

It is important that property buyers are aware of any infrastructure projects or any other type of change of use planned in the vicinity of their proposed purchase. Construction of tunnels, bridges, car parks and the like can have a detrimental impact on property prices.

These types of works invariably result in undesirable outcomes such as excess noise, parking problems, pollution and overshadowing, as well as being visually unappealing.

It is not surprising that properties for sale in the vicinity of such projects result in a significant reduction in the pool of buyers and therefore a substantial loss in capital value.

A recent example in Sydney shows that even the well-educated can fall victim to a change of use scenario.1

Powerful lawyers and real estate executives allege they were duped by local and state governments over their purchase of multi-million-dollar terraces in exclusive Millers Point.

The properties in question were housing commission and therefore the vendor was the NSW state government.

The buyers allege that they were not warned of plans to increase the size of nearby The Rocks Markets on weekends and public holidays until after their sales were complete.

As one buyer lamented: “You can forget about enjoying the peace and quiet of your home and its surrounds on the weekends ... it takes out our view of the harbour and the Opera House.”

This type of situation has occurred several times recently. Melburnians need to be particularly careful as at the moment there are a number of major transport projects either just starting or in the planning stages.
An example is the sky rail project on the Cranbourne-Pakenham railway line.

Homes affected will be overshadowed by concrete pylons that will be built approximately nine metres above ground level. Residents along this corridor are currently taking legal action against the state government.

Another project that may have an adverse effect on property values is the Western Distributor by-pass. This road infrastructure project is being carried out in partnership by Transurban and the Victorian state government.

Included in this project are both an elevated roadway and a tunnel leading from the West Gate Freeway to Footscray Road.

Traffic tunnels will be constructed approximately 35 metres below prime inner-Melbourne residential real estate. This certainly would not be on the wish list of most property owners; a multi-lane freeway directly below their lounge room. 

Another by-product of this project will be chimney stacks exuding fumes from the underground road tunnels.

Despite being well into the planning process, Transurban is not yet able to give an exact position of these chimney stacks apart from saying they will be near the tunnels’ portals.

The chimney that will be situated near the Williamstown Road portal is likely to be close to a residential area in Yarraville.

Last year Transurban held information sessions which included pop –up booths in the affected communities. These booths included detailed maps and designs of the proposed project.

In my opinion Transurban have put the cart before the horse.The position of chimney stacks is one of the most contentious aspects of the project yet residents were not able to assess and provide feedback on this important matter.

It is important that property buyers investigate any proposed major projects or any other alteration to existing use in the immediate area before making a purchase.

Some pockets of housing have greater protection from inappropriate development.This protection can be via existing zoning or restrictive overlays.

In order to protect the value of their investment, residential property buyers should always endeavour to select a property that is positioned in an area where there is little opportunity for non-residential or change of use projects to be undertaken.
 
 1 Source: The Australian newspaper; 27th December, 2016
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Selection is Everything
 

Making a sub-standard investment property selection has a series of negative implications for investors. A poor decision isn’t easily rectified as divesting out of property incurs substantial costs.

Also, the time frame between placing a property on the market and receiving the proceeds of the sale is lengthy compared with other asset classes.
  
The optimum property selection will bring about a chain of events that will result in a successful outcome for investors.

The correct choice results in the property doubling in value in approximately 10 years. This in turn leads to a build-up of equity, which can be used to borrow against for further investment or for lifestyle purposes.   

The optimum investment selection also leads to positives in regard to the rental equation. The best property choice results in minimal vacancy, and a pool of high-quality tenants ready, willing and able to rent the property. High demand on the rental side in turn leads to regular rental increases. Over time this gives the property investor higher disposable income.

Another great advantage of blue-chip real estate is that it is recession-proof. Even when the economy takes a downturn there still is demand for quality real estate. I was active in the real estate industry during the recession of the early Nineties, and during this period quality real estate was still highly sought-after.

It is certainly reassuring to know that an asset can be easily liquidated should the need arise during a downturn.

The greater majority of buyers do not have the skill or knowledge to identify the optimum investment property.

Therefore, on most occasions their selection will result in inferior capital growth, minimal equity, high vacancy periods, low rental growth, troublesome tenants and having to accept massive price reductions to offload their asset during economic downturns.

It certainly pays to seek independent professional advice before signing on that dotted line.
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Rising Damp
 

Buyers of brick or masonry homes should pay particular attention to the serious building defect known as rising damp.

Through capillary action, moisture can make its way up a brick wall from the ground. A breakdown in the waterproofing barrier or garden beds being constructed above an existing damp proof course can result in rising damp. Because of their age, period homes are particularly susceptible to rising damp.

Paint bubbling and flaking around skirting boards is one of the tell-tale signs of rising damp.
Rising damp causes timber to rot to areas such as floors and skirting boards. It also causes mould and odours, which can adversely affect people with respiratory conditions.

It is one of the most costly non-structural defects to rectify in residential properties. Many sellers undertake an internal paint prior to placing their property on the market. This can make it very difficult for the inexperienced property buyer to detect rising damp.

There are different methods of rectifying rising damp. Both solid and liquid membranes are commonly used to provide a barrier. These materials are placed in mortar joints at the base of the building.

Water pooling near a masonry building structure can lead to rising damp. Prevention is better than cure, so property owners are well advised to repair any leaking roof guttering or pipes. Rainwater should always drain away from the building structure.  

Methods to improve underfloor cross ventilation will also assist in preventing rising damp e.g. removing debris from the underfloor or installing effective air vents. Air vents and weep holes should always be clear of any type of blockage.

Because rising damp can be difficult to detect, property buyers should always engage the services of a building inspector before the contract becomes unconditional.

In situations where rising damp is difficult to detect e.g. a newly painted wall, a qualified building inspector will use a damp meter to ascertain the level of moisture in the wall.
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The Routine Inspection
 

Property investors should accompany their property manager during each routine inspection.

Routine inspections should be carried out every 6 to 12 months on residential properties that are tenanted. A report should be given to the property owner detailing such matters as the condition of the property, preventative maintenance advice, level of cleanliness and outlining any areas where the tenant is not abiding by the terms of the lease agreement.

Owners who don’t attend routine inspections and assume that property managers are always doing their job adequately will eventually end up disappointed.

Many real estate firms appoint junior staff to property management roles. The modern-day reality is most property managers are inexperienced and are not provided with appropriate training. This means property owners need to take a hands-on approach to their investment.

The quality of the routine inspection can vary greatly between property management firms. Some property managers will carry out inspections only spasmodically, while others will spend only a few minutes at the property, failing to check important areas that could require maintenance and repair.

Many property managers don’t understand basic fundamentals relating to maintaining a dwelling.
Issues such as treating timber rot, condensation in wet areas, and roof and underfloor preservation are important matters to be monitored. Not rectifying building faults when they occur can lead to greater expense for property investors in the future.

Another trap for property investors is assuming maintenance works have been carried out correctly.

Typically, property managers will contact owners and report that maintenance is required. This can be anything from a jamming door to a burst water pipe. Once the owner has authorised the repair the property manager will organise a tradesman to fix the problem.

If the matter is not urgent it is advisable that property owners request two quotes for works of a substantial cost. Because the owner does not live at the property, some tradesmen believe they are less accountable. Therefore, some will charge exorbitant amounts for work on rental properties.

During the routine inspection the property owner should check all maintenance work that was carried out since their last inspection. Was it carried out to a high standard? Did the work carried out match the actual amount paid?

Other questions should be considered: Is the tenant keeping the property clean? Has there been any damage or soiling to the property? Is the garden being maintained adequately? 
  
Occasionally tenants will blatantly break the terms of the lease. Common examples of this are keeping a pet at the property despite the lease saying otherwise, or sub-letting the premises without seeking approval.

A proper routine inspection done regularly will prevent these situations from adversely affecting the asset’s performance. Also, maintaining the property ensures quality tenants will be attracted to the property and retained for longer.

Property owners who make no effort to attend routine inspections do so at the risk of allowing their investment to quickly deteriorate, therefore incurring unnecessary future expense.
 
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Market Snapshot
 

The Melbourne market continued on its merry way in the second half of 2016. Some commentators highlighted the fact that listings were in short supply during the spring period.

An ongoing feature of the Melbourne market is that investment-grade properties have always been in short supply. Blue-chip real estate tends to be tightly held as owners recognise their exceptional performance.

In the September quarter, the median house price increased 3.2 per cent to $740,000 Melbourne-wide.

The average clearance rate for Victoria continued to hover around 75 per cent over the previous 12 months.

On the rental side, the proportion of vacant properties in metro Melbourne dropped slightly to 2.4 per cent, while also dropping slightly to 2.5 per cent in regional Victoria.

Following the Reserve Bank meeting in December, the cash rate was left unchanged at 1.5 per cent.

According to the RBA, GDP growth is expected to be solid in 2016/17 and gradually pick up thereafter to between 3 and 4 per cent.
 
The unemployment rate in Victoria continues to hover around the 6 per cent mark as it has for the past two years.
 
The Consumer Price Index (CPI) Australia-wide rose 1.3 per cent through the year to the September quarter 2016, according to the latest Australian Bureau of Statistics figures.

The Melbourne market for the first half of 2017 looks sound. I don’t expect to see any substantial upward price movement. Interest rates have bottomed out and some lenders have already increased their rates slightly.

Last year investors took a back seat as the perception was the market had reached the high point of the cycle. I am expecting to see investors return to the market over the next few years to take advantage of the next upward price spiral.
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Note: Readers should not act solely on the basis of the material contained in this newsletter. Peter Rogozik Property Consulting expressly disclaims all liability for any loss or damage arising from the reliance on this document.

Copyright © 2013 Peter Rogozik Property Consulting
Licensed Estate Agents ~ Registered Building Practitioners

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