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Issue 22 > August 2014

Editorial


Hello and welcome to Peter Rogozik Property Consulting six monthly newsletter. 

When it comes to real estate everyone has a unique set of needs and goals. That has certainly been reflected in the variety of services I have provided so far this year.

Most importantly I give a personal guarantee that I will act in the best interests of my clients; my advice will always be 100% independent. We remain one of the very few buyers advocates who do not also act in conjunction with selling agents.

A buyers advocate should always have an arm's length  relationship with the vendor's agent.

In this edition I give an overview of the commercial property sector. Personally this has been a sector that has always fascinated me. It is a totally different ball game to residential property.

Most people don’t fully understand the intricacies of conveyancing. What is the role of a lawyer or conveyancer in a real estate transaction? Over the years I have looked at many contracts and vendor’s statements. In this edition I explain some of the misconceptions about conveyancing that could have negative impacts for the buyer.

I have always been a big believer in the first home buyer’s savings account. Therefore it was very disappointing to see the Federal government scrape this initiative at the last budget. In this edition I explain why it should have been retained and what needs to be done going forward.

The investment apartments I have chosen for my clients have always been in blue chip locations. However as these apartment blocks were built many years ago many are looking tired and rundown. It is important that owners maintain them so that tenant demand remains high. In this edition I explain some simple and relatively inexpensive ways to improve and add value.

As usual in this edition included is my regular article, Market Snapshot. Market Snapshot gives an up to date review of the Melbourne property market. I explain how the market has performed so far this year and give my opinion on how it will perform for the remainder of the year.

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:

Investing in Commercial Property


The term commercial property has three broad sub-categories; industrial, retail and office property.

Successfully investing in commercial property requires a totally different set of selection criteria compared to residential property.

Compared to residential property commercial property offers investors a higher yield. Currently yields on commercial property are between 6% and 10% of initial capital outlay compared to between 4% and 6% on residential property. 

Another advantage of commercial property is that the tenant pays all outgoings e.g. rates and maintenance. Also, tenancy agreements are for a substantially longer period in the case of commercial property.

This might all sound rosy for commercial property however residential property performs better from a capital growth perspective. Also, with commercial property there is a risk of longer vacancy periods.

Commercial property investors seek a sound lease agreement. Central to this is a tenant that has a viable business. This will ensure the tenant will honour rent payments and the tenure of the lease.

Quality of location is essential for the success of a residential property. This is also the case for commercial property however a different set of criteria is applied to commercial property.

In the case of industrial property, investors will look for a property that is situated close to major freeways, shipping ports and airports. A factory or warehouse should also be functional to satisfy the needs of a business.

Highly sort after are factories and warehouses with high entrance heights and maximum internal floor to ceiling width. These features provide easy ingress and egress of machinery and enhance storage capability.

Retail property investors rank a high profile and successful adjoining tenant (anchor tenant) highly. This is because they are able to draw in consumers which results in flow on benefits for all adjoining businesses.

Investors looking to purchase an office look for a prestigious location. This will appeal to many prospective tenants and therefore drive rental increases.

The above information is a broad overview of commercial property. There are many variables that need to be considered before investors should consider taking the plunge into this rewarding yet volatile asset class.
 
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Scrapping of First Home Savers Account

The recent scrapping of the first home buyer’s savings account (FHSA) by the Federal government was a mistake. 

Contrary to bonuses and grants the FHSA sent the right message to first home buyers. The scheme rewarded first home buyers who were prepared to make sacrifices and put in the hard yards to save for a deposit.

This was achieved through offering first home buyers higher interest rates on saving for a deposit and concessional taxation rates on interest earned.

The government is now relying on handouts in the form of bonus’s and grants to assist first home buyers. The message now is it is okay to put out your hand out and the government will reward you for doing nothing.

In essence these handouts have not helped the economy or first home buyers. They have only succeeded in increasing house prices by the amount of the grants therefore adding fuel to inflation.

Also, the funds could be spent more efficiently e.g. providing important infrastructure such as better transport links around new subdivisions. This would be of greater benefit to first home buyers.

To add insult to injury legislative changes allowing first home buyers to access their superannuation savings for the purposes of providing funds for a home deposit will be introduced to the Federal Parliament in the upcoming spring session.

Politicians were quite happy to allow the FHSA to be scrapped yet they are now contemplating allowing savings that are meant to support people in retirement being used as a home deposit.
 
The FHSA as it stood didn’t go far enough in rewarding first home buyers. There should have been higher interest rates on savings and lower taxation rates on interest earned. Also, the scheme was never promoted well enough.

As a result first home buyers didn't come on board in any great numbers and as a consequence the financial institutions who administered these accounts quickly lost interest in maintaining and promoting the scheme.

The FHSA should be reintroduced. However greater incentives need to apply and there needs to be a better campaign promoting the scheme.

In the long run this will be of far greater benefit to both first home buyers and the economy than grants or allowing first home buyers to prematurely access their retirement savings.
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The Conveyancing Conundrum
 

Section 32 of the sale of land act 1962 (the Act) says that certain disclosure statements must be provided to a purchaser before a contract of sale is signed. This document is commonly referred to as the vendor’s statement.

These disclosure statements are included in the vendor’s statement in the form of certificates provided by the relevant statutory authority.

Information provided to the purchaser about the property includes zoning, local government controls, council and water rates information and any restrictions on the use of land e.g. covenants, easements etc. 

If one or more of these disclosure statements are missing or inaccurate this can give rise to a purchaser rescinding the contract prior to settlement.

On many occasions I have viewed vendor’s statements that have omitted information certificates from statutory authorities. The lawyer or conveyancer has not properly prepared the statement.This has resulted in the vendor’s disclosure obligations not being fulfilled according to the Act.

Also, some buyers will not have the contract and vendor’s statement checked prior to it becoming unconditional. This could effect the buyer's desired use of the land if there is something unfavourable in the vendor's statement.

Even if the purchaser instructs a lawyer or conveyancer to examine the contract and vendor’s statement prior to making an offer there still exists serious risks for the purchaser.  

The fact is lawyers and conveyancers never actually view the subject property and therefore will not be aware of the many important factors that can impact on the purchaser’s liability, intended use of the land or quality of lifestyle.

Not all important information is disclosed in the vendor’s statement.  An example of this is the impact of surrounding properties on the subject property or the condition of common areas in the case of an apartment purchase.

My role as a buyers advocate is to provide information to a client so that they make the optimum property purchase; this may be for lifestyle or investment purposes. This can involve sourcing information that has not been included in the vendor’s statement.

I have developed detailed checklists which include assessing a properties orientation, impacts of surrounding properties, renovation potential, etc.

It is important that buyers have the contract of sale carefully examined by a qualified person prior to it becoming unconditional.

It is also important that the many other important factors that cannot be ascertained through checking a contract of sale and vendor’s statement is scrutinized by an independent buyers advocate.
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Value Add

Purchasing an apartment as an investment has become more common over the last 10 years. The main reason for this is that the price of a house in blue chip locations has skyrocketed during this time period.This has resulted in a house purchase being out of reach of many investors.

For an apartment to achieve the optimum capital growth a strict criteria must be adhered to. Being in a primary location and situated in a low density block is paramount to the success of the investment. The apartment blocks that occupy the best locations in Melbourne were mostly built in the 1950's 60’s and 70’s.

These apartments substantially outperform the many high density developments that have recently been built in Melbourne. Because of land availability these high density apartment towers are mostly being built in secondary locations.

As a consequence of being built many years ago many of the apartment blocks that were built in primary locations are looking tired and rundown both internally and externally. Nevertheless they will always be sought after by home buyers and tenants due to their proximity to sought after amenities.

There are some inexpensive ways owners can improve their apartments so as to maximize rental return and capital value. The fact that these apartment blocks are in blue chip locations will result in exceptional return on expenditure.

The following are some relatively inexpensive ways that owners can improve their investment. The three areas owners should concentrate on to obtain maximum return on expenditures are kitchens, bathrooms and external areas.

Kitchen and Bathroom;
 
  • Re-laminate bench tops/cabinet doors and upgrade cabinet handles; this is a lot more cost effective than replacing the entire cabinetry.
  • Upgrade tapware; attractive tapware can be purchased at reasonable prices.
  • Resurface bath tub and floor and wall tiles; this is a lot more cost effective than total replacement and the surface will look brand new.
  Other Improvements;
 
  • Installation of floating timber laminate flooring; at a relatively low cost this will give the apartment a substantial boost.
  • Upgrade lighting; similar to tapware there are attractive yet inexpensive light fittings available that can enhance the feel of rooms.
    Externally;

All external works needs to be organized through the owner’s corporation. These costs are shared by all owners.
 
  • Paint and render brickwork; the bricks used in some of these apartment blocks lack aesthetic appeal e.g. the bright orange brick that was often used on apartment blocks around Melbourne in the 1950’s and 60’s. Rendering the entire building or rendering the front and painting the remainder substantially improves the appearance of the building.
  • Many of these apartment blocks are surrounded by hard ground surfaces. Landscaping can dramatically transform the look of the complex.
  • Bike ownership is on the increase in Melbourne. This has resulted in bicycles being attached to trees, posts etc around the common areas of the apartment complex; this really does look unsightly. The installation of bike racks will solve this problem.
 
I would advise all owners of apartments to make the effort to attend the annual general meeting of the owner’s corporation. Having a voice and being proactive in maintaining and improving the apartment block is something all owners should take seriously. 

Collectively a little effort and a little outlay will result in exponential gains for owners; provided the apartment block is in a blue chip location.
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Market Snapshot

The Melbourne property market has continued on its merry way in 2014. The market turned the corner at the start of 2013 and this has continued into 2014. The degree of price movement has very much been dependent on quality of location and streetscape.

Auction clearance rates throughout the year have continued to hover around the 70% mark.
 
The Reserve Bank of Australia has kept the cash rate at its current level of 2.5%.The nation’s gross domestic product edged up by 1.1% in the June quarter. Australian Bureau of Statistics figures show the annual growth rate is now at 3.5%. Victoria's unemployment rate reached 7 per cent in July, the highest it has been since October 2001. 
 
Melbourne house prices have risen to a new record median of $658,000, with the city's median price up 3.3 per cent over the three months to 30 June.

 The good times will roll on for the remainder of 2014; we will continue to see a buoyant Melbourne market. As always astute asset selection is critical to the success of any property investment.
 

The spring market is fast approaching; this is the traditional selling period in Melbourne. As usual the winter period has seen a scarcity of quality investment stock. Investors can look forward to a greater number of high grade investment opportunities in the coming months.

Continued low interest rates combined with an improving economy will provide higher levels of confidence for investors. This augurs well for the Melbourne market over the next 12 months.

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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

Level 27, 525 Collins Street 
Rialto South Tower
Melbourne, Victoria 3000
Australia

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