Bricks and mortar is a favourite investment of many Australians but there is more to this asset class than houses or units...

Residential or Commercial

Residential and commercial property share similarities such as the ability to generate relatively higher longer term returns - through rental income and the potential for long term capital growth - but there are also quite distinct differences. Let’s take a look at what’s involved.

Residential Property –

• A well-located house or apartment normally delivers regular rental returns, though landlords should budget for around four weeks of vacancy each year to be on the conservative side;
• While the tenant wears some of the property costs related to direct usage such as electricity, it is the landlord who generally pays the majority of costs such as repairs and maintenance, strata, council rates and insurance;
• The upfront costs of residential property can be significant, with stamp duty, legal fees and optional costs such as pre-purchase pest and building inspections, potentially adding about 5% extra onto the property’s purchase price;
• Residential property is generally regarded as a longer term investment. It can take time to recoup upfront costs.

Commercial Property –

• Commercial property includes office buildings, warehouses and shops and is generally regarded as a higher risk asset than residential property. The trade-off is the potential for higher returns;
• On the plus side, under a commercial property lease, it is normally the tenant who wears many of the ongoing costs such as council rates and maintenance;
• The downside is that a commercial property purchase will attract the Goods and Services Tax (GST), as will rent, so be prepared to add 10% onto the cost of a commercial property purchase. 

 
Invest in property indirectly

As an investor, you may be able to track down a property that fits your budget as a direct investor. However many commercial properties, such as large shopping malls, mid-city office blocks and super-sized industrial complexes, are simply beyond the reach of many ordinary investors.
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One solution may be to buy units in a managed investment investing in property. It can be a way to add further diversity to your investment portfolio, even if you have limited capital to invest.
 
Source: www.bt.com.au

Spring has sprung and with it, the traditional season of buying and selling in the real estate market...

Diana Mousina, AMP Capital economist from the Investment Strategy and Dynamic Markets team was interviewed and she explains what's in store for first home buyers and upgraders during the spring of 2017.

Q. How has the property market performed in the first half of the year? 
The national property market has remained surprisingly solid so far this year with strong average price gains year to date of around 6%.

However, this masks a huge variation between cities and states with strong gains in Sydney, Melbourne, Canberra and Hobart, only weak increases in Brisbane and Adelaide, and price declines in Perth and Darwin, as the end of the mining investment boom continues to have an impact.

Unit prices have also proved to be relatively resilient in Sydney and Melbourne despite surging supply.
Lending to first-home buyers collapsed to a record low in 2016 – at just under 13% of total new lending – as strong growth in home prices hit affordability for new entrants into the market.

Since then, first-home buyers have been more active in the market, rising to around 14% of total new lending, which is an improvement but still below the long-term average of 19%.

Q. What is the outlook for property in spring and the second half of 2017?
Higher interest rates for investors and interest-only borrowers, tougher lending standards, the rising supply of units and increasing uncertainty around the outlook for property prices mean we’ll probably see some slowing in property price gains in Sydney and Melbourne.

Unit prices are likely to be the most vulnerable as new supply hits.

By contrast, Canberra and Hobart are likely to continue to benefit as people in Sydney and Melbourne continue to look for more affordable housing, and this may start to have some positive impact on price growth in Brisbane and Perth too.

Property prices in Perth and Darwin are close to bottoming out after significant falls, as the slump in mining investment and its huge negative impact on employment in those cities is close to an end.

But generally, high home prices continue to weigh on first-home buyers and lending to first-home buyers will remain constrained while home prices remain high.

Q. What is the outlook for interest rates and how will this impact on the property market?
The RBA is expected to keep the official cash rate on hold until late 2018.

Solid business conditions, the end of the slump in mining investment and reasonable jobs growth are all against a further cut in interest rates but soft consumer spending, a likely slowing in housing construction, record low wages growth, below trend inflation and a stronger Australian dollar are all factors against a hike.

Lenders may still raise rates for investors and interest-only borrowers, but only modestly, and rates for owner-occupiers with traditional loans are likely to remain steady. So overall, interest rates are unlikely to have much impact on the property market for the remainder of this year and into the first part of next year.

Q. Is it better to buy a house or apartment in the current market?
Outside of Melbourne, Sydney and Brisbane it doesn’t make much difference, but in those cities there’s a huge surge in the supply of apartments on the way and this is likely to result in weakening prices for apartments relative to houses, which are still facing undersupply.

It’s a good time to act for those looking to upsize from a unit to a house before the supply of units really hits and pushes down unit prices relative to house prices.

First-home buyers should take advantage of targeted state government policies including grants and stamp duty concessions to help them get into the market.

Q. Are there any regions or cities buyers should avoid or take advantage of? 
If you can, now’s probably a good time to avoid Sydney and Melbourne which have seen massive price gains over the last five years and are at risk of a period of weakness at some point in the next couple of years.

By contrast, better relative value can be found in Perth and Darwin after several years of price falls. Regional cities beyond the state capital’s benefitting from strong growth prospects, but which have lagged Sydney and Melbourne in home prices gains, are also worth looking at.

Source: www.amp.com.au