As major property markets softened, investment financing underwent significant changes this year—from unpredictable rate movements to regulatory interventions—ultimately influencing the creation of wealth. Right Property Group’s Steve Waters and Victor Kumar looked back on the ‘year of finance’ and how it shaped the current property market:
Earlier this year, Mr Waters has already foreseen the big shift in finance across the property investment landscape as well as its great effect on investment strategies.
“It was an obvious thing that was going to happen. In fact, the levers were already pulled the year before,” according to him.
Over the past 12 months, acquiring finance for property investment has become harder. As major markets peaked and consequently declined, consumer confidence also eroded.
“Consumer confidence started to ebb away very, very quickly—that's where we are today. This year was all about finance, and it will be next year as well.”
While the decline of major markets such as Sydney and Melbourne is expected to be gradual and continuous through to the near future, Mr Kumar reminded investors that it’s all business as usual as long as they have established a stable stream of cash flow and reliable financial buffers for their portfolio.
Contrary to popular belief, the slowdown in investment is not a result of a lack of opportunities in the market but simply a period of ‘regrouping’ for investors.
Smart investors took their time to analyse the current market and its movements in order to adjust their strategies accordingly and be able to continue creating wealth amid a changing property market.
“Most people were with their accountants in July and August. There was a natural slow down in terms of investment because investors want to sit down with their accountant before they regroup. By September, October and November, there was a surge of property investments,” Mr Kumar said.
“It’s only the types of properties, the strategies that changed. It's no longer, ‘Let's buy something’ but ‘Let's buy something pertinent.’”
Acquiring finance has been arguably the biggest change in the property investment landscape this year, significantly reshaping the market and influencing the way investors craft their wealth-creation strategies.
Where investors were chasing premier properties a couple of years before, they are now looking for more affordable entry points in order to maintain good serviceability. More investors have also been prioritising cash flow over capital growth when selecting properties to purchase.
Moreover, as the markets of Sydney and Melbourne soften, they have become more willing to jump from state to state in order to maximise wealth-creation opportunities across other markets.
According to Mr Kumar: “A lot of people are now chasing the lower entry point and higher yields in different states. Because of the limitation of finance, they've changed their strategy and moved into different types of assets—more affordable, a little bit further out of the city.”
Having said that, the property expert strongly encouraged investors to seek the guidance of property professionals, where appropriate, in order to make the appropriate adjustments to their strategy.
After all, as always, there’s no one strategy that will work across the entire investment landscape. In a changing market, it has become more important to understand the movements of the market and their implication to the portfolio in order to continue achieving growth.
“Go and sit down with broker and map out your options first before you decide for yourself whether should get finance or not,” Mr Kumar said.
Mr Waters explained further: “At the end of the day, it's all about cash flow, both the property's cash flow and the household cash flow. It’s about how well you can manage all of it.”
“People choose strategies for certain reasons. It's about finding that strategy that suits your risk profile and your financial footprint. It should depend on the circumstances of the market as well as the investor.”
Amid a tight lending environment, investors are advised to keep their portfolio sustainable by establishing a steady stream of cash flow through good yields.
At this point in the market cycle, staying ‘safe’ through conservative purchases and safety buffers is critical to investment success, Mr Waters said.
“If you haven't overleveraged yourself by using more capital or getting high loan amounts for your purchases, considering the possibility of rents contracting in today’s rising market, you’re going to be fine.”
“Most people think that rents will stay in line or run parallel to the growth curve, but it’s likely that it won’t. Rents actually contract while growth happens.”
Moreover, investors will do well to diversify their asset base in order to maximise opportunities across different markets.
Most doom-and-gloom headlines highlight the downward trend in Sydney and Melbourne, but the Australian property market goes beyond these two major cities. In fact, through the past 12 months, several less-known suburbs have delivered double-digit growth.
As the property market continues to undergo significant changes in the coming months, investors are encouraged to widen their horizon in order to make the most out of the vast market.
“When you have a market that has done well, like Sydney, and you've been very deliberate in where and how you've purchased it so you don’t over-leverage, different markets will give you the best opportunity to diversify,” Mr Waters concluded.
Tune in to the first episode of the third season of Investing Insights with Right Property Group to learn from the movements of the market in 2018 and successfully shape your investment plan for 2019.