Brisbane apartment sold 27.6%loss

FINANCIAL REVIEW
Brisbane apartment sold for 27.6pc loss; a sign of things to come?
Jun 26, 4:31 PM
Chinese mainland investors Lielin Zheng and Tang Zheng have just had a taste of Australia’s bitter sweet residential property market.

The Shanghai residents bought a brand new 79 square metre residence off-the-plan in Lendlease’s The Green high rise development in Brisbane for $535,000 in 2013.

The development was sold out. Then Lendlease Australia chief executive Mark Menhinnitt said people were “embracing the opportunity to be part of Lendlease’s first inner Brisbane mixed-use development.”

Dozens of cranes littered the skyline in Brisbane back then. Interest rates were coming down, money was flowing out of China and foreigners were not getting hit with big upfront taxes as they are now.

The Green was completed in 2015 to a high quality finish living up to Lendlease’s reputation.

But fast forward less than three years and the two Chinese investors have just sold their apartment for a loss. A big loss. One of the biggest the market has seen.

The apartment has been purchased by a local for just $387,000. That is a 27.6 per cent loss for Lielin Zheng and Tang Zheng before stamp duty and other costs, not to mention time and effort.

And think of the economic cost – if they had bought Lendlease shares instead of an apartment that year they would have made a 136 per cent gain, so the total economic cost has been 163 per cent.

While the motive of those Chinese investors’ decision to sell at such a huge loss is not known, the transaction is likely to have consequences for the market.

‘Brisbane the most challenging’
It is also why Lendlease – easily one of the top three apartment developers in Brisbane – is bracing itself.

In February last year Lendlease said its buyers could be broken down into 56 per cent local, 21 per cent from China and 23 per cent from other offshore locations.

Earlier this month, Kylie Rampa, the company’s Property Australia division head, said as much.

“Brisbane is the most challenging inner-city apartment market in the country,” Ms Rampa said during the presentation.

“Inevitably there will be a rise in defaults in this market over the short term. We are working through our relatively small exposure at our RNA projects in Brisbane, including identifying potential alternate buyers, or holding the residual units for a period and renting them out.”

It is not just Lendlease that thinks this. Place Advisory which surveys a host of industry participants has revealed that only 39 per cent of respondents thought the Brisbane property market had improved over the previous 12 months – this is down from 79 per cent in 2014, and 69 per cent in 2015 when the Chinese saw their Lendlease apartment completed.

With domestic banks tightening up on credit to foreigners and foreign purchasers stepping out of the market (the Foreign Investment Review Board indicated the Chinese have halved their purchases) there is likely to be some defaults. And where there are defaults there are discounts.

So far Corelogic which collects the data on all sales has shown that Brisbane apartments have fallen an annualised -0.3 per cent – which is about the same as Sydney apartments.

Although, the difference is that in the year to date Sydney apartments are down -1.2 per cent while in Brisbane they are treading water at 0.7 per cent.

But the risk is there and it’s no surprise that the local bank – Bank of Queensland – is taking a more cautious approach in the market.

“BOQ does continue to have an appetite for apartment/unit lending in Brisbane, and continues to support funding of new purchases of apartments and units. However with the recognised potential for an oversupply in the Brisbane market and future pressure on unit prices and reduced rental yields, BOQ does have a reduced lending criteria in certain postcodes and property types,” a bank spokeswoman said.

And while many might see this as an opportunity to jump into the market – there are now bus tours where you can shop for cheap apartments – remember there is always a risk you can cut yourself catching a falling knife.

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BIS suggests Brisbane is expected to see the greatest upside to house prices over the next few years due to Queensland’s net interstate migration increasing.

The slowdown in house price growth that emerged through 2017/18 is expected to continue into the 2019 financial year, according to leading industry analyst and economic forecaster, BIS Oxford Economics.

BIS believes house prices in Melbourne will tread water through to 2020/21, rising below the pace of inflation.

They suggest that one of the biggest factors in the lack of median house price growth is the new supply which is continuing to rise.

They are forecasting just a one per cent per year increase in the median house price, before an emerging downturn in new dwelling construction results in the city’s deficiency starting to trend upwards by 2020/21, which in turn will see a modest pick up in price growth.

A six per cent growth in the median house price in the three years to June 2021 is what BIS is forecasting.

The median house price soared 65 per cent over the five years to June 2017, with a further growth of two per cent in the six months to December 2017, before a 0.2 per cent drop in the first half of 2018.

Population growth and new dwelling supply have been cited as the biggest drivers in the median increase.

Investors drove the strength of the market in Melbourne, although not to the same extent as in Sydney.

Loans to owner-occupiers in Victoria were also at record levels in the year to March 2018, which has helped to offset the weakening investor demand. Consequently, the house prices in Melbourne have held up better in 2017/18 compared to the decline in Sydney.

Sydney’s median house price is forecast to still be lower than its June 2017 peak by 2021.

The weaker investor demand is coinciding with rising supply and an erosion of the city’s dwelling deficiency, which has alleviated pressure on prices.

Although the market is expected to remain in undersupply, the drop in investor demand is expected to override the undersupply of dwellings, which in turn is forecast to result in modest price declines.

Angie Zigomanis, BIS Oxford Economics senior manager, said more downside is forecast for Sydney.

“In New South Wales and Victoria in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets respectively, the decline in investor activity has impacted price growth,” said Zigomanis.

“More downside is forecast for Sydney as it has had a much greater dependence on investors through the most recent upturn.”

“Similarly, greater downside is expected in the unit market, which is more reliant on the investor market to drive sales and price growth.

“Without the same level of investors and without the same growth in new supply, the detached housing market should hold up better compared to units.”

BIS suggests Brisbane is expected to see the greatest upside to house prices over the next few years due to Queensland’s net interstate migration increasing.

Price rises are expected to be modest over the next two years, however, BIS see a price growth acceleration in 2021.

Perth and Darwin have bottomed out, and any recovery in prices will be a slow grind.

Excess stock, low population growth and weak economic and employment growth are the biggest drivers, suggests BIS.

They find a similar story in Adelaide, with a subdued economic environment and limited population growth also having a dampening effect on prices.

Hobart and Canberra are expected to continue their strong growth in 2018/19.

The lack of supply in Hobart is continuing to drive their price growth upwards.

Price growth in Canberra began to slow in 2017/18, but BIS expects that, due to the relatively high incomes in the capital, there will be further house price growth over the next two years.

Both markets are expected to decelerate through to 2020/21 as new dwelling supply rises and affordability becomes more strained.

Zigomanis says that with the banks tightening the screws on investors, the increased restrictions on their borrowing capacity have reduced the likelihood of investors bidding up prices.

This has caused all markets, with the exception of Hobart, to record a slowdown in price growth performance over 2017/18.

Notably, after experiencing strong gains since 2012/13, house price growth is on track to have recorded a negative number in Sydney and Melbourne through the year.

Both these markets benefited most from booming investor demand, and the tightening credit conditions are now having an impact.

However, the prospect for a major correction will be mitigated by low interest rates and a relatively stable, albeit subdued, economic environment.

Very strong population growth nationally is also underpinning occupancy, which in turn should help investors generate rental income, albeit perhaps at a discounted rate in some cities.

This will prevent excessive forced sales coming to the market to drive down prices.

“Supply is running at record levels, having risen above 200,000 dwelling completions per annum in 2015/16, and expected to stay above this level through to 2018/19,” said Zigomanis.

“Demand has also risen, with population growth expected to exceed 400,000 persons in 2017/18, its highest level since the peak in net overseas migration in 2008/09, although this will still not be sufficient to meet supply.”

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‘Broke’ agents leaving Purplebricks in droves

“Broke” real estate agents are quitting British disrupter Purplebricks in droves as the fixed-fee agency’s low-margin, high-turnover business struggles to achieve enough sales amid a slowing Australian housing market.

Research by The Australian Financial Review found at least 27 agents had quit Purplebricks Australia since March with overall agent numbers now down to 88 from 105 reported by the company in October when it filed its British interim results.

Purplebricks territory owners (franchisees) and agents, who spoke to the Financial Review, said they were struggling to make a living and were preparing exit paths after the $100,000 to $180,000-a-year salaries they were told they could earn failed to materialise.

Employment contracts seen by the Financial Review show Australian agents earn just over $1000 out of the $5000 to $6000 upfront fee vendors pay when they list with the Purplebricks.

The Australian Financial Review reported that “The concept is brilliant, but the business model is wrong for Australia,” said former Purplebricks Newcastle agent Steve Bashford, who quit in May.

“There is a big difference between what they promised us and what we achieved.”

“There’s no money in it. The business model is flawed,” said a current franchisee.

“I’ve sold 50 properties in 18 months and I’m broke,” said another agent who recently quit.

Purplebricks Australia CEO Ryan Dinsdale told the Financial Review 16 agents had left since March, but said some were still working for franchisees as “sales assistants”. He said more than 80 per cent of agents were earning a “good income”.

“It’s a new model in Australia with a new way of doing things so it won’t suit everyone,”

Mr Dinsdale said. “We are really pleased with how the business in Australia is going.”

He confirmed franchisees and agents sometimes had to contribute to the cost of customer refunds because there was a “shared responsibility to provide exceptional service”.

Purplebricks a flawed model

A former Purplebricks agent told the Financial Review he was expected to list 10 new properties every month and convert 40 per cent of appraisals into instructions.

“The company cares only for listings and is pushing staff to do what they have to [get them],” said the ex-agent.

However, with homes sales slowing and the property market weakening, many Purplebricks agents now have a backlog of listings as unsold properties are carried over from one month to the next.

In an analyst piece in 2016 UBS’s Mark Fielding and Heidi Richardson emphasised how crucial the successful recruitment and retention of local property experts were for the Purplebricks model.

“We see risks in the rapid expansion of PurpleBricks, as the model has proved successful to date, but is untested at a bigger scale. We estimate that a local property expert at PurpleBricks needs to sell three times as many properties as an average estate agent branch sells in order to achieve claimed salary levels, and a typical branch would have at least four employees – suggesting that an LPE could be selling 12 times as many properties as a typical sales agent.”

And this is where the problem starts to get out of hand. In Australia agents are finding it harder to sell property with falling prices and lower volumes. The average value of property transactions in November 2016 – when PurpleBricks was in full flight – was about $1.35 billion a week, according to Domain. But that has fallen to around $500 million per week now.

When selling is harder and agents can’t move a certain amount of stock they end up being barred from taking on more listings under PurpleBricks. That presents a problem for PurpleBricks which gets its payment upfront from listings.

Equities analysts at Jefferies, Anthony Codling and Sam Cullen also raised early concerns.

“For us the arithmetic for PurpleBricks still does not add up.

“The model appears to reward listings over sales, but we believe that sales rather than listings will underpin the value of the shares and that costs will need to increase in order to increase sales.” 

Misleading customers

Earlier this month, WA Today reported that REIWA — WA’s peak real estate body — has called for an investigation into the conduct of competitor Purplebricks after claiming the business “misleads” customers by implying they do all the work of real estate agents, but without commission.

Real Estate Industry WA president Hayden Groves said Purplebricks was overselling itself to potential Perth customers.

“What we were seeing is that Purplebricks has been advertising for a long time comparing themselves with regular real estate agents … the reality is it is quite different,” he said.

“I think that what’s deceptive about their advertising is that they’re claiming to be proper real estate agents, and that goes to the heart of it.

“They are not acting like a professional agent should be doing in terms of seeing the transaction through to settlement, ensuring they’re getting the best price for their client and ensuring that they are promoting the property.

“Purplebricks are simply not delivering that service. They’re advertising they’re proper agents and they’re doing everything else that a proper agent does. It’s not the same model, it’s as simple as that.

“That’s fine to have different model or methodology – we welcome them in that regard – but not to claim they do the same job as us.”

Mr Groves said the upfront fee model meant Purplebricks area experts were not motivated to sell properties, but win listings.

“I think a real estate sales person should be remunerated upon discharging their responsibility which is to actually facilitate the sale of the property in a professional way,” Mr Groves said.

“If you don’t sell it you shouldn’t get paid. Purplebricks is getting paid whether they sell it or not.”

“We would like Purplebricks to be held to account for the false and misleading advertising campaigns that they have been running on television and other areas. We would like that to cease.”

Pressure on profit

In its last financial results filed with the regulator PurpleBricks showed it had made a $5.1 million loss in Australia.

The company intends to announce its final results for the year ending April 30 on July 5.

The company is expecting that for the year it will report group revenues around 5 per cent behind consensus of £98 million “with the consequential impact on the operating profit line reflecting the operational gearing in the Company’s business model”.

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Queensland Budget 2018: real estate changes

The Queensland Government recently delivered the budget for 2018.  Here’s what you need to know:

First Home Owner’s Grant 

The Queensland First Home Owner’s Grant has been extended for a further 12 months.

However, the value of the First Home Owner’s Grant will be reduced to $15,000 (down from $20,000) from 1 July 2018. Eligibility requirements remain the same.

Contracts entered into before 30 June 2018 may still be eligible for the $20,000 First Home Owner’s Grant. Please feel free to contact us to discuss whether your clients’ transactions qualify.

Additional Foreign Acquirer Duty (“AFAD”)

From 1 July 2018, AFAD will increase from 3% to 7%.

AFAD must be paid by foreign individuals, corporations and trusts in addition to ordinary transfer duty.

If you’re concerned that a party to a Contract may be a characterised as a foreign entity for the purposes of calculating AFAD, please contact us. We’re happy to help you determine whether AFAD applies to your clients’ transactions.

Land Tax

Property owners with holdings of $10 million or more will be liable for an additional 0.5% in Queensland Land Tax from 1 July 2018.

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Be sure to keep an eye on Queensland property prices as it’s confirmed that interstate migration has hit an all-time high for the sunshine state.

The Australian Bureau of Statistics shows that the net interstate migration is the highest it has been in 8 years and doesn’t appear to be slowing down.

The Sunshine Coast was the strongest performing regional housing market in Queensland in September, with home values rising 6.6 per cent.

Queensland Premier Annastacia Palaszczuk pointed towards her government’s marketing campaign in other states promoting Queensland as an attractive destination to relocate to, along with the added benefits of lower taxes and house prices to take advantage of.

“It’s a resounding vote of confidence again as more and more people are continuing to find our state an attractive destination to live, work and raise their families,” Ms Palaszczuk said.

There also appears to be substantial infrastructure plans taking place including construction of the Ipswich Motorway which will certainly ease the pain of commuters getting to work, and we all know what convenience can do to the price of a property.

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Not so Purple

Purple Bricks is back under the microscope, as the Real Estate Institute of Western Australia (REIWA) calls for more investigation.

According to Purple Bricks CEO Michael Bruce, their company “takes great local property experts, licensed real estate agents, and gives them the tools in order to provide a first-class service for customers.”

However, REIWA president Hayden Groves has a different opinion. REIWA has taken the position that Purple Bricks’ business model misleads customers.

While apparently he did not use the exact words “not real agents,” that is certainly the impression we got from his statements:

“What we were seeing is that Purple Bricks has been advertising for a long time comparing themselves with regular real estate agents … the reality is it is quite different.

“I think that what’s deceptive about their advertising is that they’re claiming to be proper real estate agents, and that goes to the heart of it.

“They are not acting like a professional agent should be doing in terms of seeing the transaction through to settlement, ensuring they’re getting the best price for their client and ensuring that they are promoting the property.

“Purple Bricks are simply not delivering that service.

“They’re advertising they’re proper agents and they’re doing everything else that a proper agent does.

“It’s not the same model, it’s as simple as that.

“That’s fine to have different model or methodology – we welcome them in that regard – but not to claim they do the same job as us.”

Mr Groves said the flat up-front fee model does not motivate them to sell properties, but to merely gain listings.

“I think a real estate sales person should be remunerated upon discharging their responsibility which is to actually facilitate the sale of the property in a professional way.

“If you don’t sell it you shouldn’t get paid. Purple Bricks is getting paid whether they sell it or not.

“We would like Purple Bricks to be held to account for the false and misleading advertising campaigns that they have been running on television and other areas. We would like that to cease.”

In another media statement, Mr Groves said:

“Their agents have no fiduciary interest in ensuring the vendor achieves the best possible result because they’re not renumerated by achieving a result other than listing. This in itself is not a problem other than that’s not made clear to consumers.

“A reliable source in WA tells me Purple Bricks ‘Area Experts’ are not employees of the company, and are required to sign management authorities under their own company, in violation of WA laws unless the ‘Area Expert’ is a holder of an Agent’s Licence; which I am told is often not the case. I am also informed that they exclusively sign up vendors for 12 months. A quick scan of those associated with Purple Bricks in WA reveals almost all of them have received their sales representative registration in 2017. Only four of the list of 22 held a full agent’s licence.

“There is certainly room for Purple Bricks and other models like them in Australia but they need to come clean with the public and cease comparing themselves to proper agents. REIWA calls on our regulators to look at the Purple Bricks’ model and hold them to account; just like they do for proper agents.”

Mr Groves has apparently formally asked the WA Department of Mines, Industry, and Regulation to investigate the company’s conduct.

A spokesman for the department declined to confirm or deny whether an investigation is ongoing.

Chief Executive of Purple Bricks Australia, Ryan Dinsdale, unsurprisingly disagrees.

“REIWA is an association funded by traditional real estate agents and it is understandable that they are nervous about the introduction of new competition.

“We believe there is room for all types of models and we are here to simply offer choice to consumers. Australians are starting to question why they pay tens of thousands of dollars in commissions when they sell their homes.

“It is abundantly clear to our customers the deal we offer them – that’s why we are seeing such demand for our services. The lifeblood of an agent’s business is the positive word-of-mouth that comes from delivering great sale results.”

And indeed, a brief look at review websites does seem to suggest many customers are very happy with their service. But it must also be said that every one of the reviewers this author saw was people whose property sold.

BRICKSMr Dinsdale said the assertion that Purple Bricks employees were not actual real estate agents is not correct. “All agents that work for Purple Bricks are covered by the appropriate licencing, as is required by WA legislation.”

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Brisbane – various articles of interest 12-6-2018

While it’s important that you hold an investment property for the long term to maximise your profits, there will come a time when it makes sense to sell.

And when it comes to selling, timing is everything. Ideally, you should be able to hold on to your investment property until such a time when it’s most conducive to sell.

That time is when:

  • The market is approaching its peak in terms of price growth
  • You want to consolidate your portfolio
  • The property is underperforming and you want to move your capital to better investments
  • You’re leaving your job and need the cash flow to fund your lifestyle
  • You’re facing financial difficulty and possible bankruptcy

When you’ve held your investment property for the past five years and haven’t seen significant capital growth, you’re essentially holding a dud property. In this case, you have to dump it. There are plenty of other markets where properties are growing dramatically.

You should also consider selling when the long-term demand in your market is declining or showing signs of slowing demand.

For example, if you bought in a regional area that’s main industry is mining, where the main employment is about to scale back on the workforce, you have to move fast and sell before the other properties hit the market.

The bottom line is if you do have to sell, the best time to do it is when people are willing to pay more than what your property is worth. Don’t rush to sell, but at the same time don’t hold out for too long. If you do, you may miss out and prices could fall before you’re able to sell.

Whatever your reasons, your aim should be to maximise your selling price. This means you should try and avoid finding yourself in a situation where you’re forced to sell.

Before you sell

Before you stick a for sale sign in the front yard, it’s important to be clear about what you want to achieve as a result of selling.

Here are a few suggested steps for you to consider:

  1. Go over the pros and cons of selling your investment property. Selling is expensive so be clear about why you’re doing it.
  2. Get a valuation to get an idea of how much is your investment property is worth.
  3. Speak to your accountant regarding the capital gains tax implications of selling your property. Since this is an investment property, you will get a 50% discount on the capital gains tax if you have held this property for more than 12 months.
  4. Speak to a property analyst or expert to gauge where your market is at now in the property cycle. You can also do the research on your own by looking at the property values over the past 3-5 years and see how they’ve performed.
Plan your exit before you buy the property

Before you decide to buy a particular property, you need to have a strategy in place on how you exit it when the time comes or when the worst case happens.

For example, be clear about the triggers that would lead you to sell the property. Watch your cash flow like a hawk and keep an eye on your market.

Watch for any signs of changing market fundamentals and act decisively. Don’t let greed rule your head.

Put in place risk mitigation strategies such as hefty buffer in case you lose your job.

Before buying any property, always ask yourself:

  • Can I sell this in a hurry without losing money?
  • Who would buy it off me?

You should feel confident that if the worst case happens, you’re able to sell quickly without any losses.

Most suburbs in Greater Brisbane have a median unit value below $500,000.  Even within the CBD and surrounds median unit values generally sit below $500,000 offering a much more affordable alternative, particularly in the inner city to houses.

Suburbs closest to a capital city GPO with a
median unit value of less than $500,000

2018-05-28-pulseimg1

Rocklea is the closest suburb to the city with a median house value below $500,000 and it is the only suburb below that price point within 10km of the CBD.  Once you move more than 10km from the CBD there are many options under $500,000.

Suburbs closest to a capital city GPO with a
median house value of less than $500,000

2018-05-21-pulseimg1

 

Investment mistake #1. Making a strategy fit an area

Having a strategy is important if you want to succeed as an investor. However, rigidly sticking with the strategy rather than focusing on the result can have costly consequences.

For example, if you’re pursuing a renovate for profit strategy and are looking to invest in Moreton Bay in Queensland, you’re likely to be targeting 30 years old unrenovated homes. But this type of property isn’t what the demographics of that area want. These people have dual income, high-paying jobs. They want a 4-bedroom, 2-bathroom, double lockup garage house. They want a relatively brand new or up to five-years-old property, not a renovated 30 years old property.

Therefore, it’s crucial to really understand the demographics of an area and what’s in demand to ensure you’re buying the right product.

Investment mistake #2. Becoming emotionally attached to an area or property type

It happens to many of us. You come across a property expert extolling the big profit potential of an area and we jump onto the bandwagon.

For example, if an expert recommends Moreton Bay and suggests looking at units or townhouses, you’d probably want to target them too.

So you go into the area having already developed a personal preference towards townhouse or units because you’ve been told of its potential.

But based on a research on the demographics of the area, it shows that a 2-bedroom unit will be a death sentence. The demographics aren’t keen on this type of property. They want relatively new, 4-bedroom, 2-bathroom, double lock up garage.

To ensure you avoid this mistake, look at what’s in demand in the area and understand your potential buyers and renters, not blindly following an expert’s recommendation.

Investment mistake #3. Relying on partial advice

It’s human nature. When it comes down to choosing between paying more for something better and getting a cheaper but lesser version, most of us will opt for the latter.

Although we know instinctively that you get what you pay for, we’re still attracted to the short-term “savings”.

This is especially true with property investment advice.

Unfortunately, trying to save money by relying on cheaper but incomplete advice could cost you more over the long term.

That’s because you end up filling the gaps with your personal preferences, emotions or skills and you’ll get it completely wrong.

If you have to rely on a report or recommendation, make sure that it gives you all the information you need to make an informed investment decision and leave you filling in the blanks.

Investment mistake #4. Following the herd/swarm

There might be safety in numbers, but when it comes to investing in property, more investors in an area doesn’t always spell profits.

Granted that there are benefits of banding together such as the ability to buy at a lower price, there’s equally a huge risk with this strategy.

Joining the herd creates a lot of competition in that market. A lot of investors in an area means higher competition for renters and for buyers when it’s time to sell.

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