June 2012 Newsletter

June 2012 Newsletter

Welcome to our June newsletter

The Reserve Bank of Australia (RBA) this month cut the official cash rate by 25 basis points, the second consecutive rate reduction this year, marking a 0.75 per cent reduction in the cash rate since April.

The RBA’s decision to lower the official cash rate to 3.50 per cent was largely attributed to the continuing European debt crisis and poor consumer sentiment.

“Financial market sentiment has deteriorated over the past month,” RBA Governor Glenn Stevens said.

“Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks.

“[In Australia], both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term,” Mr Stevens said.

Earlier this month, Australian shares hit a six-month low, wiping approximately $23 billion from the share market.

Moreover, recent figures released by business research house RP Data found national house prices fell by 1.4 per cent in May.

RP Data’s national research director, Tim Lawless, said that given the current state of the Australian share market and subdued property prices, the Reserve Bank decision was largely expected.

“Our latest index data showed capital city home values fell by 1.4 per cent over the month of May which is a factor the Reserve Bank would have been conscious of when deliberating their interest rate setting,” Mr Lawless said.

“Such a significant fall over a single month was unexpected considering the cash rate was slashed by 50 basis points in the same month.”

“Not only did home values fall further in May, but we also saw consumer sentiment remain fairly steady, suggesting the May rate cut has had little effect in stimulating consumer confidence and spending.”

HSBC chief economist for Australia and New Zealand, Paul Bloxham, supported the RBA’s decision to cut rates but questioned whether further rate reductions will be necessary.

“We still think that the 150 basis points of RBA rate cuts priced in by the end of the year is too much,” Mr Bloxham said.

“Given our outlook for continued elevated locally-produced inflation and a pick-up in Chinese growth in H2, we expect only one more 25 basis point cut in Q3. We then expect rates to be on hold at 3.2 per cent until mid-2013.”

But not everybody was quick to support the decision.

Residex chief executive John Edwards said he was disappointed with the Reserve Bank and believes smaller rate cuts such as this month’s 25 basis point reduction could prove more detrimental to consumer confidence.

“This can simply work to the negative by further undermining confidence, given the very widespread press about difficult global finances,” Mr Edwards said.

While it appears economists are divided on how the Reserve Bank will move subsequently, there is sufficient evidence to suggest that a rate hike is not on the cards anytime soon – which is good news for borrowers.

If the rate cut is passed on in full by some of the country’s lenders it may be time to consider refinancing your mortgage.

Second, with the property market performing relatively weakly across most sectors, now may very well be a good time to snag yourself a bargain.

If you would like to assess your current mortgage rate or discuss what opportunities are out there for you, give us a call today!

Sincerely, Nick Foale

Some property investment truths

As with any wealth creation strategy, there are no guarantees, but with a clear goal and the right approach, property investment could be your smartest choice

It’s well known – including outside this country – that Australians have a passion for real estate.

Property investment is today the most popular long-term investment strategy in Australia, and you don’t have to look far to see why.

A booming resources and mining sector, tight rental vacancy rates and a growing population continue to ensure there are plenty of opportunities for savvy investors – so long as you know what you are looking for.

You may have heard of ‘Uncle John’? He made a fortune by building his property portfolio and now sits back and reaps the rewards of strong capital growth and rental returns.

But don’t be deceived by Uncle John’s story. Property investment is a long-haul strategy and not something to be undertaken without the proper research, planning and professional advice.

The good old days of guaranteed price growth are all but gone, but that is not to say that creating a profitable portfolio is no longer a powerful wealth creation tool.

With the right approach and strategy, you too can find that gold nugget in the property market.

Building your knowledge and understanding of property as an investment will go a long way towards helping you succeed, while minimising the risks that are inevitably present, based on the steps you take.

Research is the single most important factor in successful property investment and as an investor you will need to know how your prospective market is performing and what opportunities are available.

This is why it pays to seek the advice and assistance of a professional prior to making any investment decisions.

Building a solid investment team should be your first objective. A trusted mortgage broker can assist with funding your dream, while a proven buyer’s agent or real estate professional can help you make the right decision when selecting a property.

With a solid team in place, you will now need to assess the strength of your current financial status. It is also important to factor in any changes that may alter it.

Do you see children on the horizon, are you considering marriage, do you expect to come into some money or are you simply looking for a career (or salary) change?

These life choices can dramatically affect your income and need to be factored in when deciding how much you can afford to borrow and how much you can afford to spend.

Finally, you will need to develop a clear idea of what you wish to achieve from your investment.
Some investors choose to take a long-term approach, purchasing a property based on the prospect of strong capital growth.

Others will opt for a stable cash positive investment, where minimum maintenance costs are required and weekly rental returns outweigh any loan repayment fees.

What many investors fail to realise is that achieving both goals – strong capital growth and a cash positive investment – are possible, provided you have the right approach.

Secrets of commercial success

They might involve the same underlying fundamentals, but don’t be confused – commercial and residential property investment require two very different strategies 

Taking the road less travelled by investing in a commercial property could be a worthwhile move for investors who seek strong capital growth and sizable profits.

With tight vacancy rates and a severe undersupply of commercial real estate in many markets, now could be the time to extend your portfolio into this sector.

But in considering whether to enter the commercial market, you should bear in mind there are significant differences between investing in residential and commercial property of which you need to be aware.

Certainly, many of the ground rules of investing in residential property can be applied in the commercial market. Location, property type and price still remain crucial factors when selecting a commercial property.

The basic economics of supply and demand are also equally important in determining the future prospects of a commercial property investment.

There are, however, also subtle differences.

Tenancy and lease periods
As with residential investment, you will obviously receive rental income from your commercial tenant, but the tenancy period will usually far exceed that commonly found in residential tenancies. This can be advantageous for investors looking to lock in a regular cash flow, but it might mean a longer commitment to your investment is required.

Commercial lessees will also be held accountable for costs of maintenance, rates and repairs of the property – which is sure to please any landlord.

Hidden costs
It is important to note that the purchase of any commercial real estate will be subject to the goods and services tax (GST).

This means that when calculating the cost of your commercial asset you’ll need to be sure to add an extra 10 per cent on top of the purchase price.

Keep in mind though that the additional costs of GST can be claimed back as an ‘input tax credit’ against GST charged on any rental income you may receive.

Securing a loan
Funding your commercial property investment works in much the same way as securing a residential home loan.

You will have access to a wide variety of commercial loans and depending on your financial needs and investment strategy you should be able to choose from variable rate, fixed rate, combination of variable and fixed rate, principal and interest or interest-only loans.

The chief difference is that most lenders will require a 30 per cent deposit before funding your commercial investment.

This is significantly different from the more common 10 per cent deposit requirement associated with purchasing a residential property and something that will be a major influence on your purchasing capacity.

The art of subdivision

Subdividing a larger block of land into two smaller lots can bring in sizeable profits for even the most inexperienced developer

An increasing number of investors are seeing strong returns by subdividing land, and for good reasons.

Subdividing a larger block into two smaller lots can be a very effective and affordable development strategy and a great way to potentially double your returns.

When subdividing a block of land, investors are commonly faced with an important decision and two options: build on the land, or sell it.

Both options each have their pros and cons and you should weigh them up carefully before making a decision.

Either way, you should expect to pay as much as around $15,000 in development costs, and you need to be aware that different properties and property zones will have different rules and regulations surrounding subdivision.

Due diligence – and often perseverance, particularly when it comes to council approvals – will be essential.

Why should I sell?
Subdividing and selling off a smaller block of land will provide you with an immediate cash injection and is a popular strategy precisely for that reason. It is usually most effective in locations where land is scarce and higher density living is common.

The amount you’ll earn from selling the block of land will obviously depend on the size of the lot and its location. But you can expect to turn over a relatively quick profit –plus avoid any continuing costs, such as maintenance.

Why should I build?
Subdividing and selling the block of land will provide short-term benefits; building on the block of land, however, can really open up a raft of longer-term opportunities.

The costs of subdividing and building will obviously increase, as you can expect to pay the initial subdivision and development fees, as well as the cost of building a new property.

But while this might require substantial capital at the outset, you could potentially double your profits.

Holding onto the new property will then provide a longer-term source of income in the form of weekly rental payments.

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