Valid Questions from a South African Investor looking at Australia.

Private Property South Africa
Scott Picken

Below were questions from a South African Investor, who has bought in Australia and was looking for a second property. He asked a number of questions in Afrikaans (translated in italics) and the answers are in bold.

Soos jy weet, wou ek 'n tweede eiendom in Australië bekom. As you know I wanted to buy a second property in Oz.

As gevolg van die rentekoers stygingsmoet 'n mens $37000 oor 5 jaar by die prys voeg, Due to the increase in interest rates one needs to add 37000 AUD over 5 years to the price. Die basisprys is ook ongeveer $100 000 meer as wat ek betaal het vir ongeveer dieselfde grote eiendom. The basic price is approximately 100 000 AUD more than that which I paid one year ago for more or less the same size of property. Die geskatte huur is ongeveer dieselfde as wat ek my ander eiendom kan kry.The anticipated rent is more or less the same than that which I can get at my existing property. Dit is nog 'n redelike belegging,It is still a reasonable investment maar nie meer 'n aantreklike belegging nie.but no longer an attractive investment. Investec sê die eiendoms"bubble" moet nog kom in Australië.Investec says the property bubble is yet to arrive in Oz. Die risiko verhoog.The risk is higher. 'n Mens is bekommerd oor die veranderde weerspatrone wat Australië as 'n land armer One is worried about the changing weather patterns which is making Oz poorer as a country maak met kleiner verbruikersbesteding.with less consumer spending as a result. Die risiko het dus gestyg en die beleggingspotensiaal het eintlik baie verswak The risk has thus increased and the investment potential has weakened considerably.- dit moet eintlik anders om gewees het it should have been the other way around - 'n mens weet ook nie wat die rentekoerse verder gaan maak nie one also does not know what the interest rates are going to do - dit het bykans 2% gestyg vandat ons die eerste keer na hierdie transaksies gekyk het. they have risen by almost 2%

There are many things which need to be taken into account here. Firstly the Australian property market is very regional. His first property was in Doreen, Melbourne and these properties are now valued between $410 000 and $420 000, rising $50 000 to $60 000 in a year. Melbourne was the best performing market last year and has seen substantial increase in price due to the affordability, but also due to the lack of supply vs the demand. In comparison, Brisbane has always been more expensive than Melbourne due to the land being more of a premium. The price of the house is exactly the same, it is the land which is more expensive. It was due to this that Brisbane did not rise as quickly as Melbourne last year, due to affordability. However the regional analysis of the property market is very important. At the moment I would not invest in Melbourne as it has had a very strong run and the yields have not kept up. On the other hand Brisbane, with the floods, have lost 20 000 homes and this has had a substantial impact of the dichotomy between supply and demand. It will take years for this to be resolved and this has created very strong pressure on price rises and also the rental yields. At the moment, the Brisbane market has the strongest fundamentals for growth in Australia.

With regards to interest rates the long term band for interest rates is between 7% and 8%. At the moment it is sitting at 7.25%. To avoid the Global Financial Crisis the Australian Reserve Bank dropped interest rates 66% from 8.75% to 3% in the space of 4 months. This had the desired effect and the market stabilised, however it was the lowest interest rates ever. In 2009, the Australian market was the only market to grow positively in the G20 countries and grew by 8.6%. Once it stabilised they then experienced very strong growth due to the interest rates and they have actually raised them 9 times by 0.25% since then, trying to cool the market. It has had the desired effect and interest rates are now within the long term band again. Please contact me on scott@ipsinvest.com to receive the research on the market at the moment. This gives you a very balanced view on the market and the future outcomes.

With regards to the price increase due to interest rates rising I don’t really understand this. The reason being that the long term trend – 100 years – is that the yields track interest rates. So while interest rates are rising so are rents and therefore they tend to balance each other out. Obviously the rents take some time to normalise when the interest rates have increased, but we have seen this happening over the last year.

Finally with regards to the Australian economy. It was the only G20 country to have positive growth through the Global Financial Crisis, and went into the crisis with a fiscal surplus. They used this money to sustain the economy, but unlike the UK, Europe and USA, they do not have huge debt at the moment. Sure the weather patterns have caused problems, but this has actually been further enhanced the fundamentals of supply and demand in Brisbane, but also in other areas of the country as there is a finite number of artisans. The long term potential for the Australian economy is strong with its location to China and the fact that it is a resources based economy. This is highlighted in the strength of the currency. I also think it is important to note that over 2 million people try to move to Australia every year and only 170 000 roughly get accepted. There are only 2 ways in – you have skills they want or money. Due to this the population and the economy just goes from strength to strength.

With regards to Investec’s view point, I think the important component is two things:

  1. What are they basing the crash on? The crash in USA happened due to reckless lending and a massive oversupply. In Australia the 4 major banks are within the top 15 in the world according to the IMF. They were very cautious in their lending and thus have not got themselves into the financial crisis that other countries have.

  2. Secondly there is a long term trend where supply cannot keep up with demand.

The concern is Australia is affordability, as prices are rising and more and more Australians are battling to buy their own home. The trend is moving towards Europe where 70% of people actually rent. At the moment in Australia, 65% of people own their homes, but they believe in the next 20 years this will be roughly 50%. These are all positive signs for sophisticated investors as they understand that this will improve their incomes on their properties, which are the most important component of any investment.

At the end of the day with any investment one needs to consider the investment and the long term trends. I believe the important trends are:

  1. 9% capital growth year on year for the last 100 years

  2. 5% yields with 5% escalation year on year for the last 10 years

  3. Rand devaluation of 6.9% year on year for the last 20 years.__

Oor 5 jaar gaan ek miskien sê jy was lekker "stupid" om nie te koop nie, maar met die lig wat ek nou het, moet ek miskien hierdie geleentheid by my laat verbygaan. As ek 'n jaar gelede geweet het wat ek nou weet, sou ek ook waarskynlik nie belê het nie en dit het niks met die konsep te doen nie - dit het met die ekonomie te doen.

Ek wil nog in die buiteland belê, maar die Cypres tipe belegging waardeur ek jou leer ken het, is waarin ek mag belangstel. Burgerskap begin vir my al meer aanloklik lyk. Ek weet nie hoe jy op die eiendomme afkom nie, maar as jy inligting het sal ek graag daaarna wil kyk - hoe lyk die ou oosbloklande?. Miskien in lande wat deur die eiendoms"bubble" is? He is still interested in citizenship opportunities and asks about the old Eastblock countries that have now come through the bubble.

I don’t understand the question properly, but I think that South Africa is an emerging economy and I don’t understand why people take their money out of South Africa and invest in another emerging economy. In Cyprus, Bulgaria, Croatia, Hungary, etc there was tremendous growth with the British and the Irish investing heavily. At one point in Bulgaria, 40% of all purchases were from British and Irish investors. This is not sustainable, and unfortunately as these investors got into trouble in their home countries, they have tried to get out of these European investments, with heavy consequences to the market. If you are looking for growth in a emerging market, there is far more opportunity, strong fundamentals and a market you understand in South Africa.

I think there are 2 important considerations:

  1. When investing offshore you need to invest in a first world economy which provides you with Wealth preservation, a plan B and peace of mind.

  2. With regards to citizenship I don’t think that it is wise to try and buy property to get citizenship. An example of this is Malta where many people invested top get citizenship and in the last month they revoked all citizenship. It is far better to concentrate on the investment and this will enable citizenship. As an example of this in Australia is if you have a Business Visa you need to invest $250 000 and if you purchase two properties and invest more than $250 000 then this will help you with getting Australian citizenship.

If there is anything else I can assist with, please let me know.

Thanks

Scott Picken

IPS CEO

scott@ipsinvest.com

www.ipsinvest.com

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