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Empower Wealth Blog post by Empower Wealth

2016 Property Outlook (Part 3) | Queensland, Australian Capital Territory and South Australia

Here are the other parts of the 2016 Property Outlook:

Part 1: Sydney & Regional NSW
Part 2: Melbourne & Regional VIC
Part 3: Queensland, Australian Capital Territory and South Australia
Part 4: Northern Territory, Western Australia and Tasmania


Transcript:

Ben Kingsley: Today as we move around the markets, we’re in this sort of marketplaces or states where we’re calling it the “watch and act,” aren’t we? What we’re talking about there is the Queensland market, the ACT market and the South Australian market. So let’s start with Brisbane. What are your views, Bryce?

Bryce Holdaway: Brisbane has been – 2015 was a really strong market for us to buy for clients. So we saw that historically, Brisbane has always lagged Sydney, when it has done a really big cycle, ’01 to ’03. There was the last one and then Brisbane had that lag. So it’s just kind of we saw history repeating itself and actually becoming an affordability story where as you know, people don’t sign up for that big sort of home to work, work to home, sort of drone that comes from opening a million dollar average property in Sydney where they go, “There has got to be a better life,” and as we were talking about during the week, in terms of the bigger incomes on offer in Brisbane, they’re not quite there yet. So I think our clients who have been buying there have been buying at the grand level in the first level.

I think that hopefully through 2016, we will see some price movements from that as people start to realise that the Sydney market – you know, that affordability and that lifestyle change will – is appealing as long as they can get a job.

Ben Kingsley: You know, I just didn’t think – we didn’t see the rocket ship.

Bryce Holdaway: No.

Ben Kingsley: And that’s fair and that’s reasonable and the reason why we did – and not that we were expecting it. We went in there due to the affordability story and that opportunity to buy really quality assets close in because we know that the future population forecast of the city is it’s staying. The city has got a very prosperous life ahead of itself.

So with that in mind and with the affordability story behind it, we’re trying to get ahead of the bell curve and so for me, I think the reason why we didn’t see a lot of rubber hitting the road was the economic story. The economy was sluggish. Campbell Newman sort of took a lot of jobs out of the marketplace there in terms of government jobs.

So needed to do that, the – you know, it’s a mining centre. You know, a lot of sort of head offices of some of the mining areas up Northern Queensland are based there. So they had some scaling there. So I think what we are going to see is Brisbane – it’s not – well, it is the poor cousin but it won’t always be that way. I think we will see more growth in 2016 and I would still be picking the eyes out of it. But obviously there is this supply story in that as well.

Bryce Holdaway: Yeah. I think the principle in the whole fly-around is to avoid oversupply potential through house and land and brand new. In Brisbane also, it doesn’t have the security of the massive city to protect it. What’s always interesting about Brisbane is the fact that it is the river city. So unlike Melbourne and Sydney where you had that traditional stigma with being in the West, you don’t necessarily get that in Brisbane because the river runs all the way through.

So the two drivers in Brisbane are proximity to the river, proximity to the city and if the river – and it sort undulates beautifully through the Western suburbs. So you get some amazing real estate in the Western part of Brisbane.

So it’s – for me, I see a lot of people – if we rewind the year, lots of people were saying Brisbane is the place to be in 2015 and I think that’s true.

Ben Kingsley: Yeah.

Bryce Holdaway: But what I think in my observation, I think some interpretation was lost because I saw a lot of people buying too far out too wide and I think that that might expose a few of those investors. I personally and professionally prefer to keep as close as I could to the CBD for the reasons we talked about. It’s growing up as a city but it’s not quite Melbourne and Sydney in terms of those jobs. I think the safety of being closer in was something that we focused on heavily.

Ben Kingsley: I agree. I think if you look at it from a demand-supply point of view, and if you look at those city fringe areas of Brisbane, what you saw was really cheap house and land opportunities there. So people were thinking it was a no-brainer. But as you got a little bit closer, those sort of 500,000, 600,000, 700,000, 800,000 little houses that would be 25 kilometres in Melbourne and maybe 50 kilometres in Sydney in terms of affordability were actually there and that are scarce assets.

If people had a choice, they would probably live closer to the city. So we went in there and we’re probably one of two or three companies smart – well, we think smart enough to go into there whilst lots and lots were sort of playing in those other areas.

Now if their wage growth doesn’t come, well, it’s certainly not going to come for the lower socio-demographic workers. It’s going to come for the middle and upper management first because guess who middle and upper management give pay rises to. Themselves.

Bryce Holdaway: No.

Ben Kingsley: So – yeah, you better believe that and I justify it somehow. So the reality is that those areas aren’t going to move in my view as quick as the areas closer in purely because of that story of that convenience, lifestyle element and the professional people want to be in with the other sort of groovy people and let’s say you get that sort of liveability score and that growth we’re looking for.

Bryce Holdaway: As you know Ben, it’s always – there’s no point giving someone a dollar to get 30 cents back. Economically, that’s just stupid and so – but that’s the principle behind depreciation. So a lot of people were being seduced into buying in Brisbane because of the depreciation. But if you’re 40K out, in our view, in that market, a little bit too far out.

So moving forward in Brisbane, I am more than ever staying as close as I possibly can, blue-chip Brisbane.

Ben Kingsley: Yeah.

Bryce Holdaway: We’ve even been buying last year two-bedroom flats or apartments in established blocks very close in and Brisbane is not traditionally an apartment city. It’s – if you go to Brisbane, people won’t leave the house. So we were very strategic about the price point that we went into, the sub-400,000. We are getting fantastic yields. We are in the best suburbs. We are in the best streets. We are close to the best amenities.

As that city’s population continues to grow, they’re going to become more and more popular despite the fact that Brisbane, Perth, Adelaide, they’re more house cities than they are sort of Melbourne, Sydney, where we’re quite comfortable in …

Ben Kingsley: I totally agree. I think we’ve done a good summation of Brisbane. Let’s look at quickly Sunshine Coast and Gold Coast. For me, Sunshine Coast, very much what I like about it is the vacancy rates are low, so yield is actually pretty good. So if you want that sort of traditional yield place, so I used to call it regional. So if you’re chasing a bit of yield and you want a better growth, just be really realistic that it will go and then flatten out. So unless they can get bigger industries into those particular areas, it will always sort of be that cyclical market and very easy to predict when it becomes scarce supply, shortage of vacancies and then you’ve got that sort of yield story, the property investors and the owner occupiers start dabbling into it a little bit and you see that value growth and then it stagnates.

Same with the Gold Coast, same type of story. So both beautiful areas from a liveability point of view but we will certainly be looking in those marketplaces this year. So coming back to our whole watch and act, they are in our watch-and-act areas for potential opportunities.

Bryce Holdaway: Yeah. Look, I’ve lived down the Gold Coast and the lifestyle benefits were amazing but I’ve also commuted from the train on the Gold Coast into Brisbane and if you’re at the bottom end or the Southern end of the Gold Coast, it takes an hour and 30 minutes to get in there versus being on the Northern end. You can cut off some of the train.

So for me, the types of assets you’re going to buy in these locations, you still need to keep an eye on the human interest, human behaviour. It’s very strong.

Ben Kingsley: Yeah.

Bryce Holdaway: But it’s the economic activity. Where am I going to get my job from? Where am I going to get my six-figure income from? And do I need to commute to Brisbane? If I do, keep that in mind in terms of the purchase.

Ben Kingsley: Yeah.

Bryce Holdaway: So as you said, it’s on our watch list.

Ben Kingsley: Yeah, yeah, because you get those two-bedroom flats or two-bedroom townhouses and they will rent forever because there will always be that young person looking to sort of travel around and settle in into a surf holiday or whatever.

So they will always be fairly well-occupied unless there’s mass supply coming in. So be careful where you’re buying from a supply point of view. So expect steady growth but good yield. So if you need cash flow in your strategy and in your portfolio, those are the types of areas you might look.

Bryce Holdaway: Yeah. Mining Queensland, just ignore it.

Ben Kingsley: Yeah.

Bryce Holdaway: I mean there are too many bloodbath stories of people that are in mining towns. So Gladstones and Mackays and we got to be careful about some of those dominated by mining. But if there’s a lifestyle element and mate, that’s your baby up in Cairns, do you like them?

Ben Kingsley: Yeah. Well, the Cairn’s story is agriculture, retail, construction, tourism, right? And when you got a construction boom going on there, the world is a happy place because values go through the roof. That’s what we saw. The Cairn’s story is one of opportunity cost. So you’re basically bottom-feeding in a market that – that effectively the bottom fell out of.

So property prices are what they were in 2010, 2008. So again, you’re cherry-picking the bottom. So it’s a little bit more speculative. I don’t like that word in property. But if you’re going in there, it’s higher risk, but potentially higher reward.

Low Australian dollar. We will start to see the backpackers coming in and their parents will follow them and we’ve got the Chinese dollar for tourism coming in. So medium to long term, there are some pockets of Cairns that I like.

Some – just be careful of your costs around the holiday costs because you can get a ten percent yield which will turn into a five percent net once you pay all your costs. So do your numbers tightly on that particular market. But again, it’s a really watch and act.

Bryce Holdaway: Good yield play with some potential for some upside for growth.

Ben Kingsley: I reckon that wraps up Queensland. Let’s look at the ACT quickly.

Bryce Holdaway: Yeah, interesting, isn’t it? Because after the last change of government, the sentiment shifted. It was out of there. But they’ve got strong incomes and we know that’s a very high driver for property performance. So, you as you like …

Ben Kingsley: I think it’s just being the forgotten child. I mean definitely – we will keep repeating ourselves but high density and medium density apartments have cooked that market. So it absorbs a lot of the rental supply as well. So the thing I’m watching there is if that vacancy rate starts to tighten because I’ve gotten really high disposable income, second highest in the country and I’ve got vacancy rates coming in low, I’ve got capacity for growth with a good yield component to it as well.

So that’s what I’m looking for in a capital city. There has been a little bit of a mini construction boom going on. So I’m sort of trying to understand why it is because Canberra even though it can be cold is a very liveable city. It has got the number one university in Australia. So it has also got that really strong international students coming in and again, with counter terrorism and sort of security and – all of that type of stuff says – it gets a lot of government funding as well.

So if those jobs are available, it’s a pretty reliable and stable market and because it has probably been a little bit on the nose, I’ve got a watch-and-act on that one.

Bryce Holdaway: No shortage of job opportunities in Canberra. So there you go, watch and act from Ben on that one.

Ben Kingsley: Now let’s move into South Australia. So what’s the read on South Australia for you?

Bryce Holdaway: Yeah. Well, I think there are a lot of opportunity in 2016 but I think more than ever, a bit like – you know, again rewinding 12 months ago when we said in Brisbane. You need to be very careful about where you went. I think that’s the story of Adelaide because it has under-performed for so long.

But its economy isn’t charging along in huge sort of momentum and they’ve got lower incomes and therefore lower capacity to pay rentals. So I think the outlook for Adelaide is good in the right areas. But again, I think if people just read the headline and buy there, I think they could get easily burned.

Ben Kingsley: Yeah, I think there’s a lot of – there’s a bit of that in the media now about is Adelaide the next hotspot. I hate that word but the reality is, is markets within markets. So our formula in those types of markets is looking for really quality scarce assets. That’s all you need to say. You find them. They’re only going to get scarcer over time and yeah, you’re playing in a marketplace that I suppose is coming off the bottom and so I think there’s some medium to long term upside in that market. So good buying opportunities, so a watch-and-act for me.

Bryce Holdaway: And the tip for the viewers is don’t bring your Melbourne and Sydney hat and overlay the principles in Adelaide because they don’t care how close they are to the train station because it’s the 15-minute city. They drive wherever they want to be and they don’t worry about parking because if they can’t get a park out the front of where they want to be, they will cut a lap around the block and there will be one available. So don’t overlay your Melbourne and Sydney principles in Adelaide because you will be disappointed.

Ben Kingsley: Yeah. Your demographic principles still apply but where you might have say 500 or 600 suburbs that have a good demographic profile in a Sydney market. You might have 25 or 30 in Adelaide, so it’s very particular about what you’re looking for.

Bryce Holdaway: The interesting thing for Adelaide is they often are the – almost the Irish – why would you go to Adelaide? What are you going to do in Adelaide? But there are lots to do there. It’s important to realise that there are people who live in Adelaide on good incomes.

Now there is a brain drain as you can call it, into the bigger cities. But there are doctors and lawyers and solicitors and people who are in significant incomes who have no desire to move away from Adelaide and they’re the ones that will continue to drive the price.

Ben Kingsley: Yeah. I think with that brain drain that sort of has been occurring for the last 20 years. These people are now – maybe got young kids. They’ve coupled up and they’re thinking why are we – let’s get back into a community that we can have more quality of life. So it doesn’t matter if we have a smaller salary. So, some of that brain attraction comes back into that marketplace. Then again, you’re going to see bigger companies looking to set up there because from an affordability, from a company perspective point of view, it’s actually very cheap to run a company there. You just got to get the right talent to take your business forward.

Bryce Holdaway: It’s actually a really good point you say because it’s a bit like Geelong. You don’t really want to buy a property that has the ideal tenant in the demographic between 18 and 30 because they’ve left and gone to Melbourne. But then they want to come back once they have kids and go closer to mom and dad. That’s the same with Adelaide. If they do move into state for another job opportunity, it’s usually around the time they have their kids. They want to come back. So that’s a little slipstream that you want to avoid in terms of the demographic.

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