Best Asia Real Estate editor's comments:
Well my crystal ball was working overtime last year when I stuck my neck out and predicted that Australian real estate, in major cities such as in Melbourne, Sydney and Brisbane were going to crash because it didn't make financial sense anymore.
 |
| Lawrence lecturing about Bali real estate market December 2017 |
A market motivated mostly by speculation from foreign buyers is always doomed to crash.
It happened in America in 2007, Singapore five years ago and it even happened in Bali four years ago. Since then prices in most of those areas have come down 20% to 40%.
I always tell investors in real estate here is one sure fire method to decide a property or market is a great investment, a simply to a cash flow projection acid test.
Can you buy a two or three bedroom home or condominium and rent it out for positive cash flow being very conservative about your rental income and occupancy.
If it does like you can in Bali right now where you can buy a $158,000 luxury villa and receive $20-$30,000 a year net income then it makes sense. If it doesn't, stand aside and look for greener pastures such as Bali right now.
Whereas Australia and New Zealand and and Hong Kong which I call "the bitcoin of the real estate industry" are probably beginning to see a topping off or an exponential downturn we are starting to see Bali turn up.
One strong sign of that is our own market in Sanur, Bali where there has not been a Bali Luxury Villa sold in almost 2 years. In just the last two weeks two sold primarily to baby boomers who are gonna retire here as I've been predicting as well.
 |
| Three bedroom, four bath Bali luxury Villa with private 9 m swimming pool on 600 m² of land only $158,000 |
If you want to get in on the second best time to buy Bali real estate this century you better get in now. Don't worry about property ownership because you can obtain 80 year leases, which are 100% legal.
Trust me so long as you can still buy a three bedroom four bathroom Bali Luxury Villa in a great location a few minutes from the beach with private nine meter swimming pool for as little as $158,000. It has a long way to go up with very little risk of going down.
You can start by checking out our huge inventory of the latest great values on Best Asia Real Estate.com or contact me direct and I will customize an investment property for you lawrenceb@ptbali.com
Investors are turning to rental yields to assess the prospects of the property market. Jessica Shapiro
Share on twitterby Jonathan Shapiro
With property prices in the major cities on the slide, investors may turn to a trusted measure of value to consider their investments – the rental yield.
Sluggish rental growth is weakening the income-generating prospects of property, giving buyers another reason to avoid the asset class and potentially forcing prices to fall further.
Such a "de-rating" of residential property is not out of the realm of possibility for Montgomery Investment analyst Andreas Lundberg.
"In a rational market, rental yield should drift higher but don't think it's a rational market," he said.
Mr Lundberg said official data showed property rental yields in Sydney are about 2.7 per cent – well below the long-term average of 4 per cent.
Advertisement
"In an environment where rates are no longer falling and indebtedness is very high, rental yields should become a more important consideration in where you should invest your money," he said.
The rental yield is simply the annual income that can be derived from the property via rents expressed as a percentage of the value of the property.
The fall in rental yields has meant that property buyers are effectively willing to pay a higher price for the same rental income.
Forecasting prices
In the absence of an increase in rents, prices would need to fall if investors wanted a higher yield.
For example, a $1 million property with a weekly rent of $520 generates $27,000 a year in rental income, or a gross yield of 2.7 per cent. If investors demanded a 4 per cent yield and rents remained the same, the property value would need to decline by almost one third to $675,000.
Looking at the rent a property can attract is more important than the income a potential buyer has when forecasting house prices.
Hamish Carlisle, a portfolio manager at Merlon Capital, agrees that price to rent is a "vastly better" measure of value than the commonly cited price-to-income ratio, which compares what people are willing to pay for housing relative to what they earn.
"If you look at the national accounts, there has been a structural increase in the percentage of household income being spent on rent," he said.
"Household preferences have evolved to the point where accommodation is relatively more important and that trend would account at least for part of the increase in the price-to-income ratio."
Mr Carlisle said price-to-rent ratios are about 22 per cent above their post-1990 average, but this was not surprising given low interest rates and inflation.
"If that situation remains intact then it is not a clear and present issue."
So he's not expecting rental yields to rise sharply, given the backdrop.
Bigger concern
He said a bigger concern is that there are supply issues in the property market with not enough land being released and developments being approved in areas where people want to live. That should support a rise in rents.
And higher than average residential property prices should be considered in the context of other asset classes, which appear far more inflated.
"Our view is that there is a bigger issue – yes, residential property is expensive but no more expensive than many other asset classes and if interest rates stay low it's not a disaster."
In fact, he said the price-to-rent ratio for industrial property is around 70 per cent above its post-1990 average and bond prices are around 30 per cent above post-1990 averages.
He said there are also danger signs in private markets and points to the multiples being paid by private equity funds for businesses as a sign of excess.
Listed equities on the other hand appear better value.
"The top-down view is that equities are the 'least-worst' option from a valuation perspective – the price earnings ratio is about its post-1990 average," Mr Carlisle said.
The prospect of normalising rental yields, triggering a de-rating of property prices at a time when rental growth is weak, is one of the reasons Mr Lundberg is a property bear.
He said falling property prices will reduce spending and points to a decline in savings rates as a potential concern.
"Basically people don't have the wealth effect from increasing property prices so they are tapping into their savings. This has to come to a stop when they run out of savings."
Mr Lundberg said he's avoiding the discretionary retailers that he said have relied on the wealth effect from rising property prices and believes markets are under-estimating the probability that the central bank will need to step in at some stage.
"Ladbrokes is offering $2.70 that the next move in the Reserve Bank cash rate would be down, not up. I think that's a pretty good rate."
But not everyone is convinced that rising rental yields are a risk to the property market.
Attractive opportunities
Grant Brits, the former investment banker and Olympic swimmer who founded the Superestate superannuation fund which invests in residential property, said in the long run residential property will deliver good returns.
He said the recent downturn was creating attractive opportunities to deploy funds, and depending on the area and the property they could still earn attractive rental yields.
He said the fund is focused on inner-city properties because there are limits to the new supply that can be created.
"New apartments in these areas will help to alleviate some of the demand. However, at the end of the day we can't unlock more inner-city land," Mr Brits said.
The longer term prospects still favour residential property and he believes Sydney rental yields will remain stable in the short term as new supply is absorbed.
And over the long run net migration and a net increase in supply over demand should result in rental incomes rising.
"When you go beyond the next 24 months the supply pipeline is drier," Mr Brits said.
"Prices and yields not fully efficient. It is a balancing act between new housing and migration. Our population is growing – its undeniable."
No comments:
Post a Comment