During the webinar sharing session I’ve done featuring Dr. Ong Kian Leong, who shared two real cases of his own investment in Melbourne city and also the professional who put this deal together, Lim Lay Ping, we were flooded with many questions that we couldn’t possibly address every single one.
That’s why I’ve decided to put this Q & A section on website here. We’ve compiled the most relevant questions about investing in Melbourne properties by the live attendees. Before you take our advice uncontested, please bear in mind that these are just the panelists’ expert view. You should understand the disclaimer below before you proceed with any investment decisions.
Disclaimer: Nothing on this website should be considered personalized Financial Advice. Although we may answer your general financial questions, we are not licensed under any law to address your particular investment situation.
No communication between you and us should be deemed as personalized Financial Advice. Any investment strategy recommended here should be made only after consulting with your investment advisor & financial planner and only after reviewing the prospectus or financial statements of the company.
1. As foreign non-PR investors, we can only buy off-the-plan properties. Our future purchasers are the local residences and PRs. Between the apartment units and townhouses, which one will attract the local buyers more?
KL: As an effect of urbanisation happening everywhere in the world, apartments will eventually attract more local buyers in all cities. Young couples and retirees are showing increased preference towards high-density housing which provides them the most convenient lifestyle.
LP: That will depend on location and price. In a similar location townhouse may cost more and apartment is more affordable. Buyer with affordability issue is likely to start with apartment. As an investor you may want to have a mix of townhouse and apartment in your portfolio.
2. Townhouses usually come in 2 sizes (generally). Those with narrow width (single car-space porch) and three storey units and the others with wider width (two car-space porch) and probably 2 – 3 storey units. Which type has better return in terms of rental yield and capital appreciation? Which type is preferred by the locals when we need to put it back on to the market?
LP: There are different types of townhouse designs that will appeal to different types of buyers so it’s hard to generalise. Location is important too. You may want to look at the location population profile and past 10 years record to make a decision. Generally for higher priced property the rental yield may be lower.
3. According to the report compiled by CoreLogic RP Data (independent body) published on 21 April 2015 which is very recent, it was pointed out that almost one in five Melbourne City resales made a loss. Melbourne inner city vendors lost a total of A$4.53 million in the last December quarter.
This includes area like Melbourne’s CBD, Carlton, parts of Carlton North, Docklands, East Melbourne, some parts of Flemington, Jolimont, Kensington, Parkville, Southbank and West Melbourne. It also includes parts of North Melbourne, Port Melbourne, South Wharf and South Yarra. This list given by RP Data virtually covers all the area mentioned by Ms. Lim in her presentation. Just wonder what is her take on this?
KL: The latest Pain and Gain report was released on 30 March 2015. Instead of just looking at the “Pain” side, if we compare it with the “Gain” side, we will see a clearer and better picture:
Pain: The median loss for Melbourne City resales in the December quarter was $27,350. With a total of $4,527,759 lost by vendors.
Gain: Those who did profit made a median of $152,000 on their sale, with total gains over the quarter of $108,107,048. Of those who made a profit, 38.9 per cent walked away with at least double what they’d paid for their home. A further 16.8 per cent made a profit of 50-100 per cent and 15.4 per cent pocketed a 25-50 per cent profit.
The report in fact shows fewer homeowners made a loss when they sold their home in the December quarter last year in Australia. Just 5.6 per cent took a hit on their sale, compared to 6.7 per cent the previous quarter and 6 per cent at the same time the year before.
Although Melbourne City had the highest proportion of loss-making sales at 17.3 per cent, CoreLogic RP Data research analyst Cameron Kusher said Melbourne was one of the strongest capital city markets in the nation and regional Victoria had also outperformed other regional areas, with just 8.1 per cent of resales making a loss.
Reason for the “Pain” in Melbourne resales: The report showed those who held their homes for three to five years were the most likely to wear a loss at resale, while holding for 15 years or more delivered the best chance of a windfall.
Vendors who made a gross loss on Melbourne inner city sales in the December quarter in general held their properties for a shorter time than their profiteering counterparts. A loss-making vendor held their property for an average 5.6 years, while the 82.7% of profit-making sellers in the same region sold their properties after an average of 10 years of ownership.
Australian government indeed very much welcomes short-term (or short-sighted) foreign investors. With these investors who have no intention to hold their properties for long term but for quick profit, developers are able to build more houses to supply to the market (by selling more to foreigners), while Australians are able to buy resale property at a more affordable price (thanks to such foreign investor who have no choice but to sell at loss due to their all sorts of financial problems). So if you are a flipper, better stay away from Australia property market, unless you want to help easing their housing shortage.
LP: KL said it all! I read the report too and it said those buyers who made loss tend to sell too fast. Melbourne growth is gradual and sellers need to consider transaction costs like: agent commission, conveyancing fee, etc too. We always advise that property is a long term investment and we won’t flip property in Melbourne.
4. I believe there are two different market segments. One that is on off-the-plan market and another on the established home market. The overseas investors are driving up the new properties’ market while the local purchasers (local residents and to certain extent PRs) are controlling the “secondary” market of established homes. There is a price gap between the two. While all the data presented by Dr Ong looks impressive but the Australian economy has not been much affected (even by the GFC) for the past 20 years.
Now, the Australians have kept or even lowered their bank rates and the unemployment figure has gone up coupled with a slump in their natural resources market (e.g. look at Perth property market now), it can only suggest that all is not that rosy. Having said that, I believe rental market in Melbourne will still be in a stronger position than our KLCC market. Well, I believe it is good to give a complete picture to the audience as they can gauge their investment on their risk level. It’s their hard-earned money after all.
KL: Exactly. That’s the reason we recommend Melbourne because the city has a highly diversified economy with particular strengths in finance, manufacturing, research, IT, education, logistics, transportation and tourism. Risk level of Melbourne property is relatively low compared to other cities in Australia as it is less sensitive to economic cycles.
In general, although the unemployment rate is still going up, the participation rate is stable. No doubt Australia economy is facing challenges for years to come, the government has been taking action to improve it. Other than cutting interest rate, they are going to pass the Back To Work Act, introduced last year and aimed at giving incentives to businesses that hire young or long-term unemployed people.
More people will prefer to rent than to buy a property if they are trying to look for a job in Melbourne. If we are investing in cash-flow-generating residential properties for long term, it should be rather safe because eventually people still need a place to stay, whether they are jobless or working. The demand for housing is definitely there with increasing population growth in Melbourne.
LP: There’s no perfect economy but some economies are better than others. It’s known that Australian economy is not doing very well but some states are better than others!
5. I have seen the property clock in various cities of Australia, and it pointed that Melbourne is at about 3/4 O’clock and Brisbane at 7 O’clock that rising from the bottom. I think longer term Melbourne is a good bet and better location, but shorter term Brisbane seems to be doing better, what they think?
KL: I will still bet on Melbourne in long run due to its diversified and robust economy mentioned above plus the giant magnet of population growth – No. 1 most liveable city in the world.
LP: We’ve a property in Brisbane for over 10 years and the price was stagnant for the last 5-7 years when prices in Sydney and Melbourne were growing. Thus of course it has some catching up to do. Unless you’re buying at substantially lower price in Brisbane and in good area with no flooding, etc, I still prefer Melbourne personally.
6. What is the exit strategy? Did Lay Ping ever sell her Aus property since she started investing in Aus more than 20 years ago? If she did, how easy to dispose it since her property now could me more than 20 years old!
LP: We sold the first property after the price increased by a little and shortly after we sold the price doubled. From then on we hardly sell 🙂 But it was easy selling the property. If I remember correctly the agent did it by auction.
7. Most of the investors will take the interest only loan, so we are like just working for bank paying interest, and Gov when we sell we have to pay heavy tax. So, what exactly is the strategy here? In Malaysia, the tenant is paying the house for us, and i know if i can rent out for 25 years, the house is free for me. This is not the case for Australia property.
KL: The saving in loan repayment from interest only loan increases monthly cash flow. In return we can accumulate more cash in our pocket instead of letting the money becomes equity of our property. Cash on hand provides more flexibility to us and we can use it to pay down the outstanding loan whenever we wish or reinvest it for better return. So it is still the tenant paying the property for us, unless we ourselves abuse that flexibility and spend the cash away.
On the other hand, instead of selling away a cash-flow-generating rental property, we can refinance the property to cash out some tax-free profit after some years of appreciation. This should be a smarter way to “harvest” the profit without paying heavy tax to the government.
LP: The statement is not totally correct. You have to understand the tax system and do some financial planning and we’ll be able to refer you to a tax accountant.
8. We are also exposed to currency risk, interest risk, the money that we put in doesn’t seems to get a better return that we can get from eg Singapore/Malaysia if the cycle to enter the market is correct. Your thoughts?
KL: Yes. If we look at the fundamental supply and demand of property markets in Singapore, Malaysia and Australia, together with their strength of currencies and credit/financial systems, it won’t be difficult for us to know that the cycle to enter Melbourne market may just be correct with lower currency and interest risks:
1. Oversupply and lower demand in Malaysia and Singapore property markets, respectively.
2. Borrowing from Australia banks operating in Singapore allows borrowers to enjoy lower interest rate than Australian & Malaysian banks (1.2%-2% lower), while allowing the loan currency to be switched between SGD and AUD. (We don’t know such a good credit facility that allows borrowers to manage their currency and interest risks at the same time will be available for how long. You can speak to AAM’s mortgage consultant for more details.)
LP: There’s always currency risk when investing overseas and you can manage that through financing arrangement. A$ is at favourable level now so your deposit exchange risk is reduced. If you’re holding your money in RM the risk of RM depreciating is always there. Rental yield tend to follow interest rate. If interest rate is high less people can afford to buy, they’re more likely to rent so rental yield tend to catch up with increased interest rate.
9. May I know which bank you used for your recent house loan in Melbourne? Which Aus bank in Singapore?
KL: NAB & Westpac in Singapore.
10. Anyway to get 100% loan? How can we borrow more than 80%?
KL: We can consider other alternatives to finance the down payment. For example, refinancing our other properties. But please make sure you are able to manage the risk when you borrow more. One of the way is to keep the total monthly repayments below 60% of monthly rental income. This is to give enough buffer to interest rate hike should interest rate increase by double.
11. I understand that Ritz Carlton is coming soon near the Southern Cross Station (CBD area). Is it worth investing considering high density + post code 3000 vs. branded units?
LP: Some banks may not like postcode 3000 and that may affect financing. You did not provide enough information for us to comment but I would prefer property that can appeal to a larger group of audience. In Singapore the prices of luxury property got hit the most during current downturn.
12. Maintenance fees are around how much per sf or sm?
LP: That depends on the project.
13. Are all the properties come with furnish?
LP: Yes, the non-moveable items are there. Tenant tends to bring their own furniture.
14. What do you think of west side property? such as maid stone?
LP: Townhouse? You have to look at the overall offer.
15. How much is the tax rate for rental income from properties there?
KL: Non-resident’s rental income is subject to individual income tax rate. Amount below $80,000 is 32.5%. Amount between $80,001 and$180,000 is 37%, $180,001 and above is 45%. In most cases taxable income can be reduced to loss position by deductibles like interest, building & furniture depreciations, travel expenses, maintenance costs, etc. Such losses can be brought forward to the following years for future deduction.
However, please consult professional tax consultant for details of deductibles and other tax issues. You can go to the following website to find out more details about individual income tax rate.
LP: There’s usually no tax on rental income if you use maximum financing and claim depreciation.
16. For foreigners, Is there any complexity when selling/disposing the properties? Is there something similar to RPGT like Malaysia?
KL: No. There is no separate property gain tax. But the capital gain is taxable under individual income tax rate as above. Losses brought forward from the same and other properties can be used to reduce the taxable capital gain. Again, please consult professional tax consultant for all tax issues. AAM has a network of professionals providing free consultation to foreign investors in taxation, legal, mortgage, property management, etc.
LP: There’s no difference between local and foreigner selling their Australian property.