The first webinar I’ve conducted for 2015, I interviewed Ng Chee Yong, a professional financial planner who has a 12-years experience in investing in Kuala Lumpur properties. He serves as Director for Match Properties Asia Sdn. Berhad (I’ve posted a comprehensive profile at the bottom of this article). We discussed about buying Perth properties.
If you have already tried investing in Malaysian properties and want to diversify or try new frontiers, 2015 could be the best year for you to start investing in Perth, Western Australia (WA).
Brief Profile: Perth
Sometimes called the “City of Light”, Perth is Western Australia’s capital and largest city. It ranked 9th in Economist Intelligence Unit’s 2014 list of world’s most livable cities.
Being the fourth most populous city in Australia, Perth’s 2 million residents is 20 percent of WA’s 10 million inhabitants (WA houses 10 percent of Australia’s population).
According to SGS Economics and Planning’s data based on 2012-2013, GDP growth rate in Perth is one of only a few major capital cities and states that exceeded Australia’s average GDP growth rate (Perth’s growth rate then was 3.2 percent). Perth’s Average GDP is 5 percent since 2000.
Perth has low unemployment and high demand for real estate (rent included). Proportion of age 25 to 29 year old is higher in Perth compared to other Australian cities.
Perth rental prices have increased annually since 2009, outpacing Sydney’s for most of that period.
Why Invest in Perth?
Aside from the demographic and economic considerations mentioned above, there are 4 major reasons why you should consider investing in Perth:
1. Hedge against rising future prices
2. Consistent cash flow generation
3. Friendly lending environment
4. tax advantage
1. Hedge against Rising Future Prices
Buying a property is a good way to hedge against rising future prices. Moreover, since Perth has a low-supply, high-demand residential real estate market, it could become a lucrative venture.
Prevalent in today’s Australian property market, buying a new property prior to its completion is considered buying an “off-the-plan” project. To prove a point, consider the following charts (as seen on the webinar).
You can see that Perth properties cost only A$50,000 to less than A$100,000 back in the 1970s and in most part of the 1980s. In 2013, median house price climbed to over A$500,000. Based on research, Perth housing prices increase 5 to 7 percent annually, hence buying an off-the-plan property now could help you buy at lower prices and hedge against rising future prices.
The house sales volume for September 2014 remains below the 15-year average house sales volume of 8,100. This indicates a market that is not over-heated.
Dwellings may refer to houses, apartments and other residential property. Total Dwelling Sold has remained below the Average Listing Equilibrium of 12,000 since 2010.
Total Listings (refers to all available dwellings that are put on sale in the market) has increased with a 78.5 percent sales-to-listing ratio. This ratio indicates that nearly 8 out of 10 houses get sold.
Average selling day, or the time it takes to sell a house, was 59 days back in September 2014, compared to nearly 80 days 2 to 5 years ago.
Considering all these pointers, you can see that there’s a healthy and stable real estate market in Perth that can help you hedge and make money.
2. Consistent Cash Flow Generation
If there are only two property investing rules that you need to follow, it is these: first, you need to buy a property below its market price, and second, it is important to find a property that will give you consistent cash flow generation.
One element in achieving consistent cash flow generation is acquiring a good property management service, and Perth offers a robust property management environment. In Perth, some professional property management services are “one-stop shops” and offer services such as tenant database search (you pay A$12 per tenant to help you find quality leads) and tenancy lapse insurance, among others.
The service can even help you in finding a new tenant, screen tenants, renew tenant contracts, evict tenants, or help pay for the water bill, assessment fees, and other fees related to your property. The property manager can do all that for you — while you are at home in Malaysia!
Remember, you should only deal with approved property management services to save yourself from tons of potential headaches. In Australia, it’s illegal to offer such services without a license, otherwise a fake manager would be jailed or fined A$5,000. Contrast this with Malaysia or Penang in particular, where you would come across illegal unlicensed managers or services. Be safe, rather than sorry.
3. Friendly Lending Environment
Australia is very receptive to Asian investors. Perth’s friendly lending environment would help facilitate your property investing in this city. Whether you are young or old, as long as you have a healthy financial status, eligibility criteria in Perth are comprehensive yet workable.
Once you are eligible for a loan, what you can do is find a property below its market price and avail an 80% LVR (loan to Value Ratio, used to represent the ratio of a loan to the purchased asset’s value; in Malaysia, LVR is called MOF or Margin of finance). With this loan structure, you only need to pay 20% upfront, and the tenant would pay for your loan and generate positive cash flow within a year. (Remember that, in the current environment, you could find a tenant in as fast as 2 to 4 weeks).
How good is that? You have the option to avail of up to 30 years of loan tenure even if you are currently 60 years old. You can also have the option to obtain an interest-only loan, which can boost your cash flow position.
In terms of security, your payments would be held in a trust account and is safe from your broker. Malaysian property companies are set up as a Sendirian Berhad (private limited company) where money is accessible to ANY of its umbrella companies. Contrast that to Australia where each property development is held under a trust structure and independent from each company, keeping your money secure.
4. Tax Advantages
As you can see in the list above, there are various tax advantages that could boost your cash flow position even further. For instance, you can deduct several fees like rental management fees, water bill, advertisement costs — even your air ticket! In other words, you can visit your Perth property once a year almost for free! I guess most investor will just go there for vacation.
You would notice that Australian tax rates are very high. The good thing is, you can deduct as much as you could from your annual income, as long as these are eligible expenses.
What are the disadvantages?
All being said, now let’s examine what are the disadvantage of investing oversea, while you are staying in your own country.
You need high capital investment, it is 20% down payment, compared to Malaysia where you can still get 10%-15% down payment deal, or even less.
The income tax is extremely high, and it stays there at the high side, including your taxes on your capital gain. The only exit plan is to refinance, not selling to cash out though.
You also face currency risk. Which direction it will go? I am not sure indeed. Nobody does.
The property is so far away and you don’t get to feel or see it. You can probably just do that once a year.
In summary, with all 4 elements combined, what can you achieve if you buy a Perth property?
- 100% capital appreciation in 10 years.
- At least 9 times cash-on-cash return using the power of leverage
- Consistent rental income generation (Positive cash flow within the first year of completion)
- All these are possible with a hassle-free property management service
Property investing is one of several means whereby you can grow your assets. With low interest rates and high demand, investing in Perth properties could provide you significant returns (rental yield and/or capital gains), but always make sure that you do your research and seek professional advice before you start. If you are interested to get independent financial planner’s advice on this Perth property investment, you can contact me here so I can hook you up with the right person.
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