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Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.

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Speaker 2: I'm James Kirby.

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Speaker 1: Welcome aboard everybody, and welcome to the Property Outlook show

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Speaker 1: for twenty twenty six. Now we've looked at investment markets

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Speaker 1: generally last week with Mark Jokum and on Friday, I

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Speaker 1: hope you heard the show with Jem Belou on stock

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Speaker 1: opportunities in particular stock picks in on the ASX for

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Speaker 1: the year ahead. That was a very interesting show. Don't

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Speaker 1: miss either of those. Today we're going to look at

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Speaker 1: what's ahead for you as a property investor with Stuart

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Speaker 1: Weams of the pro Solution Private Client Group. Now, folks,

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Speaker 1: last year, just to set the table out if you like,

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Speaker 1: last year across the board, we saw on eight percent

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Speaker 1: rise in house prices across the national market, which is

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Speaker 1: all very well except as any regular listener to the show, no,

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Speaker 1: that is a there's a lot behind those numbers. There

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Speaker 1: is quite enormous diversity actually of risk and opportunity inside

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Speaker 1: those figures. And I know that we have a sector

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Speaker 1: that Stuart likes and he's going to talk about that

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Speaker 1: in a few moments.

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Speaker 3: How are you, Stuart, I'm really well happy year, James,

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Speaker 3: and happy years all listeners.

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Speaker 2: Happy in a year to you. Let's just take a

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Speaker 2: look before we pin.

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Speaker 1: Down where we think there's opportunities in this market. Certainly

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Speaker 1: where there's I think clear value in this market for

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Speaker 1: any investor. And we were talking before the show about

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Speaker 1: the concept of value vis a VI the share market.

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Speaker 1: I think it's I think that the offerings in property marketer,

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Speaker 1: even though people think, you know, house prices are expensive,

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Speaker 1: I think they are outstanding compared to the share market

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Speaker 1: in terms of value. Because if you're a value investor

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Speaker 1: in the share market, I really don't know what on

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Speaker 1: earth you could be doing day by day. I think

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Speaker 1: some of them are actually drifting. Some of the really

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Speaker 1: well known ones are drifting. You know, they're not sticking

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Speaker 1: to their knitting basically because they're exhausted and tired from

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Speaker 1: being beaten around the ears every year.

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Speaker 2: By growth stocks year after year.

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Speaker 1: Still in terms of our local market in terms of property,

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Speaker 1: tell me what I mean issues are for an investor

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Speaker 1: in the year ahead.

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Speaker 3: Well, it's a really interesting market in terms of the

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Speaker 3: distribution of growth, James, and you sided that figure around

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Speaker 3: eight percent last year, which anyone would look at that

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Speaker 3: and go. It's a pretty healthy year, but the variability

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Speaker 3: and distribution of that growth is so stark, and it's

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Speaker 3: kind of a very unique market too. We've got you know,

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Speaker 3: capital cities like Brisbane and Perth going gangbusters. Melbourne is

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Speaker 3: still the major laggard no matter how you measure it.

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Speaker 3: And then it also seems like a two speed market

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Speaker 3: as well. The lower quartile of property is growing much

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Speaker 3: faster than the higher quartile. In fact, in the last

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Speaker 3: according to Coality, in the last quarter of the twenty

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Speaker 3: five calendar year, in fact, the top quart ile in

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Speaker 3: Sydney went backwards and the top call tile in Melbourne

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Speaker 3: was flat.

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Speaker 1: So the top quartile would be the more expensive properties

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Speaker 1: have actually been falling in price in Sydney, that's right.

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Speaker 3: And in Sydney that'd probably be north of two million dollars.

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Speaker 3: In Melbourne it's probably north of a million dollars. But

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Speaker 3: that upper end of the market, yeah, is certainly struggling

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Speaker 3: towards the lower end of the market. So it's a

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Speaker 3: really unique situation. I guess we're getting used to interesstrate settings.

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Speaker 3: I guess there's macro prudential changes in terms of lending

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Speaker 3: appetite from banks.

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Speaker 4: That we'll talk about.

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Speaker 3: There's a lot of moving parts at the moment that

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Speaker 3: are impacting property.

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Speaker 1: So folks, that's basically the big picture of the helicopter

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Speaker 1: picture if you like, softening at the upper end of

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Speaker 1: Sydney and certainly Melbourne markets in recent weeks, the broader

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Speaker 1: regional issue being the smaller cities breath and Adelaide and

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Speaker 1: Brisbane particularly still going very well, Melbourne and Sydney softening,

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Speaker 1: and the first home buyer layer being the hot layer.

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Speaker 1: To what extent is that related to the introduction of

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Speaker 1: I suppose a historical universal first time buyer deal by

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Speaker 1: the government last year where no limits anyone who wants

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Speaker 1: to buy for the first time this market can get

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Speaker 1: a ninety five percent mortgage. You be like, so, what

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Speaker 1: extent did that underpin this hot market at the lower end.

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Speaker 4: Well, I think it's had a material impact.

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Speaker 3: I think everyone you've had on the show has suggested

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Speaker 3: that whilst it can help more first time buyers into

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Speaker 3: the market, it will be stimulatory from a price perspective

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Speaker 3: because it's demand side rather than supply side. The other

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Speaker 3: thing is there's flow on effects from these policies as well.

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Speaker 3: So anyone would have seen this coming, So anyone that

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Speaker 3: was in that price point would have gone, well, I

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Speaker 3: better get in before all the first time buyers, even

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Speaker 3: if they're not first time buyers. But because I know

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Speaker 3: it's going to stimulate prices, So I get there's a

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Speaker 3: kind of a multiplier effect of these policies because it

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Speaker 3: I think it impacts or encourages people that might not

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Speaker 3: be directly impacted by that policy but want to get

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Speaker 3: into that particular price point. And then where growth flows money,

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Speaker 3: where growth goes, money flows. So if people are saying, hey,

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Speaker 3: that sector of the market is moving, then short term thinkers,

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Speaker 3: which is not the right way to approach, of course,

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Speaker 3: but short term thinkers will be encouraged by that and

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Speaker 3: they'll start to think, well, okay, this is more of

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Speaker 3: an attractive sector. Plus, also with the interest rate retric James,

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Speaker 3: of course, we know it can change very quickly, but

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Speaker 3: at the moment it's more leaning towards flat or rising

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Speaker 3: rates in the future, and so rental you can have

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Speaker 3: a bigger impact as well for investors, particularly with the

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Speaker 3: backdrop of much tighter borrowing capacity. So there's a few

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Speaker 3: kind of moving parts that I guess are encouraging more

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Speaker 3: people to buy at the lower end rather than the

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Speaker 3: upper end at the moment.

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Speaker 1: Right, okay, And there has that sense that there's a

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Speaker 1: thing of getting in, getting into the market, getting into

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Speaker 1: the market because suddenly everyone can I mean by that,

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Speaker 1: I mean fifty thousands will allow you, in theiory to

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Speaker 1: get a loan of a million, but also getting in

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Speaker 1: before interest rates left. Now, we don't know when they're

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Speaker 1: going to lift or how quickly, but we do know

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Speaker 1: that the pricing in money markets suggests is a ninety

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Speaker 1: percent probability that there'll be a redlift the first half

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Speaker 1: of this year.

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Speaker 2: So that's just a fact. We don't that's that we

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Speaker 2: take that as a fact.

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Speaker 1: Right, there's a ninety percent probability are suggested by money markets.

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Speaker 1: So let's put those two things on the table in

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Speaker 1: terms of the nature of the market we're looking at

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Speaker 1: the start of the year. You mentioned macropodential tightening just

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Speaker 1: in a sentence, explained to listeners what that is.

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Speaker 2: It's getting harder to borrow, you might explain, how.

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Speaker 3: Yet, so apro that regulates the bank, So any bank

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Speaker 3: that takes a deposit, if you put money in the bank,

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Speaker 3: they need to be tired. They need to have tighter

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Speaker 3: regulation because people want their money to be invested in

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Speaker 3: a safe way. They are tightening rules. Well, they certainly

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Speaker 3: tightened rules last year for what the banks can lean,

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Speaker 3: particularly on a high day income ratio. So there's tighter

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Speaker 3: regulation around there, which means that it's going to contract

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Speaker 3: borrowing capacity. It's going to attract the amount of loans

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Speaker 3: potentially that the banks will provide. But then there's a

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Speaker 3: second cohort of lenders James, non bank lenders that fall

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Speaker 3: outside of that restriction. And we've seen some non bank

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Speaker 3: lenders tell us, you know, late last year, Hey, we're

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Speaker 3: getting snowed under with applications. We're not going to take

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Speaker 3: any more applications. So I think it will just mean

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Speaker 3: I mean for borrowers out there, they just need to

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Speaker 3: cast in it a little bit wider if they're caught

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Speaker 3: with some of these macro potential try and in the banks,

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Speaker 3: you know, particularly the main big four banks and so forth,

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Speaker 3: if they're saying no to you, it doesn't necessarily mean

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Speaker 3: it's a no. It might just mean you need to

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Speaker 3: go to somewhere else, like a non bank lender, and you.

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Speaker 1: Can go to that somewhere else. I just remember that

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Speaker 1: they're not guaranteed, folks. They're not banks, so they're not

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Speaker 1: they don't have the bank guarantee.

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Speaker 4: They're not guaranteed on the deposit side, James.

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Speaker 3: But if I'm a borrower on the mortgage side, a

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Speaker 3: lot of them, particularly reputable brands, they're very safe. You know,

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Speaker 3: it's okay to borrow from them. It's just whether you

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Speaker 3: want to put your cash with them.

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Speaker 2: That's okay.

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Speaker 1: Another question, good point, and separately, but an issue that

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Speaker 1: listeners probably just came to realize, I think in recent

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Speaker 1: times about limits borrowing limits. On top of that sort

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Speaker 1: of very particular restriction that was brought in late last

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Speaker 1: year about how much you can borrow, and the caps

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Speaker 1: basically on people who are pushing it in terms of

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Speaker 1: how much they want to borrow against their income. There

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Speaker 1: is an ongoing limit also called the mortgage buffer, where

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Speaker 1: the rate you are assessed on is three percent higher

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Speaker 1: than the rate you're talking about. So if you go

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Speaker 1: in and you think you're getting a rate of six,

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Speaker 1: you are, but the bank will test you on a

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Speaker 1: rate of nine. And so those two things they're both

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Speaker 1: basically restrictors, aren't they aren't borrowing, Stuart.

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Speaker 3: They are, but the non bank lenders don't have to

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Speaker 3: use the buffer, James. And so sometimes when we look

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Speaker 3: at more recently at borrowing capacity for a particular borrower,

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Speaker 3: the bank like CBA for example, might lend them seven

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Speaker 3: fifty a non bank lender might be a million dollars.

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Speaker 3: So it can be a material difference in borrowing capacity.

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Speaker 3: But you're right, certainly for the banks there's a greater

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Speaker 3: restriction there. And I don't think Apple is going to

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Speaker 3: relax that. I mean, lending volumes are pretty high at

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Speaker 3: the moment, so you wouldn't think that they would relax

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Speaker 3: those restrictions with that backdrop.

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Speaker 2: Yeah, no, does any talk of that? All right? So

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Speaker 2: that's the let's just sit down. Is the big picture

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Speaker 2: for you folks.

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Speaker 1: That is that the world in which you will be

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Speaker 1: making an investment in property this year. Now, we're going

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Speaker 1: to come back after the break and we're going to

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Speaker 1: go right down into it and we're going to look

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Speaker 1: at where the opportunities and risks may be back in

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Speaker 1: a moment. Hello, Welcome back to the Australians Money Puzzle podcast.

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Speaker 1: James Kirby here with Stuart Wems of the pro Solution

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Speaker 1: Private client group regular on the show, probably the most

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Speaker 1: regular actually of our property guests, and the very the

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Speaker 1: idea person to take us through the outlook for the

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Speaker 1: year ahead. Okay, cut to the chase to it. Let's

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Speaker 1: say I'm want to invest in property. I am agnostic

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Speaker 1: as to where or how. I just want the best opportunity.

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Speaker 1: I'm looking for value. Where might you start looking and

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Speaker 1: then explain to us by that decision?

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Speaker 4: Yeah?

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Speaker 3: Sure, I think looking for value is a good idea

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Speaker 3: because when we make a property decision, hopefully we're making

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Speaker 3: a decade long or more decision. So it's not really

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Speaker 3: about which market do I think is going to outperform

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Speaker 3: over the next twelve months. The better question is which

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Speaker 3: market represents the best value? And ten years from now

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Speaker 3: will I look back and go, gee, I'm glad I

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Speaker 3: bought in that market at that particular time. And I

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Speaker 3: think value is important because you know that's your entry

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Speaker 3: point and the fundamentals of the property is what's going

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Speaker 3: to drive it forward.

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Speaker 4: So we know if we.

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Speaker 3: Buy quality assets at a cheap price, typically our returns

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Speaker 3: are going to be better better than average if you

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Speaker 3: look at the market.

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Speaker 4: So I mean last year.

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Speaker 3: You know, Perth, Brisbane and Adelaide were the standouts there.

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Speaker 3: Perth's only sort of three years into its growth cycles,

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Speaker 3: so I think it's still got plenty of steam left

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Speaker 3: ahead of it and it's the fastest growing market in

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Speaker 3: Australia at the moment. Brisbane and Adelaide are into their

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Speaker 3: eighth year of a growth cycle. And we know, studying

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Speaker 3: growth cycles back to nineteen eighty the average and median

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Speaker 3: length of a growth cycle is bang on ten years.

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Speaker 4: So it doesn't mean that they can't last longer.

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Speaker 3: It just means the closer you get to the ten

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Speaker 3: year period, the greater the probability you're heading into a

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Speaker 3: flat cycle. Whereas I think Brisbane's the outline here because

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Speaker 3: of the Olympics. I think the positive sentiment around the

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Speaker 3: Olympics in twenty thirty two will keep that market, keep

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Speaker 3: fueling that market. But Adelaide I'm a little bit more

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Speaker 3: concerned about. You know, it has negative net into state

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Speaker 3: migration mainly. You know, my guests best guess there is

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Speaker 3: just because of employment, all limited employment opportunities. You know,

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Speaker 3: anyone that's higher income earnie is probably going to go

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Speaker 3: find a job in Melbourne or Sydney or even Brisbane

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Speaker 3: rather than Adelaide. And it's a very I mean it's

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Speaker 3: a very small capital city. So relative value, you look

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Speaker 3: at Adelaide, you go ow, I'd be really concerned about

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Speaker 3: putting more capital into that market. And I'm taking a

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Speaker 3: teen year view here, not necessarily because I mean it

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Speaker 3: still might perform relatively well in twenty twenty six, but

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Speaker 3: I'm taking a ten year view.

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Speaker 4: Melbourne is still the laggard.

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Speaker 3: And if we think that compressed borrowing capacity, both from

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Speaker 3: a point of view of how much can I borrow

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Speaker 3: and then from a cash flow perspective in terms of

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Speaker 3: I'm chasing rental.

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Speaker 4: Yield a little bit more than what I would.

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Speaker 3: If interest rates are lower, and all the data is

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Speaker 3: telling us that lower calltil is the one that's growing

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Speaker 3: the best. I think you put all those things together,

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Speaker 3: I think the apartment investment great older style apartment market

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Speaker 3: in Melbourne rep ends the best value across the country.

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Speaker 3: And again this is on a sort of ten year basis,

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Speaker 3: and the fundamentals are really strongly are James. You can

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Speaker 3: buy these apartments pretty much for land value. You're getting

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Speaker 3: the building for free, and the cost to rebuild that

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Speaker 3: asset today is significantly higher than the market value. So

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Speaker 3: the means developers aren't going to be building apartments in

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Speaker 3: Melbourne until prices rise, and that's just going to put

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Speaker 3: a tighter.

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Speaker 4: Constraint on supply.

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Speaker 3: We know Melbourne in absolute terms has the highest population growth,

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Speaker 3: so that's going to put pressure on that supply demand

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Speaker 3: element there as well. And sentiment will turn around eventually,

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Speaker 3: we know it does. Sentiment drives markets. It will turn around.

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Speaker 3: Whether we need to wait for an election result at

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Speaker 3: the end of this calendar year in Victoria, I don't.

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Speaker 4: Know, but eventually it will turn around.

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Speaker 3: And apartments have been in a flat cycle for about

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Speaker 3: thirteen years in Melbourne, so again we're getting close to

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Speaker 3: a growth cycle.

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Speaker 4: I think.

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Speaker 2: Statistics it would suggest yes.

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Speaker 1: And I'll come back to that one moment, just on

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Speaker 1: the from the broader point, if you've got that apartment,

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Speaker 1: the concept of the apartment, so houses did so work

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Speaker 1: for so long, and then that that the COVID era

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Speaker 1: extended their premium. So the gap tell me if I'm wrong,

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Speaker 1: but the gap between houses and apartments has never been

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Speaker 1: so wide, correct, So does that narrative basically on apartments,

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Speaker 1: does it extend everywhere. Is it something that we could

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Speaker 1: apply across the national market in every city.

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Speaker 3: Yes, but to a lesser extent. So the gap in

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Speaker 3: Sydney is still wide, relatively wide relative to history, and

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Speaker 3: same in Brisbane too well, that gap is starting to

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Speaker 3: close because about two years ago that apartment market really

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Speaker 3: kicked off in terms of growth. So there is a

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Speaker 3: bit of mean reversion going on in other markets, but

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Speaker 3: it's more distinct or most distinct in Melbourne. And I

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Speaker 3: think if we're thinking about relative value, you know, what

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Speaker 3: do you get for your money in terms of the

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Speaker 3: locality of the property, the size and the value of

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Speaker 3: the land component. I think Melbourne represents the best ten

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Speaker 3: year opportunity. Whether it performs this year, who knows so.

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Speaker 1: On the apartment the argument against apartments has been pretty

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Speaker 1: strong for some time. That the simple argument is that houses,

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Speaker 1: standard one houses are a stronger investment you have less land.

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Speaker 1: This is textbook stuff. But then more recently Stewart has

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Speaker 1: been a structural issue, which is they're working from home.

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Speaker 1: Change means that apartments are less attractive as they used

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Speaker 1: than there used to be, particularly one bedroom apartments where

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Speaker 1: a person a person lived in a one bedroom apartment,

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Speaker 1: and the assumption was from the investor side, was that

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Speaker 1: person went to work every day. That's not necessarily the

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Speaker 1: case now for many people. So how do we bet that?

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Speaker 1: How do we work that into the apartments? The apartment opportunity.

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Speaker 3: Yeah, I think the sweet spot is an older style

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Speaker 3: two bedroom apartment. If you can afford a house, I

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Speaker 3: think a house will tend to be a better investment

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Speaker 3: in the long run, and you do have more control,

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Speaker 3: and it will have a higher land value component, all

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Speaker 3: things being equal. So if I was sitting in front

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Speaker 3: of someone that said, oh, look, I can buy two

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Speaker 3: apartments or a house, what should I buy? I would

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Speaker 3: buy a house. So I think houses always be departments.

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Speaker 3: But if I'm in that price point where I can't

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Speaker 3: get into an investment great house and I'm looking for

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Speaker 3: the where can I put my money to get the

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Speaker 3: best bang for buck, I think a two bedroom apartment

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Speaker 3: in Melbourne is a great investment opportunity. And I think

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Speaker 3: you can spend somewhere between say six fifty seven fifty

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Speaker 3: will buy a great property in a quiet street in

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Speaker 3: a blue chip suburb in Melbourne, and there might only

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Speaker 3: be six four to eight on the block.

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Speaker 4: You know.

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Speaker 3: So it's a really relatively large block, six to eight

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Speaker 3: hundred square meters, only four to eight dwellings on that

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Speaker 3: parcel of land, and that's the kind of asset that

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Speaker 3: I think represents the best value. One bedroom apartment I

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Speaker 3: think will still get dragged along with in the next

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Speaker 3: growth cycle, but I think to a lesser extent, and

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Speaker 3: I think two betters have wider appeal for the reasons

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Speaker 3: you decide at least I can, you know, go and

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Speaker 3: occupy that and at leaves use one room as a

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Speaker 3: study or work from home space.

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Speaker 2: Okay, And you mentioned you several times for.

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Speaker 1: The investor who's looking at income primarily over capital appreciation,

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Speaker 1: and I think, I imagine we have a lot of listeners

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Speaker 1: who are doing that right now for the simple reason

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Speaker 1: that on a holistic basis, the share market has been

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Speaker 1: so good, right It's is ten percent every year. We're

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Speaker 1: just a ten percent again last year on the ASX

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Speaker 1: so for any mission fund's doing nine percent, us doing

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Speaker 1: double that. So people aren't looking for income in the

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Speaker 1: share marketer. If there are, this year's success of the

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Speaker 1: share is mincing their years. That's why I combined, for instance,

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Speaker 1: which is a standby stock for so many people.

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Speaker 2: It's got a dividend you live three percent. It also

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Speaker 2: has a four share price.

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Speaker 1: So property in the traditional sense of an asset that

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Speaker 1: is outside the share market, that is not listed, that

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Speaker 1: can pay an income, I think it's coming back into

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Speaker 1: the frame. So tell us about the what is the

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Speaker 1: yield picture here on apartments rusus houses.

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Speaker 3: Apartments would tend to offer a high yield, but look,

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Speaker 3: it's all about growth with respect to investing in property.

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Speaker 3: I think the only focus on yield should be to

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Speaker 3: the extent that you need it from a borrowing capacity perspective.

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Speaker 3: So your bank might say, look, we'll injure this money,

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Speaker 3: but as long as the grocery intol yields at least

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Speaker 3: three percent, for example, Well, if you've got that parameter,

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Speaker 3: then of course you've got to find something that's going

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Speaker 3: to give you more than three percent. But a good

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Speaker 3: way to do it, James, is these older style apartments.

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Speaker 3: Typically they were constructed before nineteen sixty maybe nineteen seventies

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Speaker 3: or you know, before that time, and so a lot

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Speaker 3: of them need kind of a new bathroom, kitchen, some flooring,

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Speaker 3: some window furnishings, these things.

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Speaker 4: So it's a great opportunity.

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Speaker 3: To allocate some of your budget to making those improvements.

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Speaker 3: At least you'll get the depreciation benefits of depreciating the

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Speaker 3: cost of doing that, and it will then increase the

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Speaker 3: rental yield. And so from a and of course you

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Speaker 3: can still add that to your borrowing. So from a

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Speaker 3: cash flow perspective, it certainly enhances the property's value. But

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Speaker 3: at least you're spending most of your money on really

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Speaker 3: the underlying land value initially and then improve the property

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Speaker 3: after that. And I've got some investment great apartments in

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Speaker 3: Melbourne and the yields are sort of four point two

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Speaker 3: four point four and a half percent at the moment growth,

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Speaker 3: so they're pretty they're pretty attracted.

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Speaker 2: They're particularly good.

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Speaker 1: That's particularly good, I imagine, is it compet Let's say

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Speaker 1: Sydney on the same strata would be.

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Speaker 3: Two to three percent in a comparable location in terms

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Speaker 3: of from a blue chip perspective. And Brisbane yields were

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Speaker 3: relatively high, although they'll start being compressed now because they're

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Speaker 3: starting to see a bit of capital growth. So that's

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Speaker 3: your our entry point too. We've got to think about

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Speaker 3: when you buy a property. The entry yield is kind

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Speaker 3: of the most important because that's the actual cash flow

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Speaker 3: that you're going to outlay. How the rental yield changes

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Speaker 3: over time doesn't really matter, because it's really interest costs

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Speaker 3: versus gross rental income that you're getting from the asset.

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Speaker 3: So it's a great entry point to get into the

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Speaker 3: market because to hold that asset and hold that exposure,

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Speaker 3: relative to history, the cost to hold that exposure is

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Speaker 3: relatively low.

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Speaker 1: Okay, we'll be back in a moment, folks. I want

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Speaker 1: to dig deeper here. I think it's compelling. What's steward

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Speaker 1: to see. We'll be back in a moment. Hello, Welcome

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Speaker 1: back to The Australian's Money Puzzle podcast. I'm James Kirby.

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Speaker 1: I'm talking to Stuart Williams and we are talking properly.

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Speaker 1: Outlook for twenty twenty six, folks. I suppose we should

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Speaker 1: have laid it out for you at the start. For

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Speaker 1: what it's worth, the consensus forecast for a national House

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Speaker 1: process in the year aheader is five percent. I think

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Speaker 1: Stewart and I have been around long enough to know

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Speaker 1: that in a way it means almost nothing. They say

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Speaker 1: that every year no one knows what's going to happen

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Speaker 1: next and five percent is such a vague, fuzzy guideline anyway.

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Speaker 1: Just like that, the fact that the property market mid

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Speaker 1: eight percent last year means very little to you if

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Speaker 1: you're sitting in perthin you've done fifteen or twelve, and

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Speaker 1: it means very little to you if you're on your

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Speaker 1: eleventh year with an unsuccessful property investment in Melbourne, which

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Speaker 1: is going nowhere a year after the year. So we

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Speaker 1: put that on the table, but we did need to

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Speaker 1: tell you that I think that is the forecast consensus

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Speaker 1: five percent, and we made the point that rates there's

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Speaker 1: a consensus that rates will rise, not fall, and that

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Speaker 1: there will be at least one rise. I'm certainly comfortable

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Speaker 1: with that out with that outlook from here. So within

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Speaker 1: that context, Stuart has quite i think, come to the

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Speaker 1: party very clearly and said he thinks at this is

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Speaker 1: in terms of what you were going to buy this

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Speaker 1: year would be apartments. He's particularly said that in terms

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Speaker 1: of regionality. We're talking about Victoria Melbourne in particular, and

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Speaker 1: it's a strong idea. I just want to interrogate it

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Speaker 1: a little bit, Stuart. There's a couple of things in

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Speaker 1: the back of my mind. The first one obviously is

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Speaker 1: what has held apartments back all the time.

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Speaker 2: Why want to stop holding them back?

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Speaker 1: The fact that there are a second rate compared to

440
00:22:16,440 --> 00:22:19,680
Speaker 1: houses as an investment, that you can't control the block

441
00:22:19,760 --> 00:22:21,679
Speaker 1: they're in, So you could have a beautiful apartment, but

442
00:22:21,720 --> 00:22:22,960
Speaker 1: it cannot change a bad block.

443
00:22:25,359 --> 00:22:27,720
Speaker 4: I think it's about relative value, James. So I think

444
00:22:27,720 --> 00:22:28,280
Speaker 4: you're right.

445
00:22:28,400 --> 00:22:32,919
Speaker 3: If you've got an apartment market that's fairly priced and

446
00:22:33,160 --> 00:22:35,880
Speaker 3: a housing market that's fairly priced, you're comparing the two,

447
00:22:35,960 --> 00:22:37,960
Speaker 3: then I think you'd go, yeah, I want the house

448
00:22:38,040 --> 00:22:39,600
Speaker 3: because I've got more control.

449
00:22:39,640 --> 00:22:41,800
Speaker 4: I don't have a body corporate all those sorts of things.

450
00:22:42,359 --> 00:22:43,920
Speaker 3: But I think the point I'm trying to make here

451
00:22:44,040 --> 00:22:47,760
Speaker 3: is relative value is so attractive that are offsets some

452
00:22:47,840 --> 00:22:48,800
Speaker 3: of those negatives.

453
00:22:49,320 --> 00:22:51,120
Speaker 4: Now, of course, you want to do use due diligence

454
00:22:51,200 --> 00:22:51,560
Speaker 4: going in.

455
00:22:51,640 --> 00:22:53,919
Speaker 3: You want to make sure you're buying into a block

456
00:22:53,960 --> 00:22:55,960
Speaker 3: that is well managed and well looked.

457
00:22:55,960 --> 00:22:57,080
Speaker 4: You've got a good, well.

458
00:22:56,880 --> 00:23:00,600
Speaker 3: Functioning body corporate, and that's going through the minue and

459
00:23:00,640 --> 00:23:03,520
Speaker 3: making sure they've been doing the maintenance and they're allocating

460
00:23:03,640 --> 00:23:06,440
Speaker 3: enough money to the maintenance fund. All those sorts of things.

461
00:23:06,440 --> 00:23:08,280
Speaker 3: Because what you don't want to do is buy into

462
00:23:08,359 --> 00:23:12,160
Speaker 3: a block that's been poorly managed and undercapitalized, because that's

463
00:23:12,200 --> 00:23:15,280
Speaker 3: going to actually retard your ability to generate that growth.

464
00:23:15,720 --> 00:23:17,359
Speaker 3: So I think there's some things you can do to

465
00:23:17,440 --> 00:23:20,040
Speaker 3: sort of mitigate that risk, kind of avoid it. It's

466
00:23:20,040 --> 00:23:22,760
Speaker 3: always going to be a little bit challenging to deal

467
00:23:22,800 --> 00:23:26,240
Speaker 3: with the body corporate, but I think you're rewarded for

468
00:23:26,359 --> 00:23:29,040
Speaker 3: taking that high risk just because of the relative value

469
00:23:29,119 --> 00:23:29,919
Speaker 3: is so attractive.

470
00:23:30,080 --> 00:23:30,439
Speaker 2: Okay.

471
00:23:31,000 --> 00:23:33,000
Speaker 1: One thing we also should have said, and it's sort

472
00:23:33,000 --> 00:23:35,919
Speaker 1: of implicit, I suppose these days, but it's worth saying

473
00:23:35,920 --> 00:23:38,959
Speaker 1: it out loud. One of the great attractions of rental

474
00:23:39,000 --> 00:23:44,400
Speaker 1: property in Australia just now is the endless demand. There

475
00:23:44,480 --> 00:23:47,520
Speaker 1: is no virtually no risk of that apartment laying empty

476
00:23:48,040 --> 00:23:50,680
Speaker 1: because we've got one point four percent vacancy rates there

477
00:23:50,680 --> 00:23:52,920
Speaker 1: aren't changing. I've just seen the leader's supports as tight

478
00:23:52,960 --> 00:23:56,400
Speaker 1: as ever. Basically, you can rent anything in the cities

479
00:23:56,680 --> 00:23:58,040
Speaker 1: and I don't think that's going to change.

480
00:23:58,200 --> 00:24:00,160
Speaker 2: And what do you think, Stuard.

481
00:24:00,880 --> 00:24:03,320
Speaker 3: No, I mean just because of the cost to build

482
00:24:03,359 --> 00:24:06,040
Speaker 3: apartments now is so much higher than it was sort

483
00:24:06,040 --> 00:24:09,840
Speaker 3: of pre COVID, and the prices haven't risen nearly as

484
00:24:09,920 --> 00:24:13,199
Speaker 3: much as the cost to build these assets, they're just

485
00:24:13,320 --> 00:24:15,479
Speaker 3: developers just aren't going to build them. Like there's just

486
00:24:15,520 --> 00:24:19,440
Speaker 3: the supply of apartments is shrinking and will continue to

487
00:24:19,480 --> 00:24:23,720
Speaker 3: shrink until prices catch up and make them economical. Also

488
00:24:23,840 --> 00:24:26,959
Speaker 3: to your point, James, in terms of rental yield and

489
00:24:27,320 --> 00:24:31,560
Speaker 3: weekly rental amount, of course, to rent apartments is more affordable,

490
00:24:31,600 --> 00:24:34,920
Speaker 3: so your pull of potential renters is much wider than

491
00:24:35,359 --> 00:24:39,600
Speaker 3: safer houses and particularly premium houses. So your rental vacancy

492
00:24:39,680 --> 00:24:41,680
Speaker 3: rates certainly at the moment, you know if you lose

493
00:24:41,680 --> 00:24:44,359
Speaker 3: a tenant, you'll get another tenant inside of a week.

494
00:24:44,400 --> 00:24:47,000
Speaker 3: You're like, you're not dealing with much vacancy.

495
00:24:46,720 --> 00:24:49,040
Speaker 1: Yes, and that's not always like that, so it's worth

496
00:24:49,400 --> 00:24:52,399
Speaker 1: knowing that is basically a positive at the moment.

497
00:24:52,880 --> 00:24:57,640
Speaker 2: Stuart. One of the things I take it totally.

498
00:24:57,280 --> 00:25:00,400
Speaker 1: On board that there's value in the apartment market, and

499
00:25:01,359 --> 00:25:03,240
Speaker 1: we'll take it that it's also the case that the

500
00:25:03,240 --> 00:25:06,480
Speaker 1: apartment certainly the apartment developers are saying that it's not

501
00:25:06,720 --> 00:25:10,240
Speaker 1: what they're time to build apartments just now apartment towers.

502
00:25:10,440 --> 00:25:12,520
Speaker 2: But when it does turn again.

503
00:25:12,600 --> 00:25:14,480
Speaker 1: One of the weaknesses of apartments is you have a

504
00:25:14,520 --> 00:25:19,920
Speaker 1: perfectly good apartment and someone opens a tower not far

505
00:25:20,040 --> 00:25:25,240
Speaker 1: away and there are brand new apartments that are not

506
00:25:26,160 --> 00:25:29,159
Speaker 1: so different in form and function to yours, and that

507
00:25:29,680 --> 00:25:32,800
Speaker 1: can really flatten their growth for a long period.

508
00:25:32,880 --> 00:25:33,240
Speaker 3: Is it?

509
00:25:34,320 --> 00:25:35,920
Speaker 2: To what extent can you get around that risk?

510
00:25:37,560 --> 00:25:39,840
Speaker 3: I mean, I think in both Melbourne and Sydney, the

511
00:25:39,880 --> 00:25:43,800
Speaker 3: government's decided to build these activity centers and so where

512
00:25:43,800 --> 00:25:46,080
Speaker 3: they're going to have medium density or they'd like to

513
00:25:46,119 --> 00:25:47,639
Speaker 3: have more medium density.

514
00:25:48,240 --> 00:25:49,399
Speaker 4: Whereas when I'm.

515
00:25:49,280 --> 00:25:52,879
Speaker 3: Talking about investment grade apartment, I'm really talking about in

516
00:25:52,920 --> 00:25:55,960
Speaker 3: a location that's blue chap in a very quiet street. Again,

517
00:25:56,000 --> 00:25:59,600
Speaker 3: they were built in the sixties and seventies or before

518
00:25:59,640 --> 00:26:03,400
Speaker 3: that time, So I think, what could happen or we're

519
00:26:03,400 --> 00:26:05,960
Speaker 3: going to need higher density in our capital cities. That's

520
00:26:06,800 --> 00:26:09,560
Speaker 3: that's just a case of not if, but when so,

521
00:26:09,600 --> 00:26:12,120
Speaker 3: I think what might happen is if they do loosen

522
00:26:12,400 --> 00:26:17,800
Speaker 3: planning restrictions, these complexes will be down bulldozed and instead

523
00:26:17,800 --> 00:26:20,800
Speaker 3: of building six apartments, they'll build twenty on the same block.

524
00:26:21,400 --> 00:26:24,800
Speaker 3: And so I think that just improves the underlying land value,

525
00:26:24,800 --> 00:26:27,280
Speaker 3: the productive value of that land. And I think that's

526
00:26:27,320 --> 00:26:30,440
Speaker 3: where the upside is for future use of these sorts

527
00:26:30,440 --> 00:26:31,040
Speaker 3: of properties, so.

528
00:26:31,080 --> 00:26:34,239
Speaker 2: You have a shot. You have a shot basically been

529
00:26:34,280 --> 00:26:35,360
Speaker 2: bought off by a developer.

530
00:26:35,400 --> 00:26:37,520
Speaker 3: Is that what you're saying, Yeah, and buy away from

531
00:26:37,560 --> 00:26:41,480
Speaker 3: the activity centers like buy in areas where that planning

532
00:26:41,680 --> 00:26:44,080
Speaker 3: isn't in place yet. I mean it could change, of course,

533
00:26:44,520 --> 00:26:46,840
Speaker 3: but I think in the future we do need higher

534
00:26:46,880 --> 00:26:48,840
Speaker 3: density James and the only way we're going to get

535
00:26:48,880 --> 00:26:51,840
Speaker 3: that well, probably the easiest way, I should say, is

536
00:26:51,880 --> 00:26:57,159
Speaker 3: to rebuild these apartment blocks as opposed to subdivisions.

537
00:26:56,440 --> 00:26:57,440
Speaker 4: Or these sorts of things.

538
00:26:57,440 --> 00:27:00,920
Speaker 3: That's much slower, unlikely to happen in highland value areas.

539
00:27:01,040 --> 00:27:03,520
Speaker 1: In practical terms, it sounds like buying away from railway

540
00:27:03,520 --> 00:27:05,600
Speaker 1: station zones because that's the target.

541
00:27:05,640 --> 00:27:07,879
Speaker 2: Isn't in most cities ye okay.

542
00:27:08,560 --> 00:27:10,880
Speaker 1: One thing that is of concern I think to investors,

543
00:27:11,040 --> 00:27:13,679
Speaker 1: certainly on the Australian we can see this already, is

544
00:27:13,720 --> 00:27:16,919
Speaker 1: that there is a capital against tax inquiry happening in March,

545
00:27:17,960 --> 00:27:20,919
Speaker 1: with a lot of interest around that because the submissions

546
00:27:20,920 --> 00:27:23,240
Speaker 1: are already going in and there is a sense that there

547
00:27:23,320 --> 00:27:27,520
Speaker 1: is a mood where the government could if they wish

548
00:27:27,640 --> 00:27:32,359
Speaker 1: to change the terms of capital gainst tax, they'd have

549
00:27:32,520 --> 00:27:36,560
Speaker 1: considerable support to do so the inquiry will take its course.

550
00:27:36,680 --> 00:27:38,920
Speaker 1: We don't know how it'd lend, but I have a

551
00:27:39,000 --> 00:27:41,360
Speaker 1: damn good idea that it will lend with some very

552
00:27:41,359 --> 00:27:47,560
Speaker 1: clear conclusions that a reform and a tailing back of

553
00:27:47,600 --> 00:27:51,280
Speaker 1: the concessions if you like, on capital gainst tax would

554
00:27:51,320 --> 00:27:54,639
Speaker 1: be popular. The government can then say it's not our idea.

555
00:27:54,840 --> 00:27:58,960
Speaker 1: This inquiry has happened and we want to respond to

556
00:27:59,000 --> 00:28:01,800
Speaker 1: this demand. This is a really fear in markets. I

557
00:28:01,800 --> 00:28:04,119
Speaker 1: think just now in a cross the investment market, what

558
00:28:04,160 --> 00:28:05,639
Speaker 1: about property and what might happen?

559
00:28:06,880 --> 00:28:09,520
Speaker 3: Well, In fact, the Greens are saying that any changes

560
00:28:09,560 --> 00:28:12,760
Speaker 3: to capital Gains Tax should only happen with property, and

561
00:28:12,880 --> 00:28:16,439
Speaker 3: the Budget Parliamentary Office has said, and I quote, the

562
00:28:16,480 --> 00:28:20,119
Speaker 3: top ten percent of taxpayers receive eighty percent of the

563
00:28:20,200 --> 00:28:24,560
Speaker 3: CGG discount benefit. But another way to say that sentence

564
00:28:25,320 --> 00:28:28,240
Speaker 3: is the top ten percent are paying more than eighty

565
00:28:28,280 --> 00:28:32,560
Speaker 3: percent of the CGT tax revenue, which is somewhere between

566
00:28:32,760 --> 00:28:35,360
Speaker 3: fifteen to twenty five billion dollars a year, depending on

567
00:28:35,400 --> 00:28:38,520
Speaker 3: what happens in that particular year. And because the marginal,

568
00:28:38,680 --> 00:28:41,719
Speaker 3: because of our tax system's marginal, it'll be less than

569
00:28:42,040 --> 00:28:44,360
Speaker 3: less than ten percent are paying more than eighty percent,

570
00:28:44,880 --> 00:28:47,320
Speaker 3: So of course, if you increase taxes on the top

571
00:28:47,360 --> 00:28:49,560
Speaker 3: ten percent of taxpayers, of course you're going to raise

572
00:28:49,560 --> 00:28:53,520
Speaker 3: more revenue. So you know, I think there's that argument there. Look,

573
00:28:53,600 --> 00:28:56,800
Speaker 3: I think that the fifty percent discounts generous, particularly when

574
00:28:56,840 --> 00:28:59,240
Speaker 3: you compare it to the old system of indexing the

575
00:28:59,280 --> 00:29:00,000
Speaker 3: cost pay.

576
00:29:00,200 --> 00:29:00,800
Speaker 2: This is interesting.

577
00:29:00,840 --> 00:29:03,680
Speaker 1: You're a property expert and you are saying the same

578
00:29:03,680 --> 00:29:07,000
Speaker 1: thing as many of these submissions in retrospect. They changed

579
00:29:07,160 --> 00:29:12,400
Speaker 1: CGT because of inflection at the time in the Howard

580
00:29:12,480 --> 00:29:15,840
Speaker 1: government in that period. Since that time, with the new

581
00:29:15,920 --> 00:29:18,560
Speaker 1: arrangement where you get a fifty percent discount, it would

582
00:29:18,600 --> 00:29:21,239
Speaker 1: seem that if you did the marts, the discount has

583
00:29:21,280 --> 00:29:24,440
Speaker 1: been generous compared to the old system. So it sounds

584
00:29:24,480 --> 00:29:26,880
Speaker 1: to me like that's just going to be a laydown

585
00:29:26,960 --> 00:29:29,080
Speaker 1: for any inquiry. That's going to be the outcome of

586
00:29:29,120 --> 00:29:29,680
Speaker 1: the inquiry.

587
00:29:30,720 --> 00:29:33,920
Speaker 3: And my modeling, James, is forty percent discounts more in

588
00:29:33,960 --> 00:29:37,720
Speaker 3: line with CPI, and a forty percent discount will actually

589
00:29:37,760 --> 00:29:42,280
Speaker 3: incentivize investors that hold assets for a very long period

590
00:29:42,320 --> 00:29:43,680
Speaker 3: of time, and that's really what you want to do

591
00:29:43,800 --> 00:29:47,320
Speaker 3: is attract long term capital to the property market. That's

592
00:29:47,360 --> 00:29:50,800
Speaker 3: really what's going to help in terms of supply. So

593
00:29:51,160 --> 00:29:55,160
Speaker 3: whereas the Greens are talking about reducing the CGT discount

594
00:29:55,200 --> 00:29:57,960
Speaker 3: to twenty five percent, I think that's aggressive, but I

595
00:29:57,960 --> 00:30:00,680
Speaker 3: think you may as well start aggressive and then compromise

596
00:30:00,760 --> 00:30:03,560
Speaker 3: from there. So I think the outcome of the reviews

597
00:30:03,760 --> 00:30:08,000
Speaker 3: probably likely no change or a reduction, a slight reduction

598
00:30:08,120 --> 00:30:10,120
Speaker 3: in the cost base. But it's not really going to

599
00:30:10,120 --> 00:30:12,920
Speaker 3: move the dial in terms of whether it's worthwhile to

600
00:30:13,000 --> 00:30:17,200
Speaker 3: invest in property. The negative gearing benefits, tax benefits are

601
00:30:17,240 --> 00:30:20,280
Speaker 3: worth a lot more to an investor than the potential

602
00:30:20,360 --> 00:30:24,000
Speaker 3: payment of CGT, you know, in ten twenty thirty years time.

603
00:30:24,160 --> 00:30:26,400
Speaker 3: So it's not going to move the dial that much.

604
00:30:26,560 --> 00:30:28,040
Speaker 1: You're allowing for it as a risk, but do you

605
00:30:28,040 --> 00:30:30,200
Speaker 1: think it won't move the diet should it come to pass?

606
00:30:30,400 --> 00:30:32,920
Speaker 1: Very interesting and worth putting in front of the listeners,

607
00:30:32,920 --> 00:30:34,720
Speaker 1: I think in terms of an issue for this first

608
00:30:34,760 --> 00:30:37,760
Speaker 1: quarter of the year as an investor, okay, terrific.

609
00:30:37,840 --> 00:30:39,480
Speaker 2: I think we should leave it just there.

610
00:30:39,880 --> 00:30:41,520
Speaker 3: Just one other thing in terms of we're going to

611
00:30:41,560 --> 00:30:45,960
Speaker 3: interrogate the you know, the hypothesis that the apartment market

612
00:30:46,000 --> 00:30:48,880
Speaker 3: is most attractive. I guess we think about interest rate risk.

613
00:30:49,040 --> 00:30:51,040
Speaker 3: And you know, the first thing I would say is

614
00:30:51,120 --> 00:30:55,240
Speaker 3: interest rate expectations can literally change overnight. So whilst today

615
00:30:55,280 --> 00:30:59,880
Speaker 3: we're contemplating potential rate increases, all that could turn tomorrow,

616
00:31:00,400 --> 00:31:02,520
Speaker 3: so we can't get too taken away with it. But

617
00:31:02,720 --> 00:31:06,200
Speaker 3: if we look at what is the implications of higher

618
00:31:06,240 --> 00:31:11,160
Speaker 3: interest rates with the backdrop of already type boring capacity

619
00:31:11,160 --> 00:31:15,720
Speaker 3: because of interest rate settings and macro prudential regulation, if

620
00:31:15,720 --> 00:31:18,600
Speaker 3: we see interest rates go higher this year, I think

621
00:31:18,640 --> 00:31:22,920
Speaker 3: that'll just compress more people into the apartment market. So

622
00:31:22,960 --> 00:31:26,560
Speaker 3: I think it will fuel that two speed market rather

623
00:31:26,680 --> 00:31:30,320
Speaker 3: than disturb it because people, you know, people might be

624
00:31:30,360 --> 00:31:32,520
Speaker 3: at a sort of a nine hundred thousand dollars price

625
00:31:32,560 --> 00:31:34,800
Speaker 3: point now, and if interest rates go up, maybe they're

626
00:31:35,040 --> 00:31:37,560
Speaker 3: pushed down into an eight hundred thousand dollars price point.

627
00:31:37,640 --> 00:31:39,480
Speaker 3: All of a sudden, They're not buying a villa unit,

628
00:31:39,480 --> 00:31:42,760
Speaker 3: they're buying an apartment. So I think if investors out

629
00:31:42,800 --> 00:31:45,640
Speaker 3: there worried about what's the impact of interstrates, I think

630
00:31:45,680 --> 00:31:48,120
Speaker 3: it's just going to fuel that that lower end of

631
00:31:48,120 --> 00:31:50,520
Speaker 3: the market and harm the higher end of the market.

632
00:31:50,720 --> 00:31:55,120
Speaker 1: Okay, interesting, really interesting, and I think persuasive. Stuart terrific

633
00:31:55,160 --> 00:31:57,320
Speaker 1: and thank you Stuart very much for doing the show today.

634
00:31:57,400 --> 00:31:59,960
Speaker 1: Great to have a clear outlook for the year head

635
00:32:00,080 --> 00:32:02,320
Speaker 1: and I really appreciate the fact that you actually took

636
00:32:02,320 --> 00:32:04,440
Speaker 1: a very strong line and made it very clear what

637
00:32:04,480 --> 00:32:06,880
Speaker 1: you think is going to happen. Thanks to Leah Samaglu

638
00:32:07,040 --> 00:32:09,800
Speaker 1: for producing the show today. I see the correspondents are

639
00:32:09,840 --> 00:32:11,400
Speaker 1: starting to roll in again, folks.

640
00:32:11,480 --> 00:32:11,880
Speaker 2: That's great.

641
00:32:11,960 --> 00:32:14,200
Speaker 1: Keep them coming the money puzzle at the Australian dot

642
00:32:14,240 --> 00:32:17,800
Speaker 1: com dot au. We will resume reading your correspondence and

643
00:32:17,800 --> 00:32:19,360
Speaker 1: getting it answers for you next week