Projects Review Edition 15. 2019
Reflections on 2018
Retirement on the Rise
Entourage Finance
Owners Corporation
The Zoning Effect
GST – New Residential Property
Labor’s Proposed Changes
Contents
Contributors
1 Notes From The Directors
Reflections on 2018 — Daniel Schulz
2 Spotlight 6 Reflections on 2018 9 Retirement on the Rise 10 Owners Corporation 12 The Zoning Effect 15 Entourage Finance
Retirement on the Rise — Toby Ewert, Director, Ewert Leaf Owners Corporation — Bryan Phillips, Director, Tideways
16 GST – New Residential Property Withholding Obligations and Implications to Developers
The Zoning Effect — Alex Greggery
18 Labor’s Proposed Changes to Negative Gearing and the Capital Gains Tax Discount
Entourage Finance — Damien Roylance, Director, Entourage Finance GST – New Residential Property Withholding Obligations and Implications to Developers — Dani Di Blasio, Manager, Murdoch Partners
Projects 3 The Beckworth 3 Hotham & Carlisle 4 St James Park
Labor’s Proposed Changes to Negative Gearing and the Capital Gains Tax Discount —J oseph Kalb, Partner, Lowe Lippmann Chartered Accountants —C ameron Fogarty, Tax Manager, Lowe Lippmann Chartered Accountants
4 No.71 4 Olea 5 Verse 5 Rosa 5 Luminess Past Project Profiles 20 Highgreen 20 Lawson 21 Malvern Residences 21 Hudson Green
Cover Photo: Glenarm Square Glen Iris
Every effort is made to provide accurate and complete information in Marshall White’s (trading as Marshall White Projects) technical and regulatory newsletters. However, Marshall White cannot guarantee that there will be no errors. Marshall White and its contributors to the newsletter make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of the newsletters and expressly disclaims liability for errors and omissions in the contents of this newsletters. Neither does Marshall White and its contributors to the newsletter assume any legal liability for any direct, indirect or any other loss or damage of any kind for the accuracy, completeness, or usefulness of any information, product, or process disclosed herein, and do not represent that use of such information, product, or process would not infringe on privately owned rights.
+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143
Disclaimer: Information provided is believed to be accurate as at the date of printing, no responsibility is taken for any errors or omissions. It is your responsibility to obtain independent, professional advice.
Notes from the Directors 2018 was a year of rapid adjustment, it was also a time that proved that unless your business was nimble and could adjust quickly to the vagaries of a challenging market, well, you didn’t make it into 2019 fit for purpose. With builders, referral partners and large project marketers with the CBD focusing on the offshore buyer, a market that won’t return to the heady days of 2015 for many years to come, many CBD projects didn’t get off the architects desk. Locally, our focus at Marshall White Projects has certainly broadened, with the saturation of high end product on offer throughout Boorondara, Stonnington and Bayside, we’ve also sought outer areas where there’s equal demand but with lesser opportunities We look back now at what’s worked for us during 2018 and crucially, what didn’t work, highlighted by a number of projects below; 791-795 Toorak Road, Hawthorn East “The Anderson”. This was a project that proved the aspirational two bedroom buyer is still a force to be reckoned with. Marketed by another project marketer for a twelve month period with an expensive onsite display, ultimately proved ineffective. Yet cut correctly, re branded, repriced and sold off site at our projects sales office, better accommodated the most active section of the market today, namely young professional couples seeking prestigious addresses such as Hawthorn. Thirty apartments were sold within an eight week selling period, at an affordable rate psqm ranging from $ 9,000 to $ 9,800 a sqm. Without doubt the “Ashton Park” development at 338-342 Burwood Highway, Burwood, was our most successful townhouse development for a number of reasons. The average sale price at just under a million dollars was substantially below the medium price of a house in Burwood currently at a somewhat surprising $1,345,000. The twenty townhouses sold were offered in two stages, limiting choice to the market place at each stage and allowing for price growth prior to launching the second stage. The Mount Waverly School Zone proved to be the deciding factor for a number of young families despite the developments main road position. Undoubtedly the most surprising result for 2018 was the “St James Park” development at 1A Yarra Street, Hawthorn. Again it was a project put out into the market place via an onsite display prior to our involvement.
Once marketed correctly, we produced 300 enquires in 10 days with 25% of total apartments secured at a launch weekend, at an average sale price well in excess of $2.5 million. Developments like “St James Park” restore a developers faith in the empty nester market, which by all accounts had shrunk during 2018 owing to the consistently negative press within the media. It's fair to say that our founding philosophy of focusing on the local owner occupier has for the past five years put us ahead of the majority of our competitors, particularly those who have looked off shore for high volume sales. It is however fair to say that most locally based buyers have more choice for an off-the-plan purchase than ever before and as a result these buyers are slower to make a decision as they sift through a plethora of product. Against trend, we have managed to increase our average sale price to $996,000 for each off the plan sale an increase of 6% from the previous year. We are now in a relatively stable market that will however determine that not all developments marketed today will be built. Buyers today, more than ever, require absolute assurance that upon signing a contract of sale and paying a significant deposit, that they actually do receive their apartment and within an acceptable time frame. The challenge is that most projects today show extended day on market, leading to delays in construction finance and protracted build times. 2019 will see us increasingly selective as to what and where we take on a project. The better project marketers will start to be better known for what they didn’t take on as opposed to what they did. Diversification has become the key. As larger project markets move away from investor type projects in the CBD and look to greenfield sites, house and land packages, we also look to projects that we can sell through in a timely manor. Current examples are townhouse project’s in Noble Park, Boronia, Sunshine and Maribyrnong, areas we haven’t typically taken the Marshall White Project’s brand, however market demand will insure these products are ultimately built, allowing both developers and purchasers to achieve their property goals. As always, we welcome your call to assist with your development needs. Good Selling.
Mark Dayman Director
Leonard Teplin Director
T: 03 9832 1193 M: 0409 342 462 mark.dayman@marshallwhite.com.au
T: 03 9832 1191 M: 0402 431 657 leonard.teplin@marshallwhite.com.au
1
Spotlight
Lawrence Yan
Liam Adey
Nathan Aron
Sales Executive
Sales Executive
Sales Executive
Lawrence is a talented communicator. Fluent in Mandarin, Cantonese and Malay, his personal enthusiasm for property investment motivates Lawrence to help his clients find suitable investment property, appropriate to each individual need.
Personable, positive and hardworking, Liam strives toward helping people achieve their off-theplan purchasing requirements.
A firm commitment to achieving outstanding results has seen Nathan succeed as a leading sales agent specialising in off-the-plan sales. With over half a decade of industry experience, Nathan is dedicated to achieving remarkable results for his clients through expert knowledge and hard work.
With a bachelor’s degree in mechanical engineering and after years of experience overseeing the provision of mechanical building services for the construction of high-rise towers and mega-malls, Lawrence now directs his skills to off-the-plan residential project marketing. Alongside his intention to assure hassle-free transactions for his clients, Lawrence’s willingness to listen makes doing business with him a pleasure. Lawrence is a keen weekend golfer. Married with two sons, he loves taking the family to the movies or going for an invigorating swim.
2
Maintaining open channels of communication, Liam easily develops a natural rapport with his buyers. Liam finds the development industry to be incredibly rewarding as it revolves around making connections with people and perfectly suits his positive mindset. Combined with his strict time management, perfectionist nature and a refined attention to detail, Liam is well suited to his role at Marshall White projects. Active by nature and a big believer in the value of physical fitness and a healthy social life, Liam divides his free time between playing basketball, spending time with his friends and supporting his beloved Hawks.
Drawing on his training as a former professional athlete, playing baseball for the New York Yankees, Nathan brings this determination and goal oriented focus to deliver an exceptional experience. Well regarded for his supportive and personable nature, Nathan guides clients seamlessly through the sales process and is passionate about establishing genuine connections with everyone he encounters. Nathan loves Melbourne’s diverse culture, sports and impeccable family lifestyle and particularly enjoys spending time with his twin daughters at his local park.
The Beckworth 184—186 Tooronga Road Glen Iris
Hotham & Carlisle 99 Hotham Street St Kilda
3
Current Projects St James Park 1a Yarra Street Hawthron
Olea 44-54 Kambrook Road Caulfield North
4
No. 71 71 Station Street Fairfield
Verse 18 Wilkinson Road Sunshine
Rosa 30 Rosamond Road Maribyrnong
Luminess 27 Russell Street Essendon
5
Reflections on 2018 2018 was quite a turbulent year for real estate, both in Melbourne and many other parts of Australia. Stagnation and negative growth have been touted as being the beginning of a property crash. In this report, Secret Agent will analyse some indicators and metrics which affected the property market in 2018, and discuss how they are likely to affect prices further into 2019. Australian Government Bond Yields Throughout 2018, government bond yields largely remained the same, with the 10-year rate peaking at 2.935% on the 5th of February. The low of 2.34% came at the end of the year on the 20th of December and underlines the recent market volatility. There was a downward trend for all bond yield rates over the last quarter of 2018. As in 2017, the RBA kept the cash rate steady at 1.5% throughout the entire year. This is tipped to change in the new year. Some economists are predicting a fall down to 1% for 2019. This would likely soften the blow of the gradually deflating property prices.
FIGURE 1 AUSTRALIAN GOVERNMENT BOND YIELDS & RBA CASH RATE
3.00%
2.25%
1.5%
0.75%
0%
22/12/2021
6
14/02/2022
05/04/2022
24/05/2022
12/07/2022
29/08/2022
16/10/2022
01/12/2022
Australian Government 2 year bond
Australian Government indexed bond
Australian Government 10 year bond
Australian Government 3 year bond
Australian Government 5 year bond
RBA cash rate
FIGURE 2 WEEKLY CLEARANCE RATES FOR ALL CAPITAL CITIES SOURCE: CORELOGIC (HARLING, 2018)
90% 80% 70% 60% 50% 40% 30% Nov 08
Nov 10
Nov 12
Nov 14
Weekly auction clearance rate
Nov 16
Nov 18
4 week average
FIGURE 3 HOUSING PRICES AND HOUSEHOLD DEBT* (RATIO TO ANNUAL HOUSEHOLD DISPOSABLE INCOME) SOURCES: ABS; APM; APRA; CORELOGIC; RBA
Housing prices
Auction Clearance Rate There was a concerning decline in the number of properties sold throughout 2018 using a traditional auction method, with many properties being passed in and later sold at lower prices through means of a private sale. Melbourne saw a significant drop to 50.5% in 2018 (Harling, 2018), compared to 74.3% in 2017. This coupled with the negative sentiment that was present throughout the year, makes it undoubtedly the case that there is a slow and gradual deflation of the property market in Melbourne (and most other capital cities within Australia). Many failed auction results go unreported as well so the true clearance rate is likely to be 30-35%. While there have been conflicting reports about which direction the Reserve Bank of Australia will take the nominal cash rate, most analysts predict either no change in 2019 or a small decrease (McInnes & Boyd, 2018). Housing Prices and Household Debt It is also worth analysing household prices to household debt, as shown from the Australian Bureau of Statistics. In 2018, there was an unprecedented high for income-to-debt ratio of 2. This means that the average household is unable to live within their means and is relying on more debt to service not only increasing housing costs but also household expenditure. Long term, this is clearly unsustainable,
Household debt
5
2.0
4
1.5
3
1
0.5
2 1992
2005
2018
1992
2005
2018
*HOUSEHOLD DISPOSABLE INCOME IS AFTER TAX, BEFORE THE DEDUCTION OF INTEREST PAYMENTS, AND INCLUDES INCOME OF UNINCORPORATED ENTERPRISES.
and will likely require either much higher wage growth in real terms, lower household costs, strict mortgage conditions (resulting in less debt being taken on) or other changes which may reduce living pressures. Negative Gearing Changes 2018 was controversial for many property investors. This was due to the proposed changes to the ability to negatively gear property, as well as changes to capital gains and other tax incentives which have helped fuel the real estate industry in Australia for many years. Primarily, this is seen as a method to increase tax revenue, reduce the number of investors within the property market and enable more first home buyers to afford their first home. It is likely that any investment properties purchased before legislative changes are made, will be unaffected. (Fuary-Wagner, 2018)
7
Reflections on 2018 Average Median Monthly Capital Growth 2018 TABLE 1
NORTH
SOUTH
EAST
WEST
CBD
Houses & Townhouses
3.95%
6.76%
3.29%
1.23%
-
Apartments
10.51%
4.38%
11.90%
10.12%
1.46%
We find that on a month-by-month basis (that is - non-cumulative), property prices increased. This meant that for extremely short term investment (ie. 30 days) prices on average would increase. This however has little benefit to the vast majority of investors, who look for long term growth opportunities in the property market.
Houses, Townhouses & Apartments
NORTH
SUBURB
SOUTH
EAST
WEST
CBD
-12.625% -12.625%
-11.53%
-18.14%
-1.81%
In terms of yearly growth, we see that there was an overall decline in all areas, with the CBD losing the least value, and inner western suburbs losing the most value. Finally, it is useful to see a breakdown of the growth on a per Suburb level, as shown in Table 3.
APARTMENTS
Southbank
-
-1.41%
Melbourne
-
-2.84%
Docklands
-
5.31%
Inner North Fitzroy
-5.83%
7.68%
Fitzroy North
-8.40%
-10.71%
-0.38%
10.02%
North Melbourne
-16.09%
0.38%
Brunswick
-12.50%
10.75%
Clifton Hill Brunswick East Collingwood
1.22%
5.40%
-0.94%
-15.00%
-9.32%
-4.68%
Carlton
-13.82%
-1.02%
Carlton North
-19.02%
6.51%
9.19%*
43.50%
22.05%
-
-16.10%
-12.19%
-10.89%
0.00%
Princes Hill Parkville Inner South Middle Park
Houses, Townhouses and Apartment Growth
Port Melbourne
Given the results, it is evident that growth is dependent entirely on the area. The highest growth area was apartments in Albert Park with 87.50% growth (with 9 Apartments sold in 2018). It should be noted however this is quite a small sample size. East Melbourne Houses and Townhouses had the least growth, declining by 57.04%, although once again this result is likely of little actual value, due to only 3 comparable sales being recorded.
South Melbourne
-5.28%
2.19%
Albert Park
-6.60%
87.50%
4.47%
-0.45%
Inner East Cremorne
-57.04%*
7.61%
Burnley
13.03%
47.03%*
Conclusion
Abbotsford
-7.56%
-1.17%
It has been an interesting year for real estate in Melbourne and Australia as a whole, perhaps a watershed moment of such. Many investors and home buyers have seen that conventional wisdom of “property prices always go up” is in fact not true. Nonetheless, 2019 will undoubtedly be an even more interesting year for property, as we wait to see how the government, banks and the public address and operate in unknown market conditions.
Richmond
-1.66%
12.48%
Hawthorn
— Daniel Schulz PH: + 61 3 9349 4333
REFERENCES Fuary-Wagner, I. (2018, November 13). Proposed changes to negative gearing would create two markets: RiskWise CEO. Retrieved from Australian Financial Review: https://www.afr.com/real-estate/proposedchanges-to-negative-gearing-wouldcreate-two-markets-riskwise-ceo20181112-h17s8w Harling, J. (2018). Clearance Rates Continue To Track At Sub-50% Levels While Auction Activity Slumps As Melbourne Goes To The Races. CoreLogic.
8
HOUSES & TOWNHOUSES
Inner City
Northcote
Yearly Capital Growth 2018 TABLE 2
TABLE 3 Inner Melbourne percentage growth for houses, townhouses and apartments in 2018
East Melbourne
-23.81%
-3.11%
South Yarra
-1.66%
-6.30%
Prahran
-1.22%
-7.97%
-21.53%
-23.14%
Inner West West Melbourne Kensington
1.87%
6.70%
Flemington
-15.71%
-4.51%
Travancore
51.22%*
0.00%
McInnes, W., & Boyd, T. (2018, December 4). Reserve Bank of Australia keeps cash rate on hold at 1.5pc. Retrieved from Australian Financial Review: https://www.afr.com/news/economy/reserve-bank-of-australiakeeps-cash-rate-on-hold-at-15pc-20181204-h18omcKendall R and P Tulip (2018), The Effect of Zoning on House Prices, RBA Research Discussion Paper No. 2018-03. Lees K (2018), ‘Quantifying the Costs of Land Use Regulation: Evidence from New Zealand’, University of Canterbury Department of Economics and Finance Working Paper No 1/2018.
Retirement on the Rise
With retirement on the rise – literally and figuratively – it’s time to reassess your development approach.
The vertical retirement village also allows more effective utilisation of smart building innovation, and integrated health maintenance technology with vertical services design an early consideration which become key to longer ageing in place opportunities.
As the property sector watches in anticipation of how the market evolves in the current climate, there is an emergence of developers assessing residential focus against other potentially more appetizing models.
Subjective constraints can have enormous influence on the form and yield of a project and the standard of facilities, service and residence amenity available. Early involvement with expert consultants that can navigate through the tricky and often ambiguous local planning schemes is becoming paramount with this evolving model.
Amidst a growing demographic looking for higher standard of retirement living, the vertical and mixed use over 55’s lifestyle market has intriguing potential for discerning developers and operators alike. The increase of vertical retirement together with more sophisticated product expectation means the industry is naturally steering toward a methodology aligned with high end apartment design, and away from traditional cookie cutter models.
At Ewert Leaf we are currently working on a number of projects that are focusing on shared spaces and increased interaction to form like-minded communities. Dual emphasis on vertical construction methodology, and amenity and hospitality expectations are helping develop the next level of lifestyle the coming boom of retirees are demanding.
As the apartment market remains strong in areas popular with owner occupier and down sizing purchasers, the opportunity to include the next phase of lifestyle village into these areas holds key interest. Modern retirement villages no longer need to be single story builds located in the outer suburbs. They now take pride of place in thriving metropolitan locations close to family and friends, with city views, top-tier amenities, wellness facilities, community gardens and hotelstyle services.
Retirees now purchase to live, and live well. Which can only mean more demand for the vertical lifestyle model. — Toby Ewert Director, Ewert Leaf PH: + 61 3 9686 2100
9
Owners Corporation
Overview of an Owners Corporation When purchasing an apartment or townhouse you are almost certainly buying into an Owners Corporation.
Plan of Subdivision
Known as body corporate prior to 2006 the Owners Corporation you are buying into is often one of the most commonly overlooked and least understood aspects of apartment living.
The registered plan of subdivision will show each lot owner their entitlements (share of ownership of the common property/voting rights) and their liability (proportion of fees they are obliged to pay).
Consumer Affairs Victoria is the governing body for all other Owners corporation matters, including insurance and disputes.
The plan of subdivision will also provide useful information to lot owners such as the boundaries of their lot (and their location) as well as any accessory units (car spaces or storage cages). This is critical information as it may impact on what the lot owner is responsible for maintaining and insuring.
An Owners Corporation is responsible for managing and maintaining the common property of a residential, commercial, retail or mixeduse property development. Traditionally, common property (as designated on the plan of subdivision) included gardens, passages, walls, stairwells, pathways, driveways, lifts, foyers and fences. These days, as more developers are zeroing in on the discerning downsizer market, the common property within new developments is more likely to contain pools, saunas, gyms, cinema rooms, libraries, communal BBQ areas & even wine cellars. It is important for purchasers to not only understand what the Owners Corporation is and how it works, but also that being part of an Owners Corporation automatically bestows upon them additional legal and financial responsibilities.
10
New Developments — Owners Corporation Basics
Multiple Owners Corporations may exist in larger developments and is often used as a way to restrict access to the common property to certain sections of the building (e.g. commercial vs residential areas) or, more commonly, as a way to fairly apportion costs across lots. For example, a mixed-used development which has a lift serving only the residential apartments may have a separate Owners Corporation comprising only the residential lots. In this way, the commercial lots on ground floor can be excluded from contributing toward the ongoing maintenance and running costs of the lift given they derive no benefit or use from it.
Occupancy Permit
Joining the Owners Corporation Committee
An occupancy permit signifies that the relevant building surveyor is satisfied that the completed building is suitable for occupation. The Building Act 1993 requires the issue of an occupancy permit prior to occupation of a building where a building permit states that one is required.
An Owners Corporation with 13 or more lots must elect a committee at each Annual General Meeting. Owners Corporations with fewer than 13 lots may elect a committee if they choose to, but it is not mandatory.
The occupancy permit provides the purchaser with useful information pertaining to the development and will note the description of building work, the permitted use of the building and the building classification.
The elected Owners Corporation Committee (OCC) are responsible for representing the interests of all owners and making decisions on their behalf until the next Annual General Meeting where a new committee is appointed. These members work with the Manager to make decisions affecting the day to day operation of the building and ensure everything is running smoothly.
The occupancy permit also lists all the essential safety measures of the building (e.g. smoke detectors, sprinklers, hydrants and hose reels) and their required maintenance frequency. Owners Corporation Budget Most Owners give little thought to the first year Owners Corporation budget and this may bring about serious bill shock post-settlement when they receive their first Owners Corporation levy notice. Owners typically are not looking through the Owners Corporation budget when evaluating their real estate purchase choosing to focus on the apartment itself – the floor plan, location to shops/cafes and overall design. As a rule of thumb, the greater the amenity in the building (e.g. pools, gyms, cinemas etc), the greater the OC fees will typically be. As such, it is critical that prospective purchasers do their research and make an informed decision about what they can really afford to buy. Expenses not included in the budget or significantly under represented could result in owners receiving unexpected special levy invoices and be asked to contribute hundreds, if not thousands of dollars to make up budget shortfalls. Further, it is important to note that the second-year OC budget may deviate substantially from the first-year budget once the typical 12-month defect warranty period expires. Budget items which are typically included from the second year onwards include comprehensive lift maintenance, backflow prevention testing, height safety system certification, garage and sliding door maintenance, general repair provisions etc.
Who is the Manager? An important aspect when buying into an Owners Corporation is who the Manager will be. The Manager is appointed by the Developer prior to settlements taking place and as such the choice of Manager is not selected by the owners (at least for the initial term of appointment). The Manager and their organisation is charged with the responsibility of administering the Owners Corporation, maintaining the building and common property, handling the Owners Corporation finances and ensuring governance and compliance. Look to see if the company is managing other properties in the area, if they are members of Strata Community Australia (SCA) and don’t be shy to ask to see a copy of their Contract of Appointment. A good OC Manager will always try to build a relationship with the owners of a new development early on to introduce themselves, go through the budget and answer any questions owners might have.
It is important for committee members to understand their role and the powers they have with regards to the finances and decisions of the Owners Corporation. The Manager’s role is to work with and guide the committee during the year becoming a trusted advisor to the Owners Corporation. Before deciding to join the Owners Corporation Committee, owners should ensure that the Manager has taken out office bearers Liability insurance within the strata insurance policy. Office bearer’s insurance is designed to provide protection to the Owners Corporation Committee members against losses arising from alleged wrongful acts committed in the course of their duties.
Post Move-Ins Once owners have moved into the building, the Owners Corporation (through the Manager) takes over management of the building and common areas. It is important to ensure that the tradespeople maintaining your asset are reputable, licensed and carry all appropriate insurances. On a day to day basis the building may be visited by cleaners, essential service maintenance contractors, plumbers and electricians, all working to maintain your asset and ultimately preserve its value. With so many people coming and going in a busy apartment building, it is crucial for the Owners Corporation to have access control and security protocols in place; knowing who has keys, what these keys open and where they are stored will play a part in ensuring the safety and security of all residents and the building. Once these contractors have attended to jobs on site they will issue the Manager with invoices. It is also important here that the committee and Manager have clear payment authority and procedures in place. Owners should be able to contact the Manager and obtain financial information pertaining to the Owners Corporation in a timely manner. Most Managers will provide online access to the accounts via an owners portal. At the conclusion of the first financial year, an Annual General Meeting is held with all the owners invited to attend. At the AGM, the Manager will provide an overview of the financials and activities of the Owners Corporation for the preceding year and propose a new budget for the year ahead. At this meeting a new committee is appointed and the process starts again. — Bryan Phillips Director, Tideways PH: + 61 3 9534 4614
11
The Zoning Effect As any prospective homebuyer knows house prices in Australia have been rapidly increasing over the last decade. When we think of property values, we generally think of two factors: the cost of land, and price of the structure. In a free market with balanced supply and demand, the sum of these two factors should determine the price of housing. In the real world, though, free markets are hard to come by. A variety of forces affect the real estate market, for better and for worse. One significant factor is zoning controls local government policies that control the supply of housing in some way. Although they may provide benefits, these controls also push up the price of housing. In effect, this means that property values comprise of three factors: land, structure, and the “zoning effect.” In this review we disregard more intangible features such as emotion and speculation. In this report, Secret Agent will break down the findings of a recent RBA paper by Ross Kendall and Peter Tulip on the zoning effect. What Is The Zoning Effect? First off, we need to understand zoning controls. Most basically, zoning controls are regulations by governments which determine who can build what, and where. Examples of this are minimum lot sizes which limit subdivision, and height limits on buildings. Zoning controls serve a valuable function – unrestricted development would likely lead to chaos in some areas. However, by limiting the types of allowable dwellings, these controls also create a scarcity of product. In the market, this means that buyers pay a premium simply for the right to own land which is zoned a certain way. This premium is what Kendall and Tulip refer to as the “zoning effect.” Others have referred to this as a zoning “tax,” but this is misleading because no government revenue is involved (see Glaeser & Gyourko 2003). The zoning effect can be seen in the difference between the physical value of land and its market price. The market
12
price is the price that land is listed or sold for. The physical value of land is more complicated. Essentially, it is an estimation of how much people value land relative to other factors. Kendall and Tulip find that the physical value is frequently much lower than the market value. Let’s take a basic example. Say a property is made up of a $400,000 house on a block of land whose physical value is $300,000. In a vacuum, the market price of this property should be $700,000. Zoning regulations may mean that the land’s market value is actually $900,000. This extra $200,000 is the zoning effect, and represents a premium buyers must pay for the right to have a dwelling at this location, because of a scarcity of similarly zoned properties. This applies whether or not the buyer wants to develop or not. Previous research has argued that zoning controls have contributed to high house prices in Australia (Daley, Coates & Wiltshire 2018a). In the next section, we break down the findings of the RBA report to show just how much this is the case.
The Zoning Effect In Australia Kendall and Tulip look at the zoning effect on detached houses in the four largest cities in Australia: Sydney, Melbourne, Brisbane, and Perth. Table 1 shows the zoning effect in these cities in 2016. As we can see, the zoning effect is quite significant. This is particularly true in Sydney, where the zoning effect added $489,000 to the average market price of a detached house. Without the zoning effect, the average value of a detached house plus land is $671,000. This means that the average homebuyer in Sydney is paying an additional 73% for the right to build a dwelling on that land, whether or not they intend to.
Kendall and Tulip show similar effects in Melbourne, where the zoning effect adds $324,000 to the average house price, and is 69% above the physical value of the average property.
Table 1: Average House Price Decomposition: $'000 (per cent of total), 2016 Source: Kendall & Tulip 2018, p.10 PERTH
BRISBANE
MELBOURNE
SYDNEY
Dwelling structure
242 (41)
267 (49)
268 (34)
395 (34)
Land
346 (59)
275 (51)
524 (66)
765 (66)
Physical land
140 (24)
116 (21)
201 (25)
276 (24)
Zoning effect
206 (35)
159 (29)
324 (41)
489 (42)
Total
588 (100)
542 (100)
793 (100)
1160 (100)
Zoning effect as a percentage of physical input costs
54%
42%
69%
73%
The zoning effect is also present in Perth and Brisbane, although less so than Sydney and Melbourne. To show that this is not a one-off, it is worth looking at the zoning effect across the years, as shown in Figures 2 – 5. Interestingly, in 2000 the zoning effect was minimal in all cities except for Sydney, where it accounted for around 20% of house prices. Over time, the zoning effect has grown in all four cities. This may partly represent the persistence of existing zoning controls in the face of ongoing population growth. Kendall and Tulip broadly find that the zoning effect applies to apartments as well, although there is less data, and none for Perth. Between 1990 and 2006, the zoning effect was negligible in Brisbane, Melbourne, and Sydney, but since then it has gradually risen.
In Sydney, the zoning effect is higher
Figures 2 – 5: House Price Decomposition (By city, mean)
SYDNEY $'000 1000 750 500 250 0 2001
for apartments than for detached houses, adding an additional 85% to the physical value of an apartment in 2016. These numbers are lower elsewhere, sitting at 30% for Melbourne and 26% for Brisbane.
2006
2011
2016
MELBOURNE $'000 1000 750
Predictably, the zoning effect has the greatest impact (in dollar terms) in areas where there is the most desire to build new developments – inner suburbs of cities, as well as coastal areas. For example, the zoning effect might represent $700,000 of the market price of a property in an inner suburb of Sydney, but only $200,000 in an outer suburb.
500 250 0 2001
Overall, the zoning effect in these cities is comparable with cities in other countries with strict zoning laws. In San Francisco, a 1999 study showed that the zoning effect accounted for 53% of the total price of the average property (Glaeser, Gyourko & Saks 2005). More recently, a study of New Zealand showed that the zoning effect accounted for 56% of the total price in Auckland, 48% in Wellington, and 32% in Christchurch (Lees 2018). Discussion The immediate reaction to the findings of the RBA paper might be to call for a major loosening of zoning controls, in order to reduce the zoning effect. Although this may seem like a good move, there are some considerations to be made.
2006
in Sydney would fall by 73% if zoning controls were eliminated. There are many factors which affect property prices with or without zoning. In Australia, for example, the physical value of land in major cities is relatively high compared to other countries. It sits at around 21-25% of total property value. This may be because these cities are limited in their expansion,because they are constrained by coastal regions and/or national parks. Ultimately, this means that prices would only drop so far in the absence of the zoning effect.
2016
2011
2016
2011
2016
BRISBANE $'000 1000 750 500 250 0 2001
2006
First of all, it is important to note that they do not mean that house prices
2011
PERTH $'000 1000 750 500 250 0 2001
2006
13
The Zoning Effect We should also remember that zoning controls provide benefits, ones which are often difficult to measure. Zoning controls help to manage growth in areas, and can help to protect the character of neighbourhoods. Furthermore, free-for-all development in an area would likely place a large burden on infrastructure and the environment, which may have negative repercussions throughout a city or town.
Some level of zoning controls are therefore necessary, although we should be wary of the grounds on which people use “protecting the neighbourhood’s character” as a justification. The major downside to zoning controls is the fact that they inflate property prices, which privileges existing homeowners, and disadvantages prospective homebuyers. Increased property prices also mean an increase in the cost of rent. Both of these factors may contribute to inequality and disadvantages for the younger generation. Zoning controls also mean that the supply of housing is inflexible, and can’t easily change to meet demand. For example, if there was a demand for more high-density dwellings in a suburb, tight zoning controls would make it difficult for this demand to be fulfilled, and would drive up the prices of existing high-density living. Conclusion As Kendall and Tulip argue, we need to weigh the benefits and costs of zoning controls. Although there are distinct benefits to zoning controls, in their current form they appear to be negative. By driving up house prices, the zoning effect may be creating more inequality, and reducing the responsiveness of housing stock to demand. In Australia, population growth and increased demand for housing means that the zoning effect will probably continue to increase if nothing changes. Steps need to be taken to mitigate this effect. Kendall and Tulip suggest either relaxing zoning controls, or reducing demand for land through improved transport infrastructure. Others make similar points, arguing that more housing is the only real solution to the affordability issue (Daley, Coates & Wiltshire 2018b). A lack of affordable housing affects all of society. It prevents the less well-off from being able to own property or live close to their workplace. More broadly, it can have effects on society, such as a less productive workforce and a strain on infrastructure, which can lead to political pushback. It is therefore in all our interests to have a deeper conversation about zoning and how these can be freed up, while maintaining protection for local neighbourhoods. Allowing too much freedom or too much control is equally bad. A balance needs to be struck, one that is progressive but mindful that dwellings created will be where future generations live and work. — Alex Greggery PH: + 61 3 9349 4333
14
REFERENCES Daley J, B Coates and T Wiltshire (2018a), Housing Affordability: Re-imagining the Australian Dream, Grattan Institute, Melbourne. Daley J, B Coates and T Wiltshire (2018b), ‘RBA Research Shows that Zoning Restrictions are Driving Up Housing Prices’, The Conversation, March 8, viewed November 2018. Available at <https://theconversation.com/rba-research-shows- that-zoning-restrictionsare-driving-up-housing-prices-93064> Glaeser EL and J Gyourko (2003), ‘The Impact of Building Restrictions on Housing Affordability’, Economic Policy Review, 9(2), pp 21–39. Glaeser EL, J Gyourko and R Saks (2005), ‘Why is Manhattan So Expensive? Regulation and the Rise in Housing Prices’, The Journal of Law & Economics, 48(2), pp 331–369. Kendall R and P Tulip (2018), The Effect of Zoning on House Prices, RBA Research Discussion Paper No. 2018-03. Lees K (2018), ‘Quantifying the Costs of Land Use Regulation: Evidence from New Zealand’, University of Canterbury Department of Economics and Finance Working Paper No 1/2018.
Entourage Finance
In 2018 getting your home loan approved is becoming increasingly difficult. Lenders are making it more challenging in light of the revelations that have been made throughout the Royal Commission into Banking and Finance which include some less than ethical behaviour on the part of many of the banks. Some of the changes that we have seen banks implement include: • l enders assessing your ability to make repayments at double the current rates • l enders requiring itemised summary of your monthly expenses • a reduction in the number of interest only loans being approved • a reduction in the number of investment loans approved • o lder Australians having to have a very clear exit strategy in place (and not just those nearing retirement, we're talking people in their 40's) • a general slow down in the time it's taking loans to get approved as more checks are in place.
Not helping the matter is the cost of short term funding increasing in the finance market, meaning lenders are putting interest rates up despite what the RBA does (called an out-of-cycle rate increase) And with the property market beginning to slow across capital cities we are seeing valuations coming in lower than expected, meaning loan-to-value ratio's (LVR's) are higher or loans are getting knocked back because the property value isn't high enough to justify the loan applied for.
Now more than ever is when you need to be working with an expert. With over 50 years’ collective experience, the Entourage team know which lender is going to be more open to your scenario, who’s taking on business and the best way to structure your loan to ensure the best outcome for you. — Damien Roylance Director, Entourage Finance PH: + 61 3 9421 1651
With all these new lending changes and coupled with peoples changes in circumstances, many Aussies are getting stuck with one lender because they no longer meet the criteria with other lenders to refinance. Or they are having to turn to non-conforming lenders and having to pay substantially higher interest rates than their peers.
15
GST – New Residential Property Withholding
Key summary: • GST amendments effect Developers of new residential property • GST is paid by the purchaser directly to the ATO • Cashflow impact for the Developer There has been a recent amendment to the GST Act surrounding the remission of GST on new residential premises or new residential subdivisions to the ATO. Previously, Developers would be responsible in remitting the GST to the ATO through the lodgement of Business Activity Statements (BAS). The new withholding regime now require purchasers to pay the GST on the purchase price directly to the ATO. The amount payable is 1/11th of the contract price or 7% of the contract price if using the margin scheme 1. The amendment to the GST Act takes effect from 1 July 2018 and it applies to supplies for which any consideration, other than a deposit, is provided on or after this date. However, there is a two-year transitional period for pre-existing contracts, in which
1
the new withholding regime does not apply to any contract that was entered into before 1 July 2018 and consideration other than a deposit is provided before 1 July 2020. Example of a transitional arrangement: Mary enters into a contract with a Developer to purchase a new residential premise for $850,000. Contract date is on the 26 June 2018 and the property will settle on the 11 April 2020. As settlement takes place before 1 July 2020, Mary is not required to withhold the amount and there is no requirement for the Developer to notify Mary of any withholding obligations. The Developer will need to collect the GST amount at settlement and remit this to the ATO in the next BAS. What does this mean to Developers? Developers will have the obligation of supplying a written notice to the purchaser when there is a supply, by way of sale or long-term lease of: • N ew residential premises, except for those created through a substantial renovation and commercial residential premises; or • S ubdivisions of potential residential land to a purchaser who is not a GST registered entity acquiring the land for a creditable purpose 2.
If using the Margin Scheme, the withholding amount percentage may be varied between 7% to 9% by the Minister in a legislative instrument. Potential residential land means land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises as per section 195 of the GST Act.
2
16
Obligations and Implications to Developers
It is important to note that any residential premises created through substantial renovations are generally deemed to be new residential premises under section 40-75 of the GST Act, however the withholding obligations excludes any existing premises that have been substantially renovated. If the amount paid to the ATO by the purchaser is more than the GST required to be submitted, the Developer may request for a refund in an approved form to the ATO, no later than 14 days before the Developer’s BAS is due. Developer’s notification requirements A written notice must be provided by the Developer to the purchaser on or before the time supply is made. This written notice can either be incorporated into the contract of sale or provided through a separate notice and will need to include: • W hether or not the purchaser is required to make the withholding payment to the ATO; • If payment is required by the purchaser, the notice must also state: • The name and ABN of the entity making the supply; • The amount that the purchaser will need to pay; • When the amount is required to be paid; and • T he GST-inclusive market value of any consideration that is non-monetary. With any supply to purchasers acting as tenants in common, the notice provided must clearly state the respective amounts that each purchaser would need to withhold.
Failure to provide notice will incur penalties A Developer will be taken to have committed an offence if they have failed to provide a notice to the purchaser or failed to provide an accurate notice. The penalty imposed could either be a strict liability offence or an administrative penalty. The maximum penalty for the strict liability offence is $21,000 but the court may impose 5 times of the maximum penalty if a corporation is convicted of this offence. The administrative penalty is currently $21,000. Impact on cash-flow for property Developers Property Developers should be aware that this amendment in the GST Act will have an impact on their cash-flow. Previously, Developers would collect GST at settlement on behalf of the ATO and this amount would have been available for business use until the next BAS is due for payment. With the change in the remittance obligation, Developers will now experience a funding gap and will no longer be able to enjoy the cash-flow benefit. Hence it is important for Developers to take this amendment into consideration when budgeting and planning for the funding of current and future developments. The information provided in this article is general in nature and does not constitute tax advice. We recommend that you seek advice from your tax professionals. Should you have any general queries in relation to the article please do not hesitate to contact Dani Di Blasio at Murdoch Partners. — Dani Di Blasio Manager, Murdoch Partners PH: + 61 3 9854 8999
17
Labor’s Proposed Changes to Negative Ge
Federal Labor leader Bill Shorten has announced the Labor party’s (ALP) plan to introduce changes to both negative gearing and the Capital Gains Tax (CGT) discount to all investment assets. If introduced, these changes will have potentially far reaching implications for the Australian property market. The proposed changes are summarised below: • N egative gearing - Labor has proposed to limit negative gearing to newly constructed property investments from a yet-to-bedetermined date following the next election. All investments made before this date will be fully ‘grandfathered’, ensuring that taxpayers will continue to be able to deduct the full net rental losses against their taxable income.
osses from new investments in existing properties can still be L used to offset other investment income tax liabilities. These losses can also continue to be carried forward to offset future investment income and any capital gains on the investments.
• C apital gains tax - Labor has also proposed to halve the capital gains discount for all assets purchased after a yet-to-bedetermined date following the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50% to 25%.
18
ll investments made before this date will not be affected by this A change and will be fully ‘grandfathered’. This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets.
Potential Impact There is a lot of debate and disagreement about the potential impact of these proposed changes on property prices. Noting that these proposed changes were first announced when the Australian property market was booming and it has since slowed down considerably. Industry experts have contended, however, that the proposed changes appear to favour mature investors who have a combination of positively geared and negatively geared properties under mostly ‘grandfathered’ investments. Conversely, most smaller investors (ie. with a single negative geared property) will appear to be worse off. Further, in all likelihood it may increase demand for newly constructed properties, in preference to existing properties. Essentially the ALP’s proposed changes will result in the addition of a new category of tax loss – the investment loss. This may result in a whole new layer of complexity when preparing individual tax returns with taxpayers impacted having to appropriately calculate, apply and carry forward investment losses in addition to dealing with capital losses. We have provided an example to the right to help explain the potential impact of these proposed changes.
earing and the Capital Gains Tax Discount EXAMPLE: IMPACT OF PROPOSED NEGATIVE GEARING RESTRICTIONS ON THREE DIFFERENT INVESTORS
INVESTORS
ALICE
BILL
CHARLIE
Investment details for each Investor
Alice borrows $600,000 to buy an investment property in Melbourne.
Bill borrows $600,000 at 7% pa to buy shares in a Australian listed public companies.
Charlie borrows $1,200,000 at 5% pa to:
The interest rate is 5% pa and the net return (after all deductions other than interest) will be 3.5% pa. Alice also earns $250,000 pa (ie. 45% marginal tax bracket) but has no other investments.
The net return (after all deductions other than interest) will be 2.5% pa. Bill already has a positively geared investment property, worth $700,000, with a net return (after all deductions) of 3% pa.
· buy a property for $600,000 which will return a net rent (before interest) of 3%; and · buy $600,000 of shares in an Australian listed public company which will pay a grossed-up dividend yield of 5%.
He also earns $400,000 pa (ie. 45% marginal tax bracket).
In addition, Charlie uses $500,000 of his own funds to purchase five-year treasury bonds, paying him an interest rate of 2.4% pa. (assuming that treasury bonds covered by the negative gearing restrictions)
Interest expense?
=$600,000 x 5%pa
=$600,000 x 7%pa
=$1,200,000 x 5%pa
=$30,000
=$42,000
=$60,000
Investment income earned?
=$600,000 x 3.5%pa
= ($600,000 x 2.5%) + ($700,000 x 3%)
= ($600,000 x 3%) + ($600,000 x 5%) + ($500,000 x 2.4%)
=$15,000 + $21,000
=$18,000 + $30,000 + $12,000
=$36,000
=$60,000
WORSE OFF - Alice will be adversely impacted by the proposed negative gearing changes, as her interest expense exceeds her net rental income by $9,000.
WORSE OFF - Bill will be adversely impacted by the proposed negative gearing changes, as his interest expense exceeds the total investment income by $6,000.
NEUTRAL - Charlie will not be impacted by the proposed negative gearing changes.
Under the current rules, that excess could have offset against Alice’s taxable income, which would currently give her a tax saving of $4,050.
Under the current rules, that excess could have been offset against Bill’s other taxable income, which would currently give him a tax saving of $2,700.
Are the Investors better or worse off under proposed changes?
=$21,000
Under Labor’s proposed rule changes, the excess of the investment expenses cannot be offset against other taxable income, but must be carried forward for offset in future years against future investment income or capital gains from the disposal of the investment assets.
Issues to consider in later years?
Charlie’s total interest expense is $60,000, while his total investment income from the three sources is also $60,000. His position will remain neutral. Charlie can fully utilise the losses he makes from the negative gearing of his property & share portfolio, offsetting against the positive gearing of the treasury bonds.
All taxpayers with investments will need to review their position every year, as their circumstances may change. If, for example, the interest rate for the investment falls and rental returns rise; a previously negatively geared property may become positively geared. Also, taxpayers may buy new investment assets with better gearing ratios, in which a shortfall problem may be reduced, or even eliminated.
Conclusion Industry experts consider that all taxpayers with investments will need to closely manage their investment portfolios, particularly where circumstances may change going forward, such as a change in interest rates. Also, it has been identified that families purchasing properties should carefully consider in the name of which family member/entity is best able to manage any negative gearing restrictions.
— Joseph Kalb Partner, Lowe Lippmann Chartered Accountants PH: +61 3 9525 3777
— Cameron Fogarty Tax Manager, Lowe Lippmann Chartered Accountants PH: +61 3 9525 3777
This article has been prepared based on the information which has been released by the ALP to date, however it will be critical to see the final detail of any legislation (if Labor was to win the next election) before consulting your advisers to make any investment decision.
19
Past Project Profile
Highgreen 1457 High Street Glen Iris
Lawson 39 Lawson Street Hawthorn East
20
Type
% of Total
Average Size per m2
Average Price per m2
Average Price
2 Bed, 2 Bath
12
77.4
$10,975
$850,500
2 Bed + Study, 2 Bath
5
82.6
$10,983
$905,900
3 Bed, 2 Bath
10
114.4
$11,184
$1,280,250
3 Bed + Study, 2 Bath
3
121.7
$11,333
$1,380,167
Type
% of Total
Average Size per m2
Average Price per m2
Average Price
3 Bed + 2nd Living, 3 Bed + PR
4
287.8
$9,206
$2,651,250
4 Bed, 3 Bath + PR
1
261.0
$9,031
$2,357,000
4 Bed, 4 Bath + PR
1
284.0
$9,137
$2,595,000
Past Project Profile
Malvern Residences 1188 Malvern Road Malvern
Hudson Green 6 Hudson Street Caulfield North
Type
% of Total
Average Size per m2
Average Price per m2
Average Price
1 Bed, 1 Bath
2
57.0
$11,181
$637,250
2 Bed, 2 Bath
3
85.3
$12,643
$1,076,667
3 Bed, 2 Bath
8
124.3
$12,939
$1,607,500
3 Bed + Study, 2 Bath
1
123.0
$12,829
$1,578,000
3 Bed + Study, 3 Bath + PR
1
245.0
$14,694
$3,600,000
Type
% of Total
Average Size per m2
Average Price per m2
Average Price
3 Bed, 2 Bath
6
155.4
$10,317
$1,583,833
21
Celebrating over 100 Successful Sell Outs
+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143