ISSUE 10 I SEPTEMBER 2009
HORIZON THE
THERE’S NO SUBSTITUTE FOR PREPARATION & PLANNING
NEWSLETTER INVEST HERE
THE GLOBAL FINANCIAL CRISIS - ONE YEAR ON THE SPIRIT OF THE HORIZON HOW TO SECURE A TENANT AUSTRALIAN HOUSING MARKET DEFIES THE ECONOMIC DOWNTURN THE KIWI FRUIT TREASURE IN THE BACKYARD THE PENSION PROBLEM
BIG FOUR TAKE CONTROL
IN AFRICA, THE BIG FIVE ROAM THE PLAINS AND HAVE NOTHING TO FEAR. IN AUSTRALIA, WE HAVE THE BIG FOUR (BANKS).
WIN AN APPLE iPOD NANO. SEE INSIDE FOR DETAILS
THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THERE’S NO SUBSTITUTE FOR PLANNING AND PREPARATION “GIVE ME SIX HOURS TO CHOP DOWN A TREE AND I WILL SPEND THE FIRST FOUR SHARPENING THE AXE.” Abraham Lincoln This classic quote captures the importance of planning and preparation prior to embarking upon a major task. ‘Sharpening the axe’ is also regarded as one of the Seven Habits of Highly Successful People, in the best-selling book of the same name by Stephen Covey. It seems obvious enough, doesn’t it? After all, a builder would never build a house without an architect’s blueprint, nor would a carpenter build a yacht without the proper engineering plans. And what about the preparation lawyers put into researching their cases, or chefs into creating the perfect dish? If the need for sound planning is that obvious, and it’s commonsense, why then do we hear people talk about ‘getting an investment property’? You know, just like popping down to the newsagent for the paper and a few magazines. The Australian government has set up the investment property concept to run in the hands of the investor in much the same way that a business runs in the hands of its owner. At the end of the day, an investment property is a small business, with purchase costs, a financial loan, legal structures, transfer of ownership, project management, and outgoing costs that are
netted off against income. The bottom line is either a profit or a loss, with tax treatment tailored to the outcome. While it sounds complex, it is very manageable and it works extremely well. The point of the analogy is that if you really want to succeed in investment property, you have to be prepared to ‘sharpen the axe’. This means setting clear plans, doing your research, getting the concept right, and working with specialists. This is all well and good, but it takes time. Which is why some investors simply choose to go out and ‘get an investment property’ and end up making mistakes. To sharpen the axe, you need plenty of time; which most people don’t have. This is where McCarthy Group fits into the picture. We have the experience and skills needed to ensure that when you purchase an investment property, it is one of the final steps in a process that has been carefully researched, with a well-prepared plan that suits your personal circumstances. In other words, we help sharpen the axe for you, so that you can benefit from the results of a wellplanned and carefully structured investment, and enjoy the fruits of your labour.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THE GFC – ONE YEAR LATER THE COLLAPSE OF LEHMAN BROTHERS IN MID-SEPTEMBER 2008 SENT SHOCK WAVES AROUND THE WORLD AND WAS THE START OF THE WORST ECONOMIC CRISIS OF OUR TIME. ONE YEAR LATER, WE ARE ON THE ROAD TO RECOVERY. “The risk of worldwide recession deepened yesterday after the financial crisis toppled giant US investment bank Lehman Brothers and threatened the survival of the world’s biggest insurance company, AIG.” (The Australian, September 16, 2008.)
Worldwide bank and financial losses before Lehman Brothers folded were US$620 billion. The GFC is estimated to have cost the world economy over $10 trillion so far. That’s the equivalent of two thirds of the US’s annual Gross Domestic Product (GDP)!
On 14 September 2008, the giant US financial services firm Lehman Brothers announced its intention to declare bankruptcy. A few days later, the world’s largest insurer, the American International Group, only avoided collapse through a US$85 billion lifeline from the US Government. Soon after, the White House announced a US$700 billion financial support package.
We mark this anniversary because it was so frightening and so real for many of us. Who knows how much worse this past year could have been if the world’s central bankers and governments hadn’t acted together to inject the liquidity needed to keep the global economy in play?
Over the span of a week, the world watched with baited breath as the global economy slid ever closer to financial Armageddon. Share markets collapsed around the world in the wake of Lehman Brothers’ failure. The firm had assets of US$639 billion and debt of US$613 billion, and was about five times the size of Westpac. Recession did come to pass in most developed economies – with the exception of Australia.
OVER THE SMALL SPAN OF A WEEK, THE WORLD WATCHED WITH BAITED BREATH AS THE GLOBAL ECONOMY SLID EVER CLOSER TO FINANCIAL ARMAGEDDON. Unfortunately, it’s been estimated that Australian households have lost $602 million since the Global Financial Crisis began. It’s now time to face these losses and recover them. The shortage of housing in Australia and the astonishing affordability of the property market make investment property a sound strategy to recover lost wealth.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THE SPIRIT OF THE HORIZON OUR MONTHLY NEWSLETTER, THE HORIZON, OWES ITS EXISTENCE TO THE GLOBAL FINANCIAL CRISIS. THE LEADERS OF GLOBAL FINANCE AND POLITICS STOOD AT THE EDGE OF THE ABYSS AND RESOLVED TO TAKE DECISIVE ACTION TO RESCUE THE ECONOMIC AND FINANCIAL SYSTEM AS WE KNOW IT.
Born out of the need for positivism, The Horizon has been a welcome source of good news for our clients. It owes its existence to the Global Financial Crisis. The leaders of global finance and politics stood at the edge of a dark abyss and resolved to take decisive action to rescue the economic and financial system as we know it. Australia was gripped by the fear of what comes next. Every day brought more bad news. With an unfolding crisis on an unprecedented scale, at McCarthy Group we were concerned about our clients and prospects who were considering investments in property. Would they simply withdraw from the market? Would they miss real opportunities due to the global fears? Would they panic and sell? In addition, what would that mean for the industry? We were resolved that despite all the bad news, the world would not end. We would survive, as the fundamentals in our country remained sound. So we started to hunt for all the good news that we could find, and we shared it with you, our clients, our suppliers, and with each other. What has happened is that with an unwavering focus on the positive, and the opportunities that exist even in the worst of times, we managed to find plenty of things to be positive about at a time when many people were content to withdraw and defend themselves. Many of our clients have praised the positive approach of The Horizon, and it has proved to be a breath of fresh air during a time when the media was fixated on a seemingly unending stream of depressing news. Through this positive focus we made a strategic decision to seek out new developments that offered exceptional value for money for investors and renters. We entered the Melbourne market, with great results, and we have now re-engaged in Sydney. The opportunities presented themselves, the facts were clear, and many courageous people have since become our new clients despite all the uncertainty of the times. And to them we say congratulations. By remaining positive, we have been able to support our clients into outstanding properties that they will look back on as absolute bargains in years to come. It is understandable if you did pause during the GFC. Having survived it, however, there is much to be grateful for, and there is great value on the table right now. In fact, with the first-home buyers starting to vacate the market, this is an outstanding time to plan your next move. What’s on your horizon for 2010? As we hit the spring of our recovery, it’s time to revisit your personal goals, make a plan that will take you there, and then act on it. That’s what we’re doing at McCarthy Group. We’d welcome the opportunity to help you do the same.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THE BIG FIVE ROAM THE PLAINS THE BIG FOUR INANDAFRICA, HAVE NOTHING TO FEAR. IN AUSTRALIA, TAKE CONTROL WE HAVE THE BIG FOUR (BANKS).
A recent report in the Sydney Morning Herald showed that in the wake of the Global Financial Crisis, the Big Four banks are writing virtually every new mortgage in Australia. Figures released by the Australian Prudential Regulation Authority show the Big Four lenders captured almost 100 per cent of the almost $7 billion of new mortgages written in July. Of this, Commonwealth Bank secured 40 per cent, and Westpac 35 per cent. It seems a long time since the Federal Government announced the funding guarantees that gave the big banks such a major advantage over smaller rivals and non-bank lenders. As other economies continue their interest rate settings that are close to zero, in Australia we are at 3 per cent,
and rising, with all expectations being that even if the RBA doesn’t lift the official rates, the Big Four banks will act unilaterally and do it for them. What can we expect to see in the year ahead? • Interest rate rises driven by the banks; and • Massive banking profits that will make people wonder whether the GFC was simply a dream ($15 billion plus is the current estimation of the current profitability of the Big Four banks). What should you do? • Consider buying some shares in the bank you bank with so that you can recover some of the fees and interest charges through growth and dividends; and • Shop aggressively when you need finance. McCarthy Group can assist you in this regard.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
HOW TO SECURE A TENANT WHILE THE NATIONAL RENTAL VACANCY FIGURE HOVERS BETWEEN 1 AND 2 PER CENT, THERE WILL ALWAYS BE INVESTORS WHO END UP WITH A VACANT PROPERTY. IN SUCH SITUATIONS, HOW DO YOU FIND A GOOD TENANT, FAST? The flood of first home-buyers who have taken advantage of generous government concessions to buy their own homes has naturally left a vacuum on short-term demand for rental properties. Furthermore, the effects of the GFC have not been uniform, and some areas have been harder hit than others due to job losses, which means a reduction in demand as workers relocate or adjust to new conditions. While demand for rental property remains extremely strong, vacancy rates may vary by area depending on the extent of the impact of recent events. Koala Blue Real Estate is the property management arm of McCarthy Group. Our specialists have offered the following tips for landlords in terms of achieving rental success.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
HOW TO SECURE A TENANT REDUCE THE RENT While no one likes to go backwards in rent, this can be a pragmatic and sensible move. To quote property expert Jan Somers, “90 per cent of something is worth more than 100 per cent of nothing.” We agree, so be prepared to roll a bit with the punches in the short term, knowing that in the long term the fundamentals will come back, allowing you to catch up lost ground. ADD VALUE There are several ways to do this. One week’s free rent While technically not a big issue, for renters it can give them the s. It break they need as they juggle the timings and cost of leases. na also offers a 2 per cent reduction on their annual lease costs on property of the same rental. Bring in the whitegoods s. Some tenants either don’t have, or cannot afford new whitegoods. xtra You can make their new home special by installing these at no extra cost. Whether you have these in your investment home already, and what their age and condition is, is for you to know. Our pointt is ts. simply that modern new whitegoods have great appeal for tenants. Give it a makeover Everyone loves to live in a spruced up new place. Fresh paint, well ew maintained timbers, outdoor areas that are a pleasure to be in, new a ant curtains, and whitegoods that appeal, can all help turn a vacant n ng. house into a rented home. And don’t forget about air conditioning. in ng ng We all live through Australia’s hot summers, and air conditioning can swing a decision in your favour. A Big TV As Aussies, we love our sport. If we can’t see it live, we love to ts, watch on a big TV. Why not make this possible for your tenants, wn and give them a reason to choose your home over the one down the road. TIMING COUNTS ure Work closely with your investment property manager to ensure ries fro om that your lease expires in times of peak demand. This varies from ak rentall area to area, so you need to know when the time of peak demand exists and structure your lease accordingly. It’s all about supply and demand. hrough a If you’ve got a tip on how you have secured a tenant through p.com.au clever move, let us know by emailing info@mccarthygroup.com.au We’ll be giving a colourful 8GB Apple iPod Nano valued att $199 to the sender of the best tip. We’ll also publish the best tips in the next issue of The Horizon.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
AUSTRALIAN HOUSING MARKET DEFIES THE ECONOMIC DOWNTURN WHETHER WE COMPARE IT TO THE LOCAL SHARE MARKET OR SUPER RETURNS, OR LOOK TO INTERNATIONAL HOUSING COMPARISONS, THE AUSTRALIAN HOUSING MARKET MUST BE THE ‘DARLING OF THE WORLD’ IN TERMS OF ITS ABILITY TO SOAK UP PRESSURE. Residex data shows a negative 1.2 per cent change in the year to May 2009, while RP Data shows no change. The ‘Year’ they both refer to, of course covers much of the GFC! We are blessed as property owners in the Lucky Country. There are reasons for this incredible global performance, some of which are: 1) The unheard of shortage of 200,000 homes; 2) The current additional annual undersupply of new homes at 30,000pa; 3) Population growth exploding to its highest levels for 40 years; 4) The shortage of rental stock (1 to 2 per cent nationally); 5) Supply-side bottlenecks including the slow release of developed land, the cost of developed land, and developer uncertainty; and 6) The inflation effect of new construction, pushing up land development, construction costs and State government fees and levies. No matter what might have happened to your other investment portfolios, as the owner of your own home and one or more investment properties, you can go to sleep each night knowing that your property investments are sound. Then you can awake knowing that they are worth a little bit more than they were the day before! If our property market performed this well through the worst of times, then we suggest that getting more of it makes very good sense given the sound fundamentals that are in place, and the better times that lie ahead.
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
WITH MIGRATION FORECAST AT 180,000 PER ANNUM, THE POPULATION IN 2056 IS EXPECTED TO REACH 35 MILLION. GET READY FOR A HOUSING BONANZA! Move over! Australian cities are destined for massive increases in population in our lifetime. Latest reports show our population will grow by 65 per cent by 2050, the second highest growth rate in the world! ABS projections based on the ‘medium’ migration assumption of 180,000 per year would see cities like Sydney and Melbourne bursting at the seams to accommodate 7 million people each. How is this possible, when both cities are congested as it is? It’s food for thought. Will you join the stampede to balmy coastal regions to avoid living in the “big smoke”? Where will everyone live? Over 4 million new homes will be needed if we assume three people per family, per home. 60,000 new homes a year will be required simply to house the immigrants, while our housing backlog of 200,000 is increasing by 30,000 a year. In the first quarter of this year alone, Australia gained 97,000 migrants! This is the highest number ever recorded. If ever there was an investor’s dream, providing property to an undersupplied market in Australia has to be it! The writing is on the pre-fabricated wall, as the country simply has no other option to maintain economic growth other than to continue the migration policy so that we have the required numbers and skills to develop further. Naturally, when migrants arrive, they need jobs and accommodation. Most will initially be renters, adding to the pressure on availability and rental prices that has led to bidding auctions and vacancy rates of between
1 and 2 per cent. Bear in mind that these vacancy rates are actually more like zero per cent, because at any one time properties will be empty for reasons of sale, renovation, or simply awaiting tenants to move in. One can only speculate that property prices will be forced upwards as demand outstrips supply. Owning property will become increasingly difficult for the current population and even more so for new arrivals. As is the case in many countries around the world, property ownership will become a privilege, particularly in our capital cities. In the context of this massive influx of people, and the provision of accommodation to house them, investment property is set to deliver tremendous long-term returns in both rentals and capital growth. If worrying about finding tenants has been holding you back from investing in property, get over it! The implication for future demand for rental accommodation is clearly spelt out in these population forecasts. There is a clear picture of open-ended demand for accommodation. One of the keys for a successful entrepreneur is finding a hole in the marketplace and then filling it. Why don’t you become one of the entrepreneurs who fills this hole? Why not you and why not now?
74% 65%
POPULATION GROWTH WORLDWIDE
49% 43% 41% 18%
24%
24%
MEXICO
CANADA
UK
26% ARGENTINA
30% TURKEY
INDONESIA
USA
INDIA
AUSTRALIA
S. ARABIA
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THE KIWI FRUIT - TREASURE IN THE BACKYARD TODAY’S MASSIVE KIWI FRUIT EXPORT INDUSTRY IS AN EXAMPLE OF THE HUGE VALUE THAT CAN EXIST IN YOUR OWN BACKYARD. Like a lot of other Kiwis, I had a tree in my backyard and each spring this tree bore fruit. At first, the fruit was small, hard and inedible, but then it matured and eventually hundreds of them fell on the ground and lay there until dad ran them over with the lawn mower. This story repeated itself right across New Zealand. In nearly every backyard there was one or more of these trees. No one really ate the fruit. It was generally ignored and considered worthless – except that it made great ammunition to throw at your playmates to make a mess of their shirts, much to our mothers’ disgust. One day, a forward thinking entrepreneur came along and took this worthless fruit and turned it into one of the greatest business success stories New Zealand has ever seen. They created an export market worth – to date – over $15 billion. Over 365,000 people work in this industry and it has created 175 millionaires. The fruit, of course is the Kiwi fruit. What this and other entrepreneurs found was an opportunity sitting in their own backyard. In fact, it was in everybody’s backyard. What happened was a paradigm shift, that is, looking at a belief system (worthless yucky fruit) and turning it into potential. So, in order to succeed it took a change in attitude and a change in belief. The property market is a little bit like the Kiwi fruit story, lying there undiscovered and underused yet offering fabulous potential for the astute. Many of us would like to have an easier financial life and many of us look at opportunities or simply try to make more money with the latest “Get Rich Quick” scheme or by working harder yet many of us have unused ‘fruit’ sitting underneath our feet: our equity. Equity gives us the potential to meet a growing demand for more property while securing our own financial future. Are you taking advantage of the equity under your feet?
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
A POSTER FOR YOUR WALL; SHOULD YOU BUY ANOTHER INVESTMENT PROPERTY? HERE ARE SOME POINTS THAT YOU CAN PIN UP ON YOUR WALL IN YOUR OFFICE, STUDY OR ON THE KITCHEN FRIDGE. 1) Australian property sailed through the Global Financial Crisis 2) Housing affordability is the best it has been for many years 3) There is a current backlog of 200,000 homes countrywide 4) 30,000 too few homes are built every year 5) The rate of new home starts in NSW is at a 56-year low 6) There is very little housing stock available in the market 7) The rate of new migrants is at an all time high 8) Consumer confidence is rising 9) Investor confidence is at a 6-year high 10) Positively geared properties are available in the first year of ownership 11) Vacancy rates are at historical lows (less than 2 per cent) 12) The retreat of first-time buyers means good value for investors 13) Changing demographics mean fewer people per household 14) Australia’s population is expected to reach 35 million by 2049 15) Where will everyone live? In one of your houses!
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THE HORIZON NEWSLETTER I ISSUE 10 I SEPTEMBER 2009
THE
PROBLEM
RECENT REPORTS ON THE GROWTH IN AUSTRALIA’S POPULATION TO 35 MILLION BY 2049 HAVE HIGHLIGHTED MAJOR ISSUES FOR THE PROSPECTS OF THOSE WHO WILL BE RETIRED AT THAT TIME. The latest Longevity Index shows, for example that a 65-year old male retiring today who wanted a lifetime pension of $50,000 per year would need a lump sum of between $900,000 and $1 million. While the requirement for this level of assets is clear, where it comes from is not. With the forecasts of a surging growth in population, and the increasing numbers of retirees, the message is to prepare for your own retirement, as the government will be unable to do so. The reports also make clear that due to the shortfall in retirement funding, there will be a ‘grey army’ forced to keep working well into their seventies and beyond simply to make ends meet. No one wants to be in such a situation after a lifetime of hard work. Investment property presents a solution and an escape hatch from the hardship that could otherwise lie in wait. Investment property is available and more affordable than it has been for many years. The time to act is now, for all your tomorrows. McCarthy Group’s rule of thumb is that you need to own 3 or 4 properties by the time you retire, which will provide you with the income and asset flexibility to enjoy financial independence in your golden years. Simply speaking, having the option to liquidate one investment property in each of the 3 or 4 decades where you need increased funding to travel, to live, and for medical and other costs, is an ideal position to be in. Otherwise, it’s Hard Yakka. All the way.
WIN AN APPLE IPOD NANO HERE’S HOW. We’d love to hear your views on the investment property market or any other subject that you feel would be of interest and relevance to The Horizon readers. Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 8GB iPod Nano valued at $199 to the sender of the best entry. We’ll also publish the story in the next edition of The Horizon. If you have friends or relatives who you feel would benefit from an obligation-free review of their future financial circumstances, please feel free to forward them a copy of this newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
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