On why ISPT, the Property Council, the Victorian Government and funds from the US are all taking a good look at 10-year residential leases in Oz
The thin skin of the property bubble may be stretched to breaking point and whether it will collapse, hold steady or reinflate is anyone’s guess. But what’s certain is young people and increasingly many heading to their 40s are struggling with prices in the big cities.
Many are telling their parents or friends they may as well spend their money on technology, holidays and fun because there is not much point saving to buy their own house.
That’s not exactly the “Australian way”, with the ubiquitous dream of previous generations to own their own home. The way the housing market functions is one of the big drivers in creating or preventing a more sustainable urban environment. It puts pressure on farm land and can worsen social issues such as disruptive, stressed communities who may make unsustainable choices as a result.
In Victoria there are moves to investigate the concept of long 10-year leases for housing as a response to the ownership barrier. This might well further entrench the big divide between those who own their home and those who don’t but in the meantime there are some attractive attributes to being able to rent long term.
In the US and Europe they are common. In Europe there is a tradition of long-term stable property ownership, the custom tending towards property as long term asset rather than the Australian experience that in some areas at least is strongly focused on wealth creation. Blame our fast growing migration-based population to a point, but mainly blame the lending practices of the banks. The Australian Prudential Regulation Authority does.
As the CBA today (Thursday) joined Westpac in raising rates the APRA slapped the banks for irresponsible lending behaviour (you think APRA would be used to it by now). The banks had stooped to new “horribly low” standards of irresponsible lending APRA said.
(Feels like, smells like the same sort of things people were saying just ahead of the GFC V1. But that’s another story.)
Regardless of whether house prices will fall again this time, and don’t let anyone tell you they didn’t fall in the last GFC – in many areas the only house prices that didn’t fall were the ones that didn’t sell. The smoothed out stats can be deceptive and irrelevant to people needing to trade.
So with all this uncertainty you might be tempted to say long-term rental could be a good thing. People Like Phil Ruthven, founder of IBISWorld, has for years spruiked this line of thinking. When you add up all the costs of ownership, rates, taxes, repairs and other property costs, you’re better off with a long lease, he says. You can get a gist of the financial calculations Ruthven puts about here.
Ruthven might well be right, but if you if you can put aside the emotional unquantifiable value of being in your own place, and can eliminate a big part of the instability and uncertainty if renting your home, then long-term rental can start to look good.
If we could get it.
Right now the Andrews government in Victoria is looking at the potential for 10-year leases and parts of the industry are jumping in.
This includes ISPT, one of Australia’s largest unlisted property funds, which has been casting an eye to this sector with a view to whether it can yield an institutional grade investment – that is, an asset class that can satisfy the investor requirements as well as the occupant.
Development manager for ISPT Sean Hogan said this week the issue has been discussed in various industry committees and everyone can see the value for the tenant. They can raise a family in a certain area without the fear that they will need to move when the owner decides to sell, potentially disrupting kids schools, travel distances to work, community networks and so on.
A 10-year lease, Hogan said, is “a really good outcome; it provides certainty to the tenant.”
But it’s not so easy for the investor.
What’s the thinking in his patch?
“There’s been a bit of work around the concept of residential institutional grade property and certainly in Europe and the US there are some very big funds based there that own that type of investment property,” Hogan said.
“A the moment I know there are entities around exploring this but it’s difficult to get it to stack up.”
These include funds from the US and local funds, he said.
The Property Council has also delved into the area but it’s a “very complex” market, Hogan says, and very difficult to get it to stack up.
For a start the returns are much lower than for other property and not comparable to returns in other countries.
In Australia resi might yield 3-5 per cent; in other countries such as the US it’s more like 9-10 per cent.
You can see where Ruthven is coming from when you start to look at the real rather than the headline return on property over a short euphoric boom period.
Hogan says institutional investors would need some form of tax return or government incentive for the proposition to stack up, he says.
“I’m unsure of how exactly we can unlock this [opportunity].
“You really need scale for this to work. You need to be across several cities and to spread the risk.”
You also need a market with the capacity to buy a notional block of 100 apartments when you want to sell.
“So you need to create a new market.”
Then if you rely on capital gains to increase your overall return rather than rely on just rental income you will have to be very careful about picking the right timing in the cycle.
You may be forced to ensure the units are strata title in case you need to sell down units one by one.
“There’s a whole lot more work to be done in this particular area because of structural issues,” Hogan said.
Are our New Improved Feds already loosing their clean shiny lustre? Just over four weeks since the end of the Great Oppression, some of the green bits seem to be dropping off (while others are sticking nicely). It’s confusing.
For instance, on Monday we ran a story praising the NIF for their enthusiasm for a huge $30 million Environmental Upgrade Agreements funding between the City of Melbourne and the Clean Energy Finance Corporation.
- See the story: City of Melbourne, CEFC green deal sees Feds singing praises
Enviro minister Greg Hunt said he was “delighted”.
We thought that signalled more warming in the Great Thaw (the only thaw we’re happy to report these days).
The funding includes $10 million to the Sustainable Melbourne Fund to help finance commercial property upgrades, $800,000 for solar PV systems on council buildings and $4.4 million for a range of susty initiatives in other area.
A joint media statement said: “The Turnbull Government is committed to lowering power bills and lowering emissions.”
Then what happened?
The very next day Turnbull is asked in parliament if he supports the CEFC.
The question came from Bill Shorten who asked if the CEFC had a “crucial role to play Australia’s efforts to tackle climate change”.
Nah nah nah, Turnbull said. Maybe someone in the back row had started throwing darts again but he knew exactly what to say next: “Indeed, it was the government’s policy to abolish it because we do not support government banks for the simple reason that new government banks are performing roles that can be perfectly adequately fulfilled by the private sector and are not necessary.”
Oh deary us… here we go again: “the market rules and is king and queen and Beloved Leader all in One”.
We do so love that market. That same market that created this mess in the first place. The same market that doesn’t play like the economic rationalist it pretends to be but instead uses a bit of slavery here and there, a lot sweeping the tailings under the forest carpet, and a huge amount of corporate welfare by asking the public purse to clean up after it. Outrageous if you think about it.
In Perth the water table has been dropping and like everyone predicted there is now a quite serious subsidence issues. Hmm, that’d be the market again, letting people do exactly what they like, all those householders and horticulturalists taking all the groundwater they want because, well, it’s their free market, right? See what Curtin University reported this week with its research published in the Journal of Geophysical Research – Oceans.
Will the market pay for the damage to housing and buildings, and we hate to think what else?
Speaking of Perth, the incredibly talented Jemma Green has finally made her move into politics, winning a spot as councillor in the City of Perth. Well, what else do you do after running the global sustainability outfit for JP Morgan, penning some very impressive academic papers, and in only three years back home storming the susty world in academic, popular media and development land with some groundbreaking low carbon buildings?
Speaking of elections, nice to see a climate friendly, yoga loving Justin Trudeau elected prime minister in Canada this weekend.
He takes over from Tony Abbott’s partner in climate crime Stephen Harper.
The pendulum is swinging alright.