RESIDENTIAL PROPERTY

1

• RESIDENTIAL PROPERTY
• WORKSHOP
• SERIES - ONE

2
House values in Brisbane too low
Brisbane residential houses are undervalued,
according to research by independent valuer
Landmark White. Its research director, Jennelle
Wilson, said an analysis of Real Estate Industry
of Australia (REIA) median price figures showed
the market had traditionally undervalued
freestanding houses in Brisbane compared with
units, townhouses and other attached dwellings.
Source The Courier Mail
3
Melbourne price growth in doubt
Dark clouds continue to loom over apartment
resales in central Melbourne as new research
suggests capital growth in the secondary market
looks increasingly gloomy. Charters research
director, Robert Papaleo, said most re-sales
experienced stagnant prices and few, if any, had
capital growth above inflation. The figures
indicated that the capital growth of more than
3,000 apartments resold since 1992, after
inflation, represented an annual average increase
of just 1.3 over the holding area
Source Australian Financial Review
4
Student rental market accommodation undersupply

• The total number of international students
  currently studying in inner Brisbane campuses is
  just over 10,500
• These 10,500 students represent about 9.5 of the
  total student population, which is approx.
  109,000
• In five years time International students
  studying in Inner Brisbane campuses are expected
  to increase to 13,500, which will represent 12
  of the total student population at that time
  which would have increased to 115,000 students

5
South East Queensland faces a land shortage over
the next 2 years. Rod Cornish Macquarie Bank
6
Vacant land even at the bottom end of the market
should perform well as government changes and
ongoing restrictions continue to push up
values. Gordon Douglas Valuer
7
It would seem that from a tax perspective or
for protection of assets family trusts continue
to be a effective structures ASSET MAGAZINE
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• ADVANCED PROPERTY
• INVESTMENT STRATEGIES

9
BIBLIOGRAPHY

• In compiling this presentation we have sourced
  material and data from a wide variety of sources.
  Where possible, acknowledgement has been given in
  the body of the presentation
• Sources of reference material include, but are
  not limited to, the following

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• The Courier Mail
• Aust Financial Review
• Sydney Morning Herald
• The Age
• The Australian
• The Mercury
• The Herald Sun
• The Advertiser
• The West Australian
• Property Australia
• Investor Weekly
• Personal Investor
• Qld Property Lifestyle
• The Economist
• The Bulletin
• Business Review Weekly
• NSW Office of Fair Trading
• The Art of Real Estate Appraisal
• The E Myth

• The FPA
• The Securities Institute
• Mortgage Industry of Aust
• Finance Brokers Assoc.
• REIQ
• REIV
• Real Estate Assoc of NSW
• BIS Shrapnel
• ABS
• Residex
• KPMG
• ST George Bank
• ANZ Banking Group
• ING Bank LTD
• NAB Limited
• CBA Limited
• Westpac Banking Corp
• QLD Dept of Natural Resources
• QLD Office of Fair Trading

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AGENDA

• Personal Motivation
• The Property Business
• The Australian Market
• The Eight Golden Rules
• Why Property
• Understanding Risk
• Property Research
• Understanding the Development Process
• Where and What to Buy
• Statistics
• The way ahead

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Personal Motivation

• Have you got the right mental approach to
  succeed?
• Property investors require attitude

13
Have you made any of these excuses?

• Insufficient knowledge
• Not enough time
• Shell be right something will change
• Too much risk
• Adverse to debt
• Lack of motivation
• Dont understand the property market
• Its all too hard
• No support from my partner

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Or maybe one of these?

• Cant work out a plan
• Insufficient time for research
• When the going gets tough I stay home
• It just cant be done surely it cant be that
  simple to make money, otherwise everyone would be
  doing it

15
Successful property investors are usually highly
motivated people who follow a set plan!
16
Residential property owners have seen their
wealth grow more than 250 billion in the past
five years, according to Real Estate Institute of
Australia and Australian Bureau of Statistics
figures.
17
Property Just an Australian Phenomenon?

• Over the 12 months to June 2007 average house
  prices in America rose by 9, and those in
  Britain by 15.
• Adjusting for inflation, this is the biggest real
  increase on record in America, and the biggest in
  Britain since 1988.

18

• 565,000 Australians have indicated that they
  intend to purchase a property during the next
  12-18 months.
• Baby Boomers and the Over 50s account for 63 of
  these prospective buyers.
• Property is still a favourite investment tool.

19

• House prices do not just dominate backyard BBQ
  conversations they also have a big influence on
  the economy.
• For most people in most countries, housing is the
  single biggest component of their wealth.

20
Home Sweet Home
Source The Economist
21

• By boosting wealth, higher house prices encourage
  homeowners to spend more.
• They also allow owners to borrow more against the
  rising value of their homes.
• This largely explains why consumer spending is
  at the current record levels.

22

• House prices also rise over time with real
  incomes.
• A country with faster growth in incomes is likely
  to see a bigger increase in house prices.
• This explains why Spain has seen the fastest
  house-price inflation, as its income per head has
  been converging with that of the rest of EU.

23

• Germany is suffering from a hangover following
  its reunification boom.
• Massive building, encouraged by tax breaks and
  government subsidies, then created oversupply,
  and prices have dropped by almost 30 in real
  terms since 1992.
• Canada is just completing a strong growth cycle
  now.

24

• Most countries, throughout the world have been
  enjoying a boom in house prices over the past
  decade, with prices rising at their fastest rate
  in real terms since the late 80s in 9 out of 13
  countries.
• The largest increases were Madrid (15) and
  Sydney (13).

25
For Sale
100 square metres, centre of city
Source The Economist
26

• All countries tax systems favor housing over
  other financial assets, by giving tax relief on
  mortgage-interest payments or on capital gains.
• Some are more generous than others.
• In the US, interest on a mortgage up to 1million
  is deductible at the homebuyers marginal income
  tax rate.

27

• House prices are mainly driven by
• DEMAND FACTORS.
• Viz disposable income, real interest rates,
  returns on other investments, population growth
  and a shortage of product

28

• The recent surge in house prices in many
  countries has largely been assisted by low
  interest rates.
• In previous recessions house prices fell because
  the recession was brought on by central banks
  raising interest rates to squeeze inflation.

29

• The biggest immediate risk to the housing market
  would be if interest rates rose sharply, as in
  the early 90s, choking off new demand. Yet with
  few signs that inflation is about to take off,
  that seems unlikely.
• If interest rates rise only modestly over the
  next year, house prices in most countries are
  likely to continue to rise, albeit at a slower
  pace, encouraging new borrowers and sustained
  price growth in housing prices.

30
Australian Markets
Not adjusted for inflation (f)
forecast Source Historical, ABS forecasts
Residential Property prospects 2003-2007, BIS
Shrapnel
31
Property Fundamentals
32

• Basic Determinants of Real Estate Demand
• General factors
• Population increase/decrease and age
  distribution
• Overseas and interstate migration
• Geographic factors - climate and
  topography
• Land use and city growth
• Infrastructure and transportation costs
• Sources and levels of employment
• Average wages and disposable incomes
• Interest rates and availability of
  mortgage funds
• Cultural and religious factors
• Educational facilities
• Health, medical, fire, police protection
• Planning and environment issues

33

• Physical Factors
• Street patterns and width
• Public transport
• Schools, shopping
• Recreation facilities, parkland
• Land size, use and aspects
• Utilities
• Industrial noise, pollution
• Prestige, ascetics, reputation of the suburb
• Maintenance
• Employment
• Car parking and security

34
Social Factors Economic characteristics Soc
ial prestige Attitudes to law and order Family
sizes and age groups
35

• Economic Factors
• Degree of thrift and home ownership
• Rent and income levels
• Vacancy levels
• New construction and vacant land
• Mortgage market conditions
• Neighbourhood population growth
• Changing use
• Economic status of tenants
• Tenant turnover rate

36
Other Factors Zoning and building
codes Regulations restricting use or
design Government home loan subsidies Type of
land title
37
The demand for housing in general (renting or
purchasing) is a function of Income Rents Tax
regime Demographic variables Leisure
38
Underlying Demand is a function of changing
demographic factors Household formation
rates Population growth Age Socio-economic
factors
39

• HOUSEHOLD FORMATION RATES
• New overseas immigrants
• Young people leaving home
• Interstate migrants
• Divorce or separation
• Newly married couples
• Elderly people seeking aged care

40
Age and Housing Status 18-24 Renting singles,
1st time buyers 25-34 Stronger starter
market 35-44 Prime trade-up market 45-54 Empty
nesters, holiday homes 55-64 Early retirement,
resort accom 65-74 Early seniors
housing 75 Aged care housing
41
QUALITATIVE RESEARCH
42
BRISBANE HOT-SPOTS
Top 25 Suburbs Growth in median price
SourcePRD
43
BRISBANE HOTSPOTS
Top 25 Suburbs Growth in median price
SourcePRD
44
POPULATION PROJECTIONS
45
Property Trends in 2008

• Overall the property market will be sluggish
• Prestige property will shine as competition
  between locals and expatriates pushes up prices
• The outlook for housing affordability will be
  brighter
• Building approvals will keep falling and bounce
  back in 2007
• Investor returns will improve as renting becomes
  more expensive
• Low end of the market growth

46
A Two Tier Property Market is Emerging

• Australias prestige property market is powering
  ahead.
• Houses and Units in the 1mil category are
  showing remarkable strength
• Australian Property Monitors forecast that none
  of the 10 most expensive suburbs in each capital
  city and the Gold Coast will have price falls in
  the next 5 years.
• New hot-spots are emerging as prices in Darwin,
  Perth and the Gold Coast are quickly catching up
  to Brisbane and Melbourne.
• Demand for properties less than 1mil is soft
• People still want to live in the best suburbs

47
CITY APARTMENTS
Is the Brisbane City apartment market
oversupplied?

• Contrary to current press there is still strong
  and rising demand for new apartments within inner
  Brisbane
• 5,000 apartment sales in inner Brisbane in 2005
• 50 apartments sold off the plan
• Inner city residents growing by 4,000 people per
  annum
• Rental households increased annually by 1,800
  from 1996 to 2001

Source Matusik
48
Brisbane Unit Market
49
Brisbane Inner City Unit Sales Supply
50
CITY APARTMENTS
The reasons for the increase..

• Personal circumstances (divorces, later
  marriages, fewer children)
• Travel time to/from work
• Generation Xers (cosmopolitan lifestyles)
• Empty nesters selling up and moving into town.
• Increased tertiary education - easier access

51
CITY APARTMENTS
Demand Statistics..

• As a general summary
• 90 sold to new investors
• 50 of the investors live interstate (most in
  Sydneys western suburbs.
• 30 from Brisbane
• 20 split between other QLD locations (fair
  from the Gold Coast) and overseas (mainly SE Asia)

Source Matusik
52
property management is critical
53
Property management is more than simply
collecting the rent! Properties are valuable
assets and must produce the best possible returns
for their owners.
Industry experience, cutting edge technology and
good old fashioned service
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Accounting

• Funds transferred electronically and disbursed
  monthly to your nominated account
• Monthly statement
• Rates, body corporate and insurance premiums paid
  
• End of financial year summary for tax purposes
• Maintenance issues attended to by experts
• Advice on legislative changes

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NEW TENANTS
Press advertising at your cost
Signage and OFIs at no cost
Emails to our data base web site at no cost
Internet advertising At your cost
APPLICATION FOR RESIDENTIAL TENANCY TICA
REFERENCE CHECKS
Only suitable tenants are offered leases
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LEASE DOCUMENTATION
All tenants sign an REIQ lease All tenants pay 2
weeks rent in advance A bond of 4 weeks rent is
paid to the RTA
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RENTAL PAYMENTS

• We use the B/Pay system, 24 hrs per day
• Rent arrears report is generated daily
• Default tenants are contacted immediately
• After 7 days a remedy breach is served
• If no response, the tenancy is terminated.

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NEW TENANTS

• Full inspection before occupancy
• Report and photographs kept on file
• Routine quarterly inspections and written reports
  to owners

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VACATING

• A check list is given to existing tenants and
  inspection date arranged
• When notice is given we immediately start looking
  for new tenants
• Property is inspected against original inspection
  report

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WE RECOMMEND
Service directory
Welcome pack Toilet rolls, bread, milk, cereal,
vegemite, cleaning aids, garden hose cost 30.00
Pest Control 12 monthly Blinds and curtains
Every two years serviced or cleaned Lawn mowing
use our gardeners Landlord protection
insurance
Happy tenants cost you less in the long run
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Remember - in property management .you get what
you pay for !
62
Australian Markets
Source Residential Property prospects 2003-2006,
BIS Shrapnel
63

• There are some places in Australia where the
  rate of job growth far exceeds the rate of
  population growth. Given that more jobs than
  people leads to reduced unemployment and greater
  levels of spending, it follows that places with a
  growing capacity to spend are likely to demand
  new shops and houses.
• Bernard Salt
• Partner Property KPMG

Source The Australian (07/08/04)
64
Boom Towns Percentage Change in Jobs and
Population (1996-2001)
Source The Australian (07/08/03)
65
Queensland Migration

• The majority of overseas migrants that come to
  live in Queensland are from
• New Zealand 34.1
• U.K. 18.5
• South Africa 4.6
• South East Asia 21.5
• More than 22,000 off-shore people became
  residents during 2004-2005 financial year.

66

• In the Brisbane house-and-land market, John
  Edwards of Residex saw the approach of a
  resting phase. I dont think weve had a boom
  yet, he said. I think the boom is about to
  come, until about 2009 / 2010.

67
Australia is experiencing the longest-ever
recorded upswing in property markets Rod
Cornish Macquaries Property Market Outlook 2004
68
The 8 Golden Rules

• 1. Market research
• 2. Selecting the location
• 3. Ownership structure
• 4. The finance package
• 5. Selecting the right type of property
• 6. Paying true market value
• 7. Taxation issues
• 8. Property management

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WHY PROPERTY?

• CAPITAL GROWTH RENTAL INCOME
• What are the realistic expectations for
• Growth
• Income
• What is more important?
• Growth or Income
• What factors determine capital growth

70
Capital Growth

• Capital Growth is a measure of the increase in
  value of the property from the point of
  acquisition to present time

Purchased in 1997 220,000
Value in 2003 380,000
Capital Growth 160,000 or 72 or 12 p.a.
71
Rental Income

• Rental Income or Yield is a measure of the
  income produced in relation to the value of the
  asset expressed as a percentage.

Value 2003 380,000 Rent 300p.w
(15,600p.a.) Yield 380,000/15,600 4p.a
Value 1997 220,000 Rent 200p.w
(10,400p.a.) Yield 220,000/10,400 5p.a
72
Growth/Income Equation

• High growth usually means low income and vice
  versa.

For example Over a ten year period. C.G. Yie
ld Total Paddington 12 3 15 Wacol
3 9 12
73
High Growth/Low Income
74
Growth or Income ?

• What is more important?

Growth The increase in the property value over
time means an increase in our total net worth.
This enables us to use the equity as security to
buy more property. Income Each extra rental
dollar earned from the property is taxed at the
investors marginal tax rate.
75
Factors that determine Capital Growth
Shortage of Stock Underlying Demand Pent up
Demand
76
WHY PROPERTY?

• ABILITY TO LEVERAGE
• Why do we leverage?
• What are the risks?
• How do we leverage?
• Understanding non-deductible debt

77
What is Leverage?

• Leverage is using the Banks money to make a
  profit.

78
Why do we Leverage?

• Banks love to lend against the security of
  property
• Property 90
• Vacant Land 50
• Franchise 20
• Car 0
• Banks are not risk takers!!

79
What are the risks?

• The property doesnt perform the way it should in
  terms of Growth and/or Income.
• Changes in personal situation
• Macro changes

80
How do we Leverage?

• By using a small deposit (as little as 10) the
  bank will lend the majority of funds to purchase
  an investment property.
• This deposit is usually secured against existing
  property.
• Use Capital Growth to leverage into the next
  property.

81
UNDERSTANDING EQUITY?

• Equity is an asset and a measure of your personal
  wealth
• Equity is a tool for wealth creation
• Equity allows you to make capital gains and
  income
• Access to your equity is governed by the bank

82
USE YOUR EQUITY TO BUY ADDITIONAL PROPERTIES

• Purchase property for 200,000
• Re-valued later (say 2-3 years) for 275,000
• Increase in equity is 75,000
• Use part of this equity (60,000) as deposit on
  your next property purchase

83
Gearing Strategies

• Negative gearing costs exceed income
• Neutral gearing costs and income the same
• Positive gearing income exceeds costs
• Normal Cycle
• Negative ? Neutral ?
  Positive
• Primary Influences
• Depreciation - building allowance
• - fixtures and fittings
• Tax Rates

84
Deductible/Non Deductible Debt?

• Deductible Debt The interest accrued on the
  borrowings may be claimed as a tax deduction at
  the investors marginal tax rate. Use Interest
  Only loans for investments.
• Non Deductible Debt Interest on the borrowings
  cannot be claimed as a deduction. This debt
  should be eliminated as quickly as possible
  before paying off the investment loan.

85
WHAT TYPE OF PROPERTY SHOULD I INVEST IN?

• House Land package
• Townhouse
• Duplex
• Apartment
• New or Established
• Renovate
• What geographic features are important?

86
Baby Boomers
Each year 60,000 people move to the coast and I
cannot see the shift slowing. So far only 2
million baby boomers have passed the age of
50. Another 2 million are aged 43 to 49 and are
yet to reach their economic peak and start to
wind down. For the shift to subside, 2 million
baby boomers would have to decide not to do as
their older counterparts did, but sit at home and
mind the grandkids.
Source Bernard Salt, KPMG
87
Unit market swings into correction mode

• Returns on investment units in Melbourne and
  Sydney have plummeted to new lows, and rentals
  are failing to match price growth as the
  countrys apartment market buckles under the
  weight of a five-year price boom.
• Australian Financial Review 7 August 2005

88
Performance of Capital City Apartment Markets
SYDNEY
89
Performance of Capital City Apartment Markets
MELBOURNE
90
Performance of Capital City Apartment Markets
BRISBANE
91
UNDERSTANDING YOUR MARKET

• Define your geographical area
• Build your comfort zone through
  
• Research and consultation
• Know your market, prices and values
• Prevailing market conditions

92
PRICE POINTS

• Analyse by suburbs and category
• House Land
• Townhouse, Duplex, Unit

93
RISK MANAGEMENT

• Interest Rate Increases
• Quality research
• Capital Growth Prospects
• Liquidity Requirements
• Regulatory Changes
• Strong rental demand
• Serviceability
• Product selection

94
QUALITATIVE RESEARCH

• Individual valuations for properties
• Sales history reports
• Growth and rental analysis
• Market overviews
• Fundamental information critical to the
  investment process

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HAMILTON 3 BEDROOM QUEENSLANDER
SOLD IN 1988 FOR 68,000 SOLD IN 1999 FOR
180,000 SOLD IN JANUARY 2003 FOR 355,000
100
MITCHELTON 2 BEDROOM QUEENSLANDER
SOLD IN 1995 FOR 95,000 SOLD IN FEBRUARY 2003
FOR 325,000
101
MOOROOKA 3 BEDROOM QUEENSLANDER
SOLD IN 1993 FOR 168,000 SOLD IN 1994 FOR
195,000 SOLD IN 1995 FOR 205,000 SOLD IN 2000
FOR 242,000 SOLD IN AUGUST 2002 FOR
370,000 VALUED IN FEBRUARY 2003 FOR 375,000
102
ZILLMERE 3 BEDROOM HIGHSET CHAMFERBOARD
SOLD IN 1994 FOR 107,500 SOLD IN 1999 FOR
90,000 SOLD IN 2003 FOR 162,000
103
ALBANY CREEK VACANT LAND SALES
SOLD IN 1999 FOR 80,000 SOLD IN 2001 FOR
83,000 SOLD IN SEPTEMBER 2002 FOR 160,000 UNDER
CONTRACT DECEMBER 2003 FOR 170,000
104
Neighborhood Analysis

• Is the population growing/declining/neutral
• Sales rate of new homes
• Sales rate of established homes
• What type of property is outperforming
• What type of property is underperforming
• Rental demand/Vacancy rates
• Rental bands high/low
• Special features the WOW factor
• Cost per sqm of homes in area
• Cost per sqm of land in area
• Price range of homes in area

105
Neighborhood Life Cycles

• Neighborhoods generally go through three distinct
  periods in their life
• Growth
• Equilibrium
• Decline
• Residential property values tend to increase
  during the period in which an area is first
  developed. When the available land dissipates
  prices generally reach equilibrium and as the
  years go by and property deterioration becomes
  visible the area will generally decline in both
  desirability and value.
• The process of decline can be accelerated by many
  factors including
• Availability of new housing nearby
• Ownership by low income residents who cannot
  afford to maintain their properties
• Conversion of owner occupied to rentals.
• Revitalization of these areas becomes a product
  of future demand
• (e.g. proximity to City etc.)

106
Annual Price Growth for Waterfront Estates1998
- 2004
Source The Courier Mail
107
Predicted House Price Index - Brisbane
35
30
25
20
Minimum Likely Outcome
Likely Outcome
15
Maximum Likely Outcome
10
5
0
Source Residex
108
Predicted Rental Returns
14
12
10
8
6
Minimum Likely Outcome
4
Most Likely Outcome
Maximum Likely Outcome
2
0
Source Residex
109
Top PerformersMedian Values1991 2004

• ALBION 145,250 - 411,382 266,132.00 Capital
  Gain
• ASCOT 257,840 - 657,750 399,910.00 Capital
  Gain
• BARDON 146,375 - 384,175 237,800.00 Capital
  Gain
• BULIMBA 124,292 - 492,688 368,396.00 Capital
  Gain
• COORPAROO 128,578 - 342,792 214,214.00
  Capital Gain
• DUTTON PARK 153,038 - 390,819 237,781.00
  Capital Gain
• HAMILTON 222,875 - 616,417 353,542.00 Capital
  Gain
• HAWTHORNE 136,896 - 503,490 366,594.00
  Capital Gain
• HGATE HILL 139,364 - 537,375 398,011.00
  Capital Gain

110
Top PerformersMedian Values1991 2004
MANLY 133,875 -460,500 326,626.00 Capital
Gain MILTON 152,222 - 414,979 262,757.00
Capital Gain NEWFARM 158,182 -
574,546 416,364.00 Capital Gain PADDINGTON 15
7,620 - 406,594 248,974.00 Capital Gain SPRING
HILL 196,944 - 438,625 241,681.00 Capital
Gain TOOWONG 168,552 - 413,347 244,795.00
Capital Gain ST LUCIA 206,500 - 608,854
402,354.00 Capital Gain YERONGA 142,792 -
397,167 254,375.00 Capital Gain
111
Poor PerformersMedian Values1991 2003

• ACACIA RIDGE 87,654 - 144,958 57,304.00
  Capital Gain
• ALGESTER 131,896 - 206,417 74,251.00
  Capital Gain
• BELLBOWRIE 150,604 - 254,886 104,282.00
  Capital Gain
• DARRA 82,062 - 120,821 38,759.00
  Capital Gain
• FERNY GROVE 143,742 - 261,729 117,978.00
  Capital Gain
• ROCKLEA 73,771 - 146,542
  72,771.00 Capital Gain
• WACOL 57,000 - 101,000
  44,000.00 Capital Gain

112
Brisbane to remain strong

• Suburbs that are central to the city with a
  strong river focus will continue to out perform
  during the next 5 years
• Hamilton
• Ascot
• Newstead
• St Lucia
• New Farm
• West End

113
Under 400k Metro 5 yr Forecasts

• Sandstone Point 14 pa
• Murrumba Downs 14 pa
• Caloundra West 14 pa
• Forest Lakes 14 pa
• Springfield Lakes 12 pa
• Sippy Downs 12 pa
• Inner suburbs such as Stafford where you can buy
  a house around 375k

114
Gold Coast Hot-Spots

• The next upswing in house prices will start in
  the second half of 2008
• Currumbin
• Paradise Point
• Runaway Bay
• Coomera
• Gaven
• Mermaid Beach
• Clear Island Waters / Hope Island

115
Analysis 1991 2003
Why invest in the bottom seven ?
116
Regional Hot-Spots

• Palm Cove
• Magnetic Island
• Townsville
• The Whitsundays
• Mackay
• Yeppoon
• Hervey Bay
• 1770
• Agnes Waters

117
Exploding Population Centres

• Caboolture
• Hervey Bay
• Pine Rivers
• Coomera
• During the year to March 2006 Queenslands
  population increased by 76,900 new residents and
  most of this was in the south east corner

118
Median Price Change 2000-2005

• Adelaide 14.9
• Brisbane 16.1
• Darwin 8.0
• Hobart 14.9
• Melbourne 7.5
• Perth 13.5
• Sydney 9.5

119
Population Growth 1981 - 2002
Source QLD Property Lifestyle
120
Forecast Population Growth 2011 - 2021
Source QLD Property Lifestyle
121
Both major southern cities will increase in
population by an additional 400,000 people over
the next 10 years, with a resultant continuing
demand for housing, while southeast Queensland
will see an additional 600,000 set to move to
this region over the same period. Bernard
Salt KPMG
122
COMPARE THE BOOMS
How real after inflation prices changed in
the 2 years to June 1989 and in the four years to
Oct 2001 ()
Source Westpac Institutional Bank, Australian
Market Insights December 2001
123
Source REIQ 2003
124
Matusik Property Insights Australia
Residential Property Supply
Annual averages over the last 3 years
125
Brisbane does not have the structural problems
it had last cycle. Interstate migration jumped
62 in the past 12 months and overseas migration
is the highest ever more than 18 of those
coming to Australia. And the sheer strength of
the QLD economy has just delivered a 17 increase
in white collar employment thats huge. Once
home buyers and investors realise the (interest
rate) rises will be relatively moderate, further
growth can be expected.
Rod Cornish Property Analyst Macquarie Bank
126
We expect a 15 growth in Brisbane house prices,
based on very strong migration. People are
getting up there in huge numbers. The property
market in South-East Queensland is going
gangbusters, fuelled by southerners seeking
sunshine and affordable housing. Over the past
two years, net domestic migration inflows to
Queensland doubled to 39,000, and this, coupled
with a share of overseas migrants, has pushed
housing prices up strongly.
Angie Zigomanis BIS Shrapnel
127
With a population of 3.6 million in 2001,
Queensland had more people than South Australia,
Western Australia and the Northern Territory
combined. Australias average annual growth rate
between 1996 and 2001 was 1.2 compared with the
fastest growing region in the nation (the Gold
Coast), with an average annual growth rate of
3.7.
Australian Bureau of Statistics Australia in
Profile 16/01/05
128
Of the new QLD residents 43 or almost 38,000
were from net interstate migration ... Net
overseas migration made up 31 or about 22,000 of
total migration. Approx 1300 new migrants are
moving to QLD each week.
Pradella Research December 2004
129
The rush to bring on vacant blocks in the
current cycle has been frantic. Typically we
receive applications for 3000-4000 lots every
year. In just two months in mid-2003, submissions
were received for 7000 lots. Ive never seen the
property market as good as it is now.
Gary Baildon Gold Coast Mayor
130
ASSESSMENT GUIDE

• Using the assessment guide to make logical
  decisions
• Understanding the criteria of a successful
  investment property

131

• INVESTMENT PROPERTY
• TAX ISSUES
• AND
• OWNERSHIP STRUCTURES

132
AGENDA

• Taxation
• Personal Tax
• Stamp Duty
• Capital Gains Tax
• Land Tax
• Tax Deductions

• Structures
• Individual Ownership
• Trusts
• Companies
• Super Funds

133
Are they important?

• Use tax deductions to lower the overall cost of
  your investment
• www.ato.gov.au NAT 1729
• Carefully structure your investments to maximise
  tax considerations and protect your assets from
  litigation

134
Tax

• An important component of the investment and
  wealth creation process.
• Tax deductions can be used to reduce the overall
  operating cost of the investment.
• The decision to invest should not be based on the
  effect of the tax deductions alone.
• Every Australian has the right to legally
  minimise the amount of tax he or she must pay..
  

135
Taxes to Consider

• Personal Tax
• NAT 2036 Taxation Variation (old 221D)
• Capital Gains Tax
• Stamp Duty
• Land Tax
• Tax Deductions

136
Personal Tax

• A tax liability is accrued on income earned by an
  individual at predetermined rates. The more you
  earnthe more tax you pay.
• Tax deductions may be used to reduce this
  liability by reducing assessable income.
• Rent from an Investment Property (IP) is
  assessable as income.
• An investment property is the most effective way
  to create tax deductions for individuals.

137
Personal Tax

• A taxpayer earns 80,000 per annum.
• Tax liability 24,512
• Tax Deductions 36,836
• New Tax liability 15,304
• Tax Saving 9,208

138
NAT 2036 Tax Variation

• Most employees pay tax under PAYG Pay as You
  Go.
• As you earn your income, you pay tax. This is
  deducted from your wage.
• A NAT 2036 in effect, notifies the tax office
  that you are entitled to a calculated amount of
  tax deductions that may result in a reduced tax
  liability.

139
NAT 2036 Tax Variation Example

• Taxpayer is paid fortnightly.
• A 9,208 tax credit is calculated.
• Investor lodges NAT 2036.
• Taxpayer receives an extra 354 per fortnight.
• Taxpayer receives nil tax refund at the end of
  the financial year.

140
NAT 2036 Tax Variation

• Before

Eligible for 9,208 tax refund
July 1
June 30
Tax Refund of 9,208
After
July 1
June 30
No Tax Refund
Extra 354p.f. 9,208.
141
NAT 2036 Tax Variation

• Lodgment of NAT 2036 enables the taxpayer to
  reduce the regular tax liability.
• This results in more money in the taxpayers
  pocket during the year but no tax refund at the
  end of the financial year.
• These funds should be applied to the costs
  incurred by the IP.

142
Capital Gains Tax (CGT)

• Tax on profits from sale after 19/9/85
• The taxpayers Principal Place of Residence (PPR)
  is free from CGT.
• PPR also includes a maximum of 2 Hectares of
  adjacent land.
• For all other assets CGT is applied to the net
  capital gain arising from a CGT event (disposal).
  Gifts are included.

143
CGT Concessions

• Individuals CGT concession of 50 of the
  taxable CGT component applies.
• Trusts CGT is distributed to the beneficiaries
  as applicable and the individuals rule applies.
• Super Funds concession of 1/3 applies.
  Effective CGT tax rate of 10.
• Companies Full CGT payable. No concessions

144
CGT Example
Investment Property Purchased in 1999 for
250,000 Sold in 2003 for
450,000 Acquisition Disposal costs
12,000
Property sold in 2003 for 450,000 Minus
acquisition/disposal costs 12,000 Subtotal
438,000 Assessable Capital Gain 188,000 Apply
CGT concession (50) 94,000 Taxable Capital
Gain 94,000
145
Capital Gains Tax (CGT)

• The tax is calculated using the selling price of
  the asset minus certain acquisition costs, minus
  the cost price and applying a concessional
  factor.
• The resultant figure is treated in various ways
  according to the ownership structure.

146
Capital Gains Tax (CGT)

• If the asset is held for less than a 12 month
  period the CGT discount, in most cases, will not
  apply.
• The net capital gain will be assessable at the
  investors marginal rate of tax.

147
CGT FAQs

• Q. I like my new IP so much I want to move into
  it as my PPR and rent out my old home.CGT
  implications?
• A. Complex. You will need to have the old home
  valued to establish a cost base for eventual sale
  purposes. If you decide to sell your old home you
  have a period of 6 months prior to CGT
  application. Consider the tax consequences.

148
CGT FAQs

• Q. I could buy a house, move in for a day, move
  back in with Mum, rent out the house and claim
  the house as my PPR to get around the CGT issue.
  Would this work?
• A. No. The ATO give a period of grace of six
  years if this is your only PPR. An individual
  cannot have more than 1 PPR.

149
Tax Deductions

• Non cash deductions
• Depreciation
• Building (40 years)
• Fixtures fittings
• (15 years)
• (Quantity Surveyor)
• Loan Costs (5 years)

• Cash deductions
• Interest
• Agents commission
• Letting fees
• Rates
• Maintenance
• Body corporate
• Cleaning
• Gardening
• Other

150
Quantity Surveyors Report

• The Quantity Surveyor inspects the property
  (Inside and Outside).
• Owner is provided with a comprehensive
  depreciation schedule.
• Used by the Accountant to calculate non cash
  deductions.
• Substantiates the claim for depreciation if
  audited by the ATO.
• Cost?.....varies.check around and compare.

151
Tax Deduction FAQs

• Q. Can I claim a deduction on interest paid for a
  construction loan?
• A. Yes you can. Interest is not a capital item
  and can be claimed as a deduction before income
  is generated.

152
Tax Deduction FAQs

• Q. I have just purchased an IP. I want to spend
  5,000 on the property prior to new tenants
  moving in. Can I claim these expenses as a tax
  deduction?
• A. No. Initial repairs to a property shortly
  after acquisition are treated as a capital
  repair. If it can be shown that the repairs were
  necessary to fix damage caused by tenants after
  acquisition of the property, expenses will be
  allowed.

153
Tax Deduction FAQs

• Q. I feel that a carport will increase the value
  of my IP and make it more rentable. Can I claim
  the cost of the new carport as a tax deduction?
• A. No. This is judged a capital expense and
  therefore not deductible.

154
Tax Deduction FAQs

• Q. I need to repair the fence around my IP.I may
  as well go ahead and replace the whole fence. Can
  I claim the cost of the new fence as a tax
  deduction?
• A. No. Renewal or replacement of the whole item
  is judged a Capital Expense and therefore not
  deductible.

155
Tax Deduction FAQs

• Q. I like my new IP so much I want to move into
  it as my PPR and rent out my old home.Can I
  claim interest payments on my old home (now
  rented)?
• A. Yes. Beware of split loan arrangements.
  Consider interest accrual on the IPbeware of
  interest capitalisation arrangements.

156
Tax Deduction FAQs

• Q. Are there any other things I can claim???
• A. Yes. Cost of travel to inspect the property,
  telephone and postal expenses in relation to the
  IP Any administration requirements and Insurance
  premiums for the IP.

157
Tax Deductions

• Ensure you keep concise records for
  substantiation purposes of all income and
  expenditure for your IP.
• The next tax audit could be yours

158

• The managing director of the Housing Industry
  Association, Ron Silberberg, said the commission
  would not want to spend too much time on
  federal taxation issues such as negative gearing
  and the impact of the 1999 changes to capital
  gains tax.
• The federal Treasurer has publicly committed the
  government not to change negative gearing.

159
Ownership Structures

• Individual/Joint/Tenants in common
• Trusts
• Companies
• Super Funds
• Each of these structures has a differing effect
  on personal tax, CGT and asset protection.

160
Individual Ownership

• Owned and controlled entirely by one person.
• Any net income/loss assessed at the owners
  marginal tax rate.
• A CGT concession of 50 of the capital gain
  applies on disposal.
• Assets are fair game for libelous action.
• Property forms part of the individuals estate on
  death.

161
Individual Ownership - Strategy

• A large taxable capital gain may push an investor
  into a higher tax bracket.
• The investor could plan to dispose of the
  property at a time when he/she can manage to
  reduce the marginal rate of tax say, just after
  retirement.
• The adjusted capital gain will now be taxed at a
  lower rate hence reducing the tax liability.

162
Individual OwnershipTax reduction strategy

• Income of 60,000 Marginal tax rate of 42
• CG of 15,000
  47
• Retire on 40,000
  30
• CG of 15,000
• 55,000
  30

163
Joint Ownership

• Two or more individuals own equal shares.
• All income/losses distributed to the owners in
  accordance with their holding.
• Each others assets are still at risk.
• On disposal, CGT is attributed proportionately.
• If one owner dies, their share is distributed
  equally to the other owners.
• For CGT purposes, surviving owners deemed to
  acquire their portion at the date of death.

164
Tenants in Common

• Two or more individuals own predetermined
  portions of the asset.
• All income/losses distributed to the owners in
  accordance with their holding.
• Assets are still at risk.
• On disposal, CGT is attributed proportionately.

165
Tenants in Common

• Individuals have the ability to sell their
  interest to others.
• If one owner dies, their share passes to their
  estate.
• For CGT purposes, the estate is deemed to acquire
  that portion at the date of death

166
Trusts.what are they?

• A trust is a legal entity created to hold assets
  on behalf of beneficiaries.
• It has its own set of rules called a Trust Deed
  and is controlled by a trustee/s.
• Trustee/s may be two or more individuals or a
  corporation (company trustee) controlled by one
  or more directors.
• There are different types of trusts.

167
Trusts.what are they?

• Trusts cannot distribute losses to beneficiaries.
  The loss is carried forward and offset against
  future income.
• The CGT concession applies to gains distributed
  to individuals.
• Assets are quarantined and protected from any
  litigation against the trustee or beneficiaries.
• Any funds remaining in the trust attract tax at
  the top marginal rate

168
Family Discretionary Trusts

• Used mainly for Tax and Asset protection.
• Trustee holds assets and conducts business on
  behalf of the trust.
• May have any number and class of beneficiary.
• Beneficiaries have no claim over the assets in
  the trust.

169
Family Discretionary Trusts

• The trustee controls the regular distribution of
  income generated in the trust and eventual
  distribution of assets.
• The distribution may vary from year to year as
  the trustee decides.
• Trust distributions are taxable in the hands of
  the beneficiary.

170
Fixed Unit Trusts

• Same principle as a discretionary trust however
  the beneficiaries hold a fixed number of units
  each.
• Distributions are in accordance with the number
  and class of units held and cannot be altered
  from year to year.
• Suitable structure for unrelated parties.
• On disposal, asset gains are also distributed
  according to shareholding.
• Units may be sold. This may activate a CGT event
  with possible stamp duty liability.

171
Hybrid Trusts

• A combination of a Discretionary Trust and a Unit
  Trust.
• Gives the trustee/s the ultimate flexibility in
  distributions.
• Although beneficiaries hold units, the trustee
  can vary the income distribution year by year.
• Can overcome some of the capital gains
  distribution problems.

172
Companies

• One or more Directors.
• Can pay franked dividends.
• No distribution flexibility.
• Company owns property in its own right.
• No CGT relief available.
• Complex estate planning issues.
• Not a desirable form of property ownership.

173
Superannuation Funds

• Operate under a Trust Deed and controlled by a
  Trustee.
• Strict Government guidelines and supervision.
• Cannot have borrowings or be involved with an
  entity that has borrowings.
• Funds cannot be accessed until retirement.

174
Superannuation Funds

• Assets owned by the super fund.
• Income taxed at 15 in the fund.
• CGT concession applies on sale. CGT is discounted
  by 1/3 and 2/3 of the gain is taxed at 15.
  Effective CGT rate is 10.
• In house asset rule no more than 5 of fund to
  be invested in a related party of the fund

175
Superannuation Funds

• Self-managed superannuation funds can invest in
  property either directly, as tenants in common or
  through a private unit trust.
• The property cannot be geared, nor can the trust
  which owns the property.

176
Sole Purpose Test

• Regulated superannuation funds are maintained
  for the purpose of providing benefits to fund
  members upon their retirement.

177
Structures..

• Ensure you investigate all the pros and cons
  before you purchase an asset.
• Incorrect structures can leave your assets
  exposed and can be costly to fix.
• Maximise the potential..

178
WHAT NOW?

• Just Do It!