Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Friday, 3 August 2012

Property or shares the better investment right now?

Property or shares right now?
Most people are very much either/or on this question, but I’m not. I prefer to invest in a balance of both property and shares. And the truthful answer to the question of which of the two is the better investment is: it depends on your goals.
But if I was pushed to answer decisively, I would say that, for me, property is looking more attractive than shares at the moment. Let me explain why.
Share market
As I have explained in several previous posts, the Australian stock market is being impacted by the strength of the Australian dollar.  With somewhere between a quarter and a third of listed company shares in Australia owned by foreign investors, the strong dollar is impacting the market's mojo and explains why the Dow has outperformed the ASX by well over 25% over the last 2 years.

Property market
I noted recently that using the bank’s cheap capital is looking more appealing to me at the moment than buying shares in the banks.
Sure, shares in Australian banks pay great dividends to shareholders, but from a market cap perspective, their price-to-book ratios are the highest of anywhere in the world. It’s just hard to see where great capital growth will come from for shareholders in the near-term.



Property affordability dividend
On the other hand, property investors have been delivered a wonderful affordability dividend by the 1.25% of cuts in the cash rate since November 2011. This means that even prime-location investment properties are generating a healthy cashflow and confidence is returning to the property market too.
Allow me to demonstrate with some numbers. Suppose you buy a $600,000 investment property using a 10% deposit. Here is what the cash flow in a year might look like on an apartment generating a 5.4% yield (the average yield on units in Sydney is around 5.37%) with an interest only loan at 6.00% (3 year fixed rate mortgages are available at significantly lower rates than this too).

$
Rent at 5.40% yield on $600,000 property per annum
32,400
Interest only mortgage ($540,000 mortgage at 6.00%)
(32,400)
Strata fees – 4 quarters at $400
(1,600)
Repairs, cleaning etc.
(1,000)
Property management and other costs
(2,500)
Net cash flow before depreciation allowances
(4,600)


Even on an average property yielding 5.4% in a prime location, the annual cashflow loss might be fairly moderate, and when the depreciation allowances and other deductible borrowing costs are thrown in, the loss you can show on the tax return could be far greater and save the investor handsomely in tax under the negative gearing rules in Australia (at the marginal rate, usually 37%-45% for higher income earners, perhaps 32.5% if you earn between $37,000 and $80,000).
If you choose the right property with great depreciation allowances, you might be able to show a loss after depreciation and other deductions of somewhere closer to $15,000 than $5,000, which, depending on your marginal rate of tax, could make the property cashflow neutral or even positive overall.
If you can also manufacture 20% growth by buying below intrinsic market value, adding equity through a cosmetic renovation and investing in a booming property type and suburb, you might have created equity of $180,000 relatively quickly.
Shares can offer you these kind of returns sometimes, but with commodity prices first stumbling and now treading water, it seems very unlikely in the present Australian climate outside of gambling on the highest-beta, penny-dreadful speculative stocks.
Doing better than average in property
Use of expertise in property allows investors to do FAR better than average by finding properties which:

Ø  have a stronger rental yield of closer to 6%
Ø  need cosmetic renovations (repainting, new carpets, or upgrading the kitchen and bathrooms) so they can be improved to add instant equity and rental yield

Ø  have great depreciation  allowances

Ø  are of investment-grade, in high demand and are in the best location to achieve optimal capital growth

Returns
If you choose an investment property of the right type in the right city and for growth (I’ll give you a couple of hints: the best city right now is the one I live in, and the growth property asset at present is not houses…) and especially in the right location for growth, property investors are seeing some great returns, even in supposedly ‘flat’ markets.

Property is best to buy counter-cyclically
The best time to buy is usually when everyone else is panicking: "be greedy when others are fearful, and be fearful when others are greedy". For example, I bought a stack of properties from 2007 through 2009 (which I still own) when everyone was telling me that the world must surely be ending. Why? Because it was easy to make low-ball offers that were willingly accepted, even at 20% below asking price. If you want to start generating equity and wealth that runs into the millions, this is exactly how it is done.
The great thing about investment is, as Buffett says: we don’t need to make too many great decisions, we only need to make a few good decisions and restrict the number and magnitude of the bad ones. Buying and holding prime location, investment-grade properties that are in continual high demand is one of the most straightforward and most effective investment strategies there is.