Source: Wealth Creator Magazine Sep/Oct 2006

Investors will tell you that to support the infrastructure of a particular area it is necessary to expand and there is no doubt that expansion, certainly in coastal growth areas, means great return on investment.
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Developing a head for investment

Source: Wealth Creator Magazine Sep/Oct 2006

Investing in Property

Property investment can span a whole range of different spectrums. From residential to commercial, to putting money into property developments, savvy investors have a wide range of options to choose from.
It is the various development options that are making waves at the moment. In this issue Wealth Creator looks at three development options: student accommodation, sea change developments and luxury apartments.

The kids are alright

Student accommodation is proving to be the investment niche of the new millennium. Statistics around the world show high rental yields and excellent cash flow opportunities. In the UK occupancy levels have exceeded 97% during the past 12 months and annual rental increases have risen 5.1% to 10.7%. The trend is the same in the USA. Author Michael H. Zaransky, who penned Investing in Student Housing: Cash in on the Campus Housing Shortage writes that there are seven things to look out for.

Here are three that are relevant to the Australian market:

1. Make sure the property is located at a school that has a favourable (i.e. low bed to student) ratio.

2. Be sure your net operating income (NOI) expenses make sense. Zaransky writes, “In addition to rent, include potential income from these items: late charges, laundry, parking, vending machines, utility reimbursement and damage deposit forfeiture revenue. Typical operating expenses include real estate taxes, insurance, utilities, repairs and maintenance; supplies, advertising administrative expenses; fees for legal, accounting and management services; and capital reserves and expenditures.

3. Housing should include the following: modern amenities, good location close to campus, little competition from development competitors and growing student body population.

The third point Zaransky makes relates well to the current situation in Australia. Paul Franzé, developer of Unisity, a student accommodation development in the Melbourne suburb of Footscray close to Victoria University has “Seized on an underdeveloped commodity in Melbourne’s West.”
Demand outweighs supply and in the last decade there has been significant growth in the offshore student market with currently 151, 798 international students enrolled at an Australian educational institution compared to 35,920 in 1994. Paul believes that it is only in recent times that attention has been brought to this type of market, even though the opportunity has existed for some time.

“Secondary education is also a huge revenue earner and the student population is at an all time high,” says Paul. “Students and parents require a purpose built facility into which students, particularly those from overseas, can easily assimilate.”

On the town

Sea change, green change, it seems when we hit a certain age or point in our lives, a change is as good as a … well change. There was a debate recently on Seven’s morning programme Sunrise in which two Byron Bay residents disputed the merits of the commercialisation of one of Australia’s favourite hideaways. Is development in coastal towns a blight on the landscape or a necessary part of industrialisation and growth?

Investors will tell you that to support the infrastructure of a particular area it is necessary to expand and there is no doubt that expansion, certainly in coastal growth areas, means great return on investment.

In Townsville new developments continue to emerge. Fortia Group founder and Managing Director David Harker believes it is to do with the underlying infrastructure of Townsville. “The growth of the community is pretty well evenly distributed across seven main sectors including manufacturing, mining, rural, education, tourism and they all account for about 17% of the local economy. In Townsville you’re not actually focusing on one particular sector, whereas somewhere like Cairns might be more tourism based in its local dynamic. Townsville is more diversified, so from our point of view it actually has a stronger and more reliable underlying commercial base and is actually the commercial hub for that part of Queensland.”

The biggest market chasing the sea change is the Melbourne market. For reasons of weather and investment opportunity, Queensland offers excellent long-term prospects. Townsville alone has enjoyed double-digit growth in the last five years, vacancy rates are 1.1%, rental growth in 2005 was 8.8% and there is almost $9 billion worth of infrastructure plans for the next few years.
Phil Graham of Heron Todd White agrees, “Traditionally sea changers have moved to the Sunshine Coast, but due to big prices there over the past four years, a lot of people are heading further north to towns such as Hervey Bay, which are a slightly lower price point. Agnes Waters is a really prestigious
area. Further up, Mackay has been influenced by sea change and the mining boom. There are many miners who are cashed up and a lot of sea change, retirement-type investors.”

Graham also notes excellent depreciation scales as an investment attraction. He says, “The important thing for investment in units is depreciation. As yields have gone down, investors are looking to maximise the return of their investment property and depreciation is one way they can do it. It’s a huge financial benefit in terms of tax cuts.”

Hedley Group is another North Queensland developer who has enjoyed enormous growth over the last five years. Hedley’s Peter Shervey puts it down to the fact that Hedley is not reliant on sub-contractors; they do all their own building which keeps costs down. “Our products are a lot cheaper and therefore we have a lot of repeat clients who have made some pretty good profits.”

Hedley develops across North Queensland and their apartments attract those looking for immediate investments or retirement options. What better way to retire than to Queensland views, of which Shervey argues his Elysium project has the best.

Another developer who is tuned into the needs of sea changers and investors who are looking for some luxury is SC Land’s Lance Chu, an architect by trade, who believes architecture can play a major role in investment decisions. Lance believes the strength of the luxury segment is due to the asset boom of the last half a decade, which has created asset rich individuals, looking for absolute water frontage and prime real estate.

And that is probably the message for developers to take heed of. It is one thing building, but it is another differentiating the product and creating a market. In a competitive market, developers need to stand out from the crowd and offer investors what they need and what they want.