Delayed Gratification

Posted by Daniel Joseph

Over the past decade, the weekly holding cost on a $500,000 investment property declined by more than 80% (based on an income of $80,000 per annum). With the cash rate likely to decline further over the next 12 months, there’s never been a more affordable time to invest in property. Lucky you!

Access to cheap credit does, however, present some challenges to the uneducated investor:

Pros	Cons
Lower holding costs	Cheaper to develop – increased supply
Increased borrowing power – build your portfolio!	Where supply exceeds demand, the potential for elevated vacancy rates
Increased demand for property	Deflated rental yields

A less obvious result to those above is the delay in project delivery given the response of financial institutions to the changing market. More about that in a moment; first, let’s talk history.

Some History

Between 2011 and 2015, developers were required to cover less of their debt prior to commencing construction meaning that their financier required only a small percentage of sales prior to construction. Over the past twelve months, however, increasingly stringent development finance conditions have meant that developers need 85-90% of their project sold off the plan to start construction. This is largely reactionary policy implemented to address the risks (to the financier) associated with a Sydney market that, broadly speaking, is headed toward a correction.

The retraction in foreign investment spurred by increased taxes, changing financing conditions and restrictions on capital flight have further reduced sales rates and contributed in lengthier time frames between off plan sale and construction commencement. For some investors, particularly those seeking to use negative gearing to lower their taxable income, delays can be an unwelcomed surprise. There is, however, a silver lining:

With rates likely trending downward, you’ll likely secure a lower rate in 18 months than you would currently
By buying off the plan, you lock in your purchase price. Delays provide the opportunity to capitalise on property growth between purchase and completion
You’re earning interest on your initial investment (your 10% deposit) so that your money continues to work for you

Off the plan investing is basically like layby for an appreciating asset. The longer the layby period, the higher the probability of appreciation. It’s all about perspective really.

Posted by Daniel Joseph, on 6th Sep 2016