Alan Kohler talks with Anthony Wamsteker
Alan Kohler talks about SMSF Property Development via an innovative no-debt model.
Anthony Wamsteker: …shares. If you’ve got a diversified portfolio, having a bit of property and some shares means, when one’s doing well, the other might not be doing so well, and vice versa. You smooth out your returns, which is important when you’ve got growth assets in your portfolio.
Alan Kohler: Speaking of growth, what sort of growth is available, do you think, in housing investment?
Anthony: If you look at the last 20 or 30 years, it’s averaged about 5 or 6% per annum growth in price and about 4% in net rent. So all up, you’re in the realm of 9 or 10% returns out of property. Whether that will continue to hold for the long term, I see no reason why it won’t. Because one way of looking at it is to say, property prices typically grow in terms of the economy as a whole. If people are spending 30% of their income on property, they continue to spend 30% of their income on property 10 years down the track. Property prices track the economy and nominal GDP does grow at about 5% per annum. I think there’s no reason why those long-term returns can’t be sustained.
Alan: You’ve got a graph here of multicolored spaghetti. [laughter] Anthony, talk us through this. What are we talking about?
Anthony: I’m sorry to everyone on the webcast because this is a complex graph, and I encourage you to go to the latest Reserve Bank Bulletin to see it. But the explanation of it is that, even though we hear some commentators say Australian property prices are very expensive by world standards, the RBA has done a detailed analysis of Australia compared to the rest of the world and, in fact, we’re right in the middle of the pack. The black line on that graph is Australian property prices compared to the rest of the world and the RBA concludes, our property prices are not as expensive as some commentators would have. The reason that’s important, because in any growth asset, once we’ve formed the view, yes, it’s a good long-term asset to hold, we can get a bit nervous about, when’s the right time to invest? I don’t think there’s a great deal of evidence to say you should be holding back. You shouldn’t rush in either, but there’s no reason to hold back, thinking Australian property prices are due for some massive correction to equal the rest of the world’s property prices.
Alan: You’ve got another graph showing lending volumes since the GFC. I’m not sure whether Drew can get this up quickly or not, but let’s have a quick look at that. Talk us through that while we’re showing it.
Anthony: I’m indebted to Robert Gottliebsen for first producing this graph as part of his analysis of what happened in GFC. It shows, the red line there is lending to residential investment. The blue line is lending to all business, of which property development is one of the major classes of loans that the banks do. You can see a very big gap has opened up, as banks have continued to lend for people who are doing buy-and-hold property, but they haven’t lent to the people who are manufacturing property or developing property. What that means is that, property development sites have not risen at the same rate. In fact, they’ve fallen when residential property prices have increased. So if property development was previously an attractive sort of business activity to undertake, it’s even moreso now because the raw material, being the development sites, have fallen in value. Whereas the end product, the property that you make, has risen in price, in line with the finance that’s been made available to it.
Alan: What are the particular issues around developing property within an SMSF?
Anthony: Well, I think the biggest one… or the two biggest issues… the first one is, how do you get involved in a property development when obviously that often takes something like a million, two million, or even more to do the development? Not many self-managed superfunds can do that. So we do need a mechanism where a number of funds can come together who have got the same interest in developing property and team or pool their resources. The second issue is that, inside an SMSF, you want to leverage your property. You really need to do that with a buy-and-hold property, rather than a development property. But I think that’s quite a good thing, because I think property development returns stack up without debt. Indeed, it’s better to do property development without debt because debt, whilst it’s appropriate for assets where there’s good income coming along to cover the interest, in a property development, you’re forgoing a bit of current income for a later development profit. I don’t believe that is ideally suited to a debt environment.
Alan: So you shouldn’t have any debt at all with a development property.
Anthony: Well, not everyone will tell you that, but I will say, it’s certainly a lot safer if you’ve got no debt.
Alan: The bank probably won’t tell you that.
Anthony: No. Although once a development goes bad, that’s part of the problem. The bank is very quick to step in and take control. If they’ve got 70% of the finance and 30% is equity, they will act in the interest of the 70% that’s been put in. Whereas if you’ve got 100% equity, you don’t have any such conflicts of interest. You’ve just got people saying, how do we best manage this development to get the best return for everyone for the total equity? Given, that’s a safer approach to take. Particularly with self-managed superfunds. You’re talking about people’s retirement income, I think the safer you can make it, the better. Plus, with that opening up of the gap between the end product and the lower cost development sites that are currently available, there’s no need to take the risk to earn pretty good returns out of development anyway.
Alan: You’re also suggesting that property development in the SMSF is a way to minimize the disruptive impact of the Internet. What do you mean by that?
Anthony: Yeah. What I mean by that is, in years gone by, property development was always going on and there were people investing in it, but often that was quite wealthy people through property syndicates and individual investment opportunities that they had. Because it was very expensive to try to get 1000 people together to participate in a property development. Now with the Internet, communicating to people and presenting an opportunity and getting a number of people interested in it to put the funds together, is a lot easier. So it’s made property development an opportunity that many people can participate in. You can do a development with 50 or 100 people without any trouble at all. You don’t have to keep it to two or three that you’ve got to keep up to date. Through the Internet, you can keep everyone up to date on how it’s going.
Alan: Tell us about an example development. How might it work?
Anthony: Yeah. One that I invested in, when I first started looking at how to invest in property, was a development in Brisbane. That was actually my first introduction to SMSF property. In fact, I think I first heard about it through an ad in the Eureka Report, was how I first came across them. It was a development of 30 partners.
Alan: Even the ads in Eureka were useful. There you go.
Anthony: Exactly. It started an interesting journey for me. I was one of about 58 investors, I think it was. We collectively invested in land that’s copse, with 35 townhouses. Those townhouses are currently being developed. Interestingly, quite a lot of the investors also wanted a buy-and-hold property. So they started off in the development, but then elected to purchase one of the townhouses that was manufactured in this development. So 21 of the townhouses were sold to investors who’d also been in the development. They continue to hold it in their fund as a buy-and-hold asset. Development updates are reported to all of us via the website. We all know what’s going on, can see how it’s going. To date, that’s been a very attractive development. It’s proceeding according to schedule. We look forward to the final 14 being sold, and a good return being generated for us.
Alan: You’ve got a graph here of the volatility of house median prices. I think you’re talking about volatility there. Talk us through what you’re meaning with that.
Bruce: That’s why a lot of people love property so much, is because it is less volatile than shares. As we had, from November 2007 until March 2009, 55% wiped off the Australian share market during that period. The worst property downturns in recent years have been a lot lower. You know, 10, 20%. In the early ’90s, Sydney’s market fell about 20%. But if you have a look at that graph, which is showing a period of years, the volatility bouncing around is not nearly as high. Perth went for a great canter there, the blue line, for a period. But then, if you look from, sort of 2008 onwards, Perth has barely moved since. It’s bounced around a little bit. Some of the other major metropolitan cities in there have done something similar. It’s a lot steadier. Yes, property does fall. Yes, property can fall 10, 15%. But there haven’t been any major falls since the late ’80s, early ’90s. Prior to that, the crashes don’t seem to be as big in property as they are in the share market.
Alan: Nor do the rises, it would seem. Looking at this graph, we’re not talking hockey sticks.
Bruce: Well, no. I mean, if you do look at that Perth example, when the resources boom was really kicking off, 2002, 2003, through to the first corrections that we had in sort of 2008, there wasn’t quite a significant rise. But what you are talking about, which Anthony raised, when you’re looking at property… I’ll work on quite similar numbers to Anthony, 5% capital growth, 4% yield, total return, 9%… property is capable of doing far better than that if you’re able to pick well and choose the right points in the cycle. As a general rule long-term, I’m talking about sort of 9% total shareholder return, or total return for investor.
Alan: Yeah. I suppose one of the other problems is, with a superfund, you need a fairly large superfund to buy property, because you have to buy the whole thing rather than bits of it.
Anthony: Part of the questions are, property is a lumpy asset class. If you’ve got a fund where you really don’t want to invest as much money in your fund as would allow you to buy one good quality property on your own, that does get back to, as Bruce said, managed funds are one of the alternatives that you’ve got for getting that property exposure. You can get into managed funds with a much smaller investment, $5000 or $10,000, and start to get property exposure. If your fund builds up so that you’re then able to buy an individual asset, you can look at that as a longer term strategy.
Alan: John says, “Look, if you’re still working and you’re 60 years old,” that’s me. Just turned 60, I’m still working, still intent on working. Yeah, that’s me. Will it be advantageous to buy a property in the SMSF? This is me. Should I buy a property in my SMSF, me and John?
Anthony: I think the point is, whatever age you are, the purpose of your SMSF is to give you investment returns. As part of a balanced portfolio, I think property has a valid place. Yes, you would look at it. One of the things you do when you’re getting older is, you take into account what your liquidity requirements are, because you are allowed to draw it down. Clearly if you’re working and you’re going to continue to work, then you might not have the same need for cash draw-down as you do if you retire at 60 and your total income is dependent on the self-managed superfund. If you’re 60 and you’ve got good income, and you therefore are not drawing much of the income, you’ve got a greater capacity to hold property, which doesn’t produce the same ability to sell it in pieces like shares does. It’s probably a more valid asset class for people who are still working. Again, it’s part of a balanced portfolio that takes into account your liquidity as well as your growth aspirations.
Alan: How does that apply to development?
Anthony: With development, the model that we’ve talked about is, development through a managed investment scheme. In that case, it’s going to give you your money back relatively quickly. You’re going to do the development. After a year or so, you’re going to be finished with the development. You’re going to sell it and provide a return to investors. It’s not like a buy-and-hold property in that sense.
Alan: No, okay. Is that what your firm, SMSF…
Anthony: That’s right, that’s exactly right.
Alan: … Property does? You organize those…
Anthony: We organize those managed investment schemes, so that people can pool their resources, invest in a development, get it out after a year or so. They can get their money back with whatever development profit has emerged in that time.
Alan: Assuming that there is one.
Anthony: Assuming there is one. Which is part of why it needs professional management and part of why we don’t have debt in there, so that the profit is available to the investors. Because it’s through that asset managed investment scheme structure and there’s a shorter payback than, say, a buy-and-hold property you might want to hold for 10 years. It’s still going to give you some exposure to the property market, even if you feel like you want to start drawing down a pension within the next few years.
Alan: The development scheme through a managed investment scheme is ungeared.
Alan: What are the minimum amounts that you can put into it?
Alan: $5000 is the minimum.
Anthony: Yes, yes. As I say, it’s just a classic example of…
Alan: What sort of range of developments are you doing?
Anthony: Mainly residential developments, would be the main area. We have done commercial…
Alan: Lots of flats.
Anthony: Yeah. No, no. More house and land packages are the space we’ve been in.
Alan: Oh, right. Okay.
Anthony: Again, because even though it’s a development, it leaves a fair degree of land component in the deal for those investors who want to own one of the townhouses as part of it. We’ve typically been in the house and land package space and trying to earn development profits, which is all specced out up front, and give people their money back in a relatively short period of time.
Alan: Gentlemen, I think we’ve nailed it. I think we’ve pretty well covered it. Wouldn’t you say? I reckon that’s been great. That’s it for our webcast on SMSF property investing, sponsored by SMSF Property Australia and including Anthony Wamsteker, executive director of SMSF Property Australia, and Bruce Brammall, who’s the principal of Castellan Financial Planning, and also Eureka Report’s superannuation editor, and an expert on property investing. We’ll be doing this again. If you have any further questions, please write in. We’ll make sure you get answered. Hopefully, this will be the first of many of these kind of webcasts. Thanks very much for joining it. See you around.