Property Report for year 2010..What next ?

                                                                                                        Source: www.smartcompany.com.au


At this time of year it's customary to look back at the last 12 months, as well as make some forecasts for the year ahead.

Well, 2010 will be remembered as the year the property market stalled. Rising interest rates, decreasing affordability and economic uncertainty were a volatile mix that stalled the property boom we experienced in the first half of the year.

While many property buyers think Christmas has come early, some home owners and investors are concerned by the bad news they are reading.

Yes, property prices are flat lining and auction clearance rates have fallen and there are more properties on the market than there are potential buyers, but nothing suggests that the property market is about to crash.

Let's first look at the latest figures from RP Data:

The markets are fragmented

What these figures don't show is how fragmented the markets really are.

What I call "A class properties", properties in prime locations and with an element of scarcity, are still selling well, even though there is clearly less interest from both owner occupiers and investors than there was before.

However "B" and "C" class properties are not selling well. Some have dropped in value – maybe 10% - and some can't be given away (well, it's not really as bad as that, but you'd have to give a very steep discount for someone to buy them).

And all the key indicators suggest the slow down will continue well into the first half of 2011. The number of properties on the market is high and many vendors still have unrealistic expectations. They would like the type of price they would have achieved six or nine months ago, but unfortunately most will be disappointed.

Properties are remaining on the market for sale longer and more vendors are discounting their asking price to sell their properties. Rising interest rates and the prospect of further increases to come next year means there are fewer home hunters competing for the properties that are for sale. With more houses for sale this means more choices for buyers, and the longer homes take to sell the more likely they are to go for a lower or more reasonable price.

What's ahead in 2011?

Looking forward, 2011 looks like it will be another year when our markets are fragmented. The value of certain properties will keep rising, others will stagnate and certain properties will fall in value. However, rents are likely to increase strongly in most areas.

I see minimal growth and more likely falling values in some outer new home owner suburbs and cheaper suburbs where rising interest rate will hit hardest. In contrast, in many inner and middle ring suburbs, increasing demand from owner occupiers, investors and tenants is likely to maintain property values in these areas.

You see, the current tight lending criteria have meant that developers aren't able to build the medium and high density apartments required in these suburbs. This lack of new rental stock together with a growth in the 20-24-year-old demographic group means our vacancy rates will remain at historic lows and rents will keep rising strongly. And this situation is unlikely to improve over the next four to five years.

Why will it take so long?

Currently builders are just not building apartments (other than in the CBD where an oversupply is looming.) Eventually the banks will start lending to developers again – but with the time lags involved in getting developments on stream, all this means it will be quite awhile before our vacancy rate impr oves.

Rents will rise

Even though house price growth has stalled, our capital city populations are still increasing at the highest rates in the Western world. About 150,000 new Australian households are formed each year and each of them needs a home.

When people can't afford to buy they have to rent, and this means that capital city rents are going to rise significantly over the next year or two.

This means that if you want to increase your wealth through property, and take advantage of the new buyers market, then 2011 could be a great year for you, but:

1. You need to buy the right property – one that is bought below its intrinsic value, in an area of strong long-term capital growth and one with a "twist" – with an element of scarcity or one to which you can add value. And...

2. You will need to structure your finances correctly and allow for our changing interest rate environment.

I'm sure the 'chicken littles' will be back again yelling the 'sky is falling', as interest rates rise and affordability bites, however smart investors will be out buying the right type of property.

Sitting on the sidelines waiting to see how things pan out may seem safe to some, but it is likely to mean they will miss out on great opportunities. It is easy to do nothing... as Donald Trump says: "Nothing is easy... but who wants nothing?"

Cheers,

Rashesh Bhavsar
Financial Planner
Fortune Wealth Creation Group
www.fortunewealth.com.au

Portfolio construction: Finding the perfect fit

In an ideal world, all planning clients would have their own individually tailored portfolio of direct investments constructed to suit their personal circumstances and preferences. Indeed, the rise of individually managed accounts (IMAs) has delivered the technological platform to make it easier than ever to achieve this outcome. While it can be a complex and time-consuming exercise, here we explain the key steps in portfolio construction. 

Step 1: Asset allocation – the most crucial decision

A number of academic studies have concluded the most important determinant of portfolio performance is the allocation of funds between the various asset classes. When constructing portfolios, we determine optimum allocations across a series of risk-based investment portfolios that aim to provide appropriate returns for a commensurate level of risk.

Allocations are based on long-term (10-year) forecasts for each asset class, using a rigorous analytical framework to undertake a thorough assessment of each asset class in the broader context of the economic environment and investment markets. We recommend using long-term forecasts as they tend to be less volatile than short-term forecasts and certainly more reliable than historical extrapolations. Growth in income is also steadier over 10-year periods and the effect of a change in valuation ratios is much smaller over 10 years than one year.

Ten-year forecasts are calculated by decomposing market returns into three elements: income, growth in income and the effect of changing valuation ratios. This can then be used to produce leading indicators for meaningful long-term forecasts of future returns.

An example of how this is done is shown in Table 1, which shows the 10-year, pre-tax index return forecasts for various asset classes. 

Once long-term forecasts are determined, the next step is to develop a strategic direction for each portfolio based on your assessment of the relative values of each of the major asset classes. This assessment is used to determine whether positions within the investment portfolios should be underweight or overweight, relative to what is considered a long-term neutral position. 

To demonstrate how this all comes together, Table 2 (see page 17) shows the neutral asset allocations for each of the portfolios. Changes to these allocations, be it underweight or overweight, are based upon the long-term forecasts shown in Table 1. 

Further to these decisions, the planner needs to consider risks and value opportunities within each asset class, for example at the sector or sub-sector level, which should prompt them to tilt the portfolio, typically on a short-term basis, to take advantage where appropriate. 

Step 2: Selecting the assets 

The next step is to determine what assets to use. The options and combinations available are endless – including managed funds, exchange traded funds (ETFs), direct equities, listed property, unlisted property, bond funds, and the list goes on. At its most complex level, this step requires extensive knowledge of the individual assets and managers.

Much attention has been paid to the science of manager and stock selection, and if you can consistently pick the best performing managers to justify the price you pay for them. Regardless of where you stand on this debate, there is no denying it is a challenging task. For this reason, we use ETFs.

ETFs offer broad exposure to the market at a relatively low cost with high levels of transparency. Also as a non-pooled investment, your clients are the beneficial owner of all investments so they don’t inherit another investor’s cost base for capital gains tax purposes. 

Step 3: Implementation – slow and steady or one big bang

Once extensive research has been completed on asset allocation, forecasting and determining which assets will be used, the portfolio has to be implemented. There are two options: investments can either be bought immediately in one transaction, or  value targets for each individual asset can be set, with multiple transactions made incrementally. 

We choose to stagger changes over a period of up to 12 months for two reasons. Firstly, if our asset allocation and investment committee has identified an asset as being expensive, it can continue to get more expensive, sometimes over the course of several years. A gradual reduction in exposure means we can continue to benefit from the positive performance of that asset. 

Conversely if the committee values the asset cheaply, it may continue to get cheaper and we can thus increase allocations more cost effectively. 

In some circumstances however, the decision may be made to implement changes more quickly if the valuation of an asset has become extreme. This means that if asset prices are assessed as being overpriced or very cheap, we increase the pace at which we implement set targets. 

Challenges that can arise at this step in portfolio construction include: what if the market moves against you and your price target is never reached? Do you defer the rebalance? Are you now forced to buy at a higher price or sell at a lower price than you wanted to, to achieve the model allocation? Have the relative market movements changed asset class weightings such that the need to trade is reduced or even removed? 

Like the steps preceding it, the implementation strategy requires significant research on the part of the person constructing the portfolio to ensure cost efficiencies are maximised at every point, and changes in the market are used to the portfolio owner’s advantage.

Are you the right person for the job?

As you have probably gathered, portfolio construction can be incredibly challenging. Successful construction requires planners to manage the objectives of their client’s portfolio on one hand and a forever changing set of economic variables and investment choices on the other – not to mention giving clients advice beyond their investments. 

Individually constructed portfolios are an excellent option for many investors – they offer greater flexibility, control and transparency. But effectively constructing and implementing portfolios is a complex exercise, so planners considering this option for their clients should ask themselves if they are suited to this task and can deliver the returns their clients deserve. 

Source: http://www.financialplanningmagazine.com.au