Funds and Property

I’ve written about it before (“I am not a nutter” and “That’s not a Housing Affordability Crisis”), and I’m about to write about it again. Today I received a letter from my accountant (who, admittedly, is more savvy than the average accountant when it comes to property) confirming, and even encouraging purchase of geared property in a super fund. I quote:

If you have over $120,000 sitting in Superannuation you can now buy property through your superannuation fund … the SMSF makes the first installment of 20% deposit plus stamp duty/ legal costs plus the first year’s interest repayment.

And I have also come across a company called the Quantum Group that is setting up a similar structure for superannuation funds, calling them property warrants. So, there’s also an option for people whose accountants aren’t quite as savvy.

The residential property market has been performing quite well recently. For example, the average annual growth of median residential property prices in Melbourne over the last ten years has been 10.65% (according to this article, reporting Residex figures). If a property purchased at $450,000 (the current Melbourne median property price) grows at the average figure of 10.65% annually, and is purchased at a gearing level of 80% (as in the example from my accountant), then the growth is considerably higher. Ignoring tax, rents and interest payments, the $90,000 invested would become equity of around $880,000 after ten years – that’s about 25% annual growth. Not bad, and will be hard for super fund investors to ignore.

I would expect that once superannuation funds start investing directly in residential property, the big players in Australian superannuation will want to address the demand by packaging up property so that it is easy to invest in, i.e. indirect investment in residential property, or funds of geared residential property which a SMSF can buy units in. The catch will be that while the SMSF area is regulated by the ATO, the wider superannuation funds industry is regulated by APRA, and they are not going to want to see superannuation funds gearing up and putting people’s pensions at risk. The gearing cat is already out of the bag, so perhaps all they can do is cap it at a more conservative level, of say 60% (this would have produced a return of around 18% in the example above).

It is worth considering what sort of property funds the industry would be looking to set up. Generally they look to the blue-chip end of the market, so in property this would be houses or whole apartment blocks (rather than individual apartments) and in well-established suburbs such as Hawthorn, Toorak and South Yarra in Melbourne, and their equivalents in Sydney and possibly Brisbane. Such property typically goes for multiple millions of dollars, but I would expect that people living in such houses would prefer not to rent it. I don’t really know – I’ve never been in that position myself! Innovation in rental / purchase contracts will probably be required to give residents in such houses the certainty, control, or capital gains that they require. However, where there’s money, there’s incentive to fix such problems.

So, initially, I expect to see the big funds going after apartment blocks, then eventually houses, then when supply is exhausted in the blue-chip areas, moving into neighbouring areas or the other cities in Australia. A side-effect of this staggered buy-up is that these funds may not be particularly diversified. There could be a “Toorak houses” fund, or a “South Yarra apartments” fund. It may not be a bad thing – it doesn’t matter if a particular fund is not diversified as long as someone’s overall portfolio is diversified. And it could enable people buying that type of property in that type of area to invest in something that tracked the investment performance of their dwelling without having to invest in (i.e. renovate) the dwelling itself.

Is this complete speculation, or have similar things happened overseas? Well, to be honest, no. Real-estate Investment Trusts (REITs), as they are often known overseas, tend to invest in hotels, office blocks, shopping centres, and sometimes apartment blocks. Although I’m no expert, I’m not aware of big REITs buying up houses. So, this is all in the realm of speculation. But the fact that it hasn’t happened overseas should not be an indicator that it won’t happen here, as Australia tends to lead the world when it comes to putting real estate into retail funds. According to Wikipedia, the first real-estate trust was launched in Australia in 1971.

Anyway, for the everyday investor, who can’t pony-up a few million to buy a house in Toorak, the impact of competition for real-estate from the major fund managers is likely to be limited. You’re more likely to be bidding against someone running a SMSF. Unfortunately, the number of SMSFs is growing rapidly.

Finally, one thing to watch out for will be unscrupulous operators. There are already dodgey property marketers who prey upon interstate investors, e.g. Perth people buying overpriced property in Melbourne, or Melbourne people buying overpriced property in Brisbane. This will give them one more tool to exploit: that vulnerable people can invest their super into a dodgey scheme, and possibly not realise for many years that the property that they’ve bought was massively overpriced because the whole thing is so hands-off. Hopefully people know not to invest in something they don’t fully understand. It’s a vain hope, I know.

Book Club Homework: complete!

A couple of hours ago I finished reading the last book for our book-club this year. It surprised me. For a literary novel – a genre which typically doesn’t excite me – it turned out to be enjoyable. Lucky, because the book-club only picked it on a re-count. And given the truculent and debate-hardened members of the book-club, it’s a wonder we managed to get someone to change their vote at all!

Anyway, before I discuss this with anyone else, or check out the publisher’s official book-club website, I thought I’d jot down my thoughts while I can claim that they are still mine.

The History of Love
A tangled history that I loved being caught up in.

This is a book about the intertwined histories of a number of quirky characters, all with Jewish ancestry, around New York, and their relationship to a book called The History of Love. It’s the second novel by Nicole Krauss, and I would not be surprised if she drew upon her own family’s history of Jewish culture and migration. Certainly, those details had the feeling of accuracy throughout the book.

Strangely, one thing didn’t quite ring true for me: the male voice of the character Leo Gursky, who we are introduced to through his narration in the first chapter. I must confess that I like to play a game when reading articles in the newspaper, trying to guess the gender of the author from their style, and usually it’s not too hard. However, finding out that Leo was male was a little unexpected. I assumed he was a Leonore or something. And once I’d identified that the male characterisation didn’t gel for me, I noticed that other male characters weren’t as well realised as the female characters. But it was a minor thing, really, and a little strange.

Something far more impressive was how Krauss maintained the half-a-dozen storylines through the book. To be honest, I was confused for most of the way along about which stories were “real”. And the stop-start manner of my reading this book didn’t help given the concentration required to keep track of what had happened and when. But perseverance paid off, and by the end I was thoroughly enjoying how it was all coming together. Not the sort of book I would’ve normally picked off the shelf to read, but glad that I did.

My rating: 4.0 stars

Real Christmas Carolling

I saw this clip on a friend’s Wall in Facebook, but I’ve stolen it and put it here instead. It took me back to my carolling days when, during the 1,000th rendition of O Little Town Of Bethleham you could easily forget what verse you were meant to be singing. Except these guys are doing the 12 Days Of Christmas, and a couple of others besides. And they have talent!

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The other cool thing is that I’ve actually sung Africa in a choir too.

The Karma of Kringle

Christmas is a time of giving, and this is keenly illustrated by the tradition of the Kris Kringle. A group of people committing to give presents to each other, often anonymously, and generally randomly, up to a fixed dollar value. It’s fair, fun and festive. However, what if people don’t play by the rules?

The other week I went out to dinner with my Toastmasters club for our Christmas break-up, and everyone who came had to participate in a Kris Kringle, up to a value of $5. The other rule was that everyone had to give a short talk on the present they got – well, it was Toastmasters after all.

It took me a long time to find something for no more than $5 that I would like to receive as a gift, and was interesting enough to be able to talk about. Ironically, once I left the shop, I immediately found something better, but I felt I had to stick with the original present. What’s worse: spending $5 on a $4 present, or $10 on a $5 present? I thought that the latter bent the spirit of Kris Kringle a little.

Unfortunately, on the night it became clear that almost everyone had cheated. Most presents would have been between $8 to $10.  One person appeared to have spent $15 on a $15 present – the RRP was printed on it! I get it that people may have valued their own time highly, and traded off searching time against present cost. But it was not a level playing field any more – not everyone was giving a talk about a $5 present, and some people were probably disappointed at what they received versus what they gave. Personally, I benefited, since what I received would have cost more than $5, but I felt a bit let down on behalf of the person who received my gift. If I’d known that the Kris Kringle was a minimum, not a maximum, then I would have shopped differently.

Should you keep to the Kris Kringle limit? Can you conscientiously break the implicit agreement between the group? Is it just about the giving, not the shopping? All I’ve been told is that Santa knows who’s been naughty or nice …

Blame it on the rain

A week ago, Australia voted in a new government, and there are many theories going around as to why. Politicians and commentators are pointing to leadership issues with the Liberals, interest rate rises, the Tamar Pulp Mill, WorkChoices legislation and the Kyoto Agreement. Well, I’ve got another theory: it was due to water restrictions.

The the last twelve months leading up to the election on Saturday November 24, most states of Australia introduced legislation that made life of “working families” tougher, resulting in people needing to get up earlier to water their gardens, lawns dying off, and cars getting grubbier. Water is seen as an environmental issue, and the last Federal government was not seen as doing much about the environment. Hence, they got they axe. But let’s look at the data:

City Water Restrictions Introduced When introduced Wash your own car? Water your lawn? Swing against Govt ***
Sydney Level 3 1 Jan 07 Bucket only Hand-held hose or bucket 5.7%
Melbourne Stage 3a 1 Apr 07 No No 5.5%
Brisbane Level 5 * 10 Apr 07 No No 6.4%
Perth unchanged (permanent) Yes Yes 1.7%
Adelaide Level 3 1 Jan 07 Bucket only Hand-held hose ** or bucket 5.8%
Hobart none removed 28 Feb 07 Yes Yes -0.4%
Canberra Stage 3 16 Dec 06 No No 2.0%

* – Brisbane upped their water restrictions to Level 6 the day before the election (November 23).
** – Adelaide allowed limited use of hand-held hose from October 1.
*** – Swing figures from The Age, Saturday December 1.

So, you can see that the two cities (Perth and Hobart) where water restrictions were unchanged, and in fact allowed watering of lawns with sprinklers and washing of cars with a hose, the swing against the Federal Liberal government was the lowest. Also, the city (Brisbane) with the harshest water restrictions, increasing them the day before the election, had the highest swing against the government.

I’d never suggest that elections are simple affairs, decided by a single issue, but this particular issue seems to have had a significant weight, and hasn’t yet received the full credit it deserves in the analysis.