Investing in Residential Property as an asset class
Alan Kohler and Evan Thornley talk about the investment elephant in the room !!!!
So what does the founder of Looksmart and a tech guru , Evan Thornley , know about property?
A lot , it seems
His company, LongView, now manages 4300 properties for individual investors and is also a national buyers’ advocate.
Thornley is about to disrupt this lazy giant!
Property and Gearing
Residential property and gearing …. A cocktail that has been given Australians exponential returns since 1926.
Solidly built properties, preferably on a rail corridor, have been an investor’s best bet for capital growth , as major city’s rapid population growth pumped up residential properties !
Total residential housing in Australia is $10 trillion, of which about $2.1 trillion is mortgage debt and $300 billion is in new developments. That leaves $7.6 trillion in equity in existing residential property, which is three times the size of the sharemarket.
And yet the $3.4 trillion in super funds don’t currently invest as there is not a liquid market and the risk/return equation makes it worthwhile.
It is certainly a big asset class – the biggest, in fact:
Research by Shane Oliver, of AMP, shows that the total return from residential property since 1926 has been 11 per cent a year – almost identical to the 11.3 per cent p.a. return from the sharemarket, but with much less volatility, so that’s a tick.
Shares vs Property and gearing (using OPM)
Real estate earns lower rental yields (2% than company dividends 6% (after Frankish credits ), but the gap is made up with negative gearing and capital gains.
The magic formula for exponential returns – gearing and being able to afford rental repayments through net rent received and negative gearing!
An example of how the average property owner with a mortgage has made money since 1926!
Investor holds an investment property for 15 years at a net 3% shortfall (after tax 2%) – after 10 years property needs to increase by 30% in 10 years to breakeven .
Let’s assume you purchased a property for $500k 15 years ago – and sold it for $1 million today.
After costs and negative gearing , your return would be $350k or 23k per annum (circa 5 %pa on an investment of $500k )
Let’s assume you purchased a property for $500k 15 years ago – put down $200k deposit and sold it for $1 million today.
After costs and negative gearing , your return would be $350k or 23k per annum (circa 11.5% per annum )
So why don’t superfunds invest in property ?
- Rent returns are less than share returns
- Inability to Scale
- Low gearing policy
They need large investment vehicles, preferably with the ability to sell quickly, in large lumps, if they need to.
Enter Evan Thornley’s property fund
Evan Thornley puts business 101 into property
The goal :- To improve the rental experience for both tenants and landlords – to “dignify tenancy”, and provide a better service for investors, including guaranteed rent, where LongView takes the risk.
Investing in “solid older dwellings on well-located land”, as Thornley puts it, in the suburbs.
1. The bank of mum and dad and the Bank of Government – shared equity
One of the funds will be for long-term rental, and the other will invest alongside home buyers in a shared equity scheme….. much like the government is doing!!!!
In the shared equity arrangement, the fund wouldn’t own any part of the house but would provide up to a third of the deposit and stamp duty in return for a contract to share in the capital gain when it’s sold.
“Our shared equity clients are almost all migrants and children of migrants; sole parents and the children of sole parents,” says Thornley. “That is, people without the Bank of Mum & Dad.’’
2. Invest for rent through a REIT
The other fund will be a straightforward real estate investment trust that will create a suburban land bank of existing energy efficient houses for rent close to stations and shops so that large aggregated sites can be used for affordable housing in future.
The investment will be geared to rely on long term capital gains
Thornley says the initial interest in these funds will come from family offices and high net worth individuals.
Says Alan Kohler
Whether it’s Evan Thornley or someone else, the only way the superannuation pool can be mobilised for housing is if it can be pooled into funds that break down the super funds’ bias against it as an asset class and work as a decent investment.