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Top 10 Major Risks Faced by Ipswich Property Investors

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Today we present a back to basics lesson on Property Investing from Pete Wargent.  You can never go to wrong when you stick to the everyday basics of Investment.  Now with more people looking at the Ipwich  property market again, this article is a timely reminder.

We all understand that all types of investment including property investment comes with a risk. So let’s discuss the 10 pre-eminent guises of investment risk, as they apply to Australian property investors.

ipwich Property Investment Risks

 1. Market risk (or systematic risk)

Market risk may affect all investments in an asset class in a similar manner, such as in the event of a market-wide price crash. As such, market risk that cannot easily be mitigated through diversification. While buying properties in different states might diversify market risk to a partial extent, if the wider property market crashes, diversification is unlikely to assuage the systematic risk successfully.

Property investors should additionally invest in other asset classes that tend to move in a non-correlated manner to real estate. Property investors can also focus upon a longer investment time horizon which allows correcting markets greater opportunity to recover.

2 Liquidity risk

Equates to the possibility that an investor may be unable to buy or sell an investment when desired (or in sufficient quantities) due to limited opportunities.

Illiquidity is a salient risk in real estate. It is difficult to sell a property quickly should the need arise, which is not the case for large-cap stocks or government bonds. Liquidity risk in Australian property is best mitigated through investing in landlocked capital city suburbs with eminent demand and constrained supply.

3 Specific risk (or unsystematic/business risk)

Equities investors and fund managers talk much of specific or business risk, being the measure of risk associated with a particular stock or security. Also known as unsystematic risk, this typically refers to the risk associated with a specific issuer of a security. Businesses in the same industry may have similar types of business risk, and issuers of stocks or bonds may become insolvent or lack ability to pay the interest and principal in the case of bonds.

Specific risk in property investment is somewhat different, and rather relates to the risk of acquiring a loss-making property or one which delivers sub-optimal returns giving rise to opportunity cost. Specific risk can be mitigated through diversification, although this can represent a challenging proposition in property as dwellings tend to be expensive.

One frequently invoked strategy of property investors is to acquire different types of property in different states. Careful, detailed due diligence and research of any property purchase also tends to reduce (if not eliminate) specific risk.

4 Interest rate risk

Normally refers to the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Where an investor buys a security offering a fixed rate of return, he introduces an exposure to interest rate risk. Examples thereof including bonds and preference shares (preferred stocks).

In Australian investment property, the interest rate risk instead lies in variable rate mortgages as the cost of debt capital can materially increase when the Reserve Bank ratchets up the cash rate. The risk can be mitigated through the use of fixed-rate mortgages and prudent cashflow management.

5 Foreign exchange risk (or currency risk)

Arises from a movement in the price of one currency against another. When the Australian dollar appreciates, the value of foreign investments declines. Conversely, if the dollar weakens the value of foreign investments effectively increase.

Presently the strong Aussie dollar attracts investors to overseas investments, in particular to US real estate. A good strategy? Maybe. Our dollar may depreciate, and regional US property markets have corrected. But is there a foreign exchange risk in investing overseas? Absolutely, for exchange rates are inherently unpredictable. Few commentators in 2008 opined that the Aussie dollar could ever be worth 110 US cents, and yet it indeed became so.

Currency risk tends to be greater for shorter-term overseas investments, which have insufficient time to revert to a mean valuation in the same manner as longer-term equivalent ventures.

6 Sovereign risk (or social/political/legislative risk)

Sovereign risk is associated with the possibility of unfavourable government action or social upheaval resulting in investment losses. Governments retain the power to amend laws affecting investments, and rulings which result in an adverse investment outcome are representative of legislative risk. One frequently highlighted legislation risk in Australian property investment is the possible phasing out of the negative gearing tax rules.

Investing in developing or unstable countries variously offers opportunities for substantial returns but, reflecting the principles of the risk-return trade-off (of the CAPM model) may bring a heightened associated sovereign risk.

7 Credit risk

Credit risk normally refers to the possibility that a bond issuer becomes unable to service expected interest rate payments or a principal repayment. Typically, the higher the credit risk is, the higher the interest rate on the bond.

In property investment, credit risk often lies in the investor rather than the lender, although there is of course a possibility that lending institutions can become insolvent as was seen in the US as the subprime crisis played out. Property investors should retain a liquid buffer in order to mitigate the risk of mortgage default.

8 Call risk

Also usually refers to bond issues and the possibility that a debt security will be ‘called’ prior to maturity. In bonds, call risk prevails when interest rates fall, as companies redeem bond issues with higher coupons and replace them on the bond market with lower interest rate issues to save cash.

Can call risk impact Australian property investors? Indeed, but conversely when interest rates run higher. Investors with high exposure to adverse interest rate movements may be considered risky by mortgage providers cyclically. Investors in Australian commercial property have periodically been subjected to the real estate equivalent of a margin call, being forced to reduce debt exposure through the redemption of assets.

9 Reinvestment risk

Usually refers to the risk that future coupons from a fixed-interest investment will not be reinvested at the interest rate prevailing when it was initially purchased, a risk that increases in likelihood when interest rates decline. Zero coupon bonds are the only fixed-income instrument to eliminate reinvestment risk due to having no interim coupon payments.

The most straightforward strategy for property investors to avert reinvestment risk is simple: never sell.

10 Inflation risk

Also known as purchasing power risk, the possibility that the value of an asset or income stream will be eroded as inflation diminishes the value of a currency. The risk is the potential for future inflation to cause the purchasing power of cash inflows from an investment to decline.

Inflation risk is best countered through investing in appreciating assets such as real estate, dividend-paying stocks or convertible bonds, each of which has a growth component allowing them to outperform inflation over the long term. The uplifting news for property investors is that favourably located Australian real estate is well recognised as a tremendously effective inflation hedge over time.

 

You can see more from Pete Wargent at his blog.

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Investment Advice

Superannuation property fund ISPT invests in Brisbane malls

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Property

On behalf of its ISPT Retail Property Trust (IRAPT), ISPT is buy a 3741sq m property in Springfield and a 4889sq m neighbourhood centre in Ipswich.

Both were growing areas supported by strong residential catchments, said IRAPT fund manager Cameron Gregson.

“Obviously the quality of the anchor tenants in both centres also was a drawcard for IRAPT,” he said.

The Springfield property comprises of a 3200sq m supermarket leased to Woolworths on a 20-year lease, along with eight specialty retail outlets.

The Ipswich centre, located just 2km from the Ipswich CBD, has a 15-year lease commitment from Coles to open a 4200sq m supermarket in June 2017.

The two properties will be developed by Brisbane private property group Citimark, which has $1.5 billion of diversified development book focused on southeast Queensland.

“IRAPT’s decision to acquire both the Silkstone and Springfield retail centres is a huge show of confidence in these projects and the southwest corridor (of Brisbane),” said Citimark’s director of commercial and retail Jonathan King.

McNab Constructions has been appointed to build the Springfield centre, with completion expected in May 2017, while Hutchinson Builder will build the Ipswich Centre.

Sam Hatcher from JLL and Craig O’Donnell from CBRE managed the sale.

 

Originally Published On: http://www.theaustralian.com.au/

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Investment Advice

Low interest rates cuts negative gearing ATO investor claims in 2012-13

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Low interest rates cuts negative gearing ATO investor claims in 2012-13

Low interest rates cuts negative gearing ATO investor claims in 2012-13

Record low interest rates have shown up in new statistics from the Australian Taxation Office, in a sizable drop in negative gearing tax claims by property investors.

Claim for rental properties fell from around $13.8 billion to $12 billion between the 2011-12 and 2012-13 financial years.

The latest statistics for 2012-13 show that 1.26 million people deducted losses made on investments (including mortgage interest) from their overall income, from the 12.7 million lodged individual tax returns.

The overall cost of negatively-geared rental properties has fallen by $2.4 billion, or 31 per cent, in 2012-13, due to record low interest rates and higher rents.

The Tax Office’s latest statistics shows 1.9 million landlords.

The value of rent returned was up 8.6 per cent to $36 billion but the value of interest claimed was down 6.7 per cent to $22 billion.

While the number of landlords with negatively-geared properties increased by almost 60,000, their tax deductions fell 13 per cent.

​The highest number of property investors claiming tax deductions had a taxable income – after tax deductions – of between $37,000 to $80,000 a year.

By JONATHAN CHANCELLOR

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Investment Advice

How investor Nautilus nearly doubled money on property in 18 months

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How investor Nautilus nearly doubled money on property in 18 months
How investor Nautilus nearly doubled money on property in 18 months

Nautilus purchased this complex of 10 industrial buildings at 93 Burnside Road, Yatala, Brisbane, 18 months ago. Photo: Supplied

 

Nautilus Investments Corporation has made a 75 per cent gain on the value of an industrial property in less than 18 months after fully leasing half empty buildings and selling them off to Sydney-based fund manager Ringmer Pacific.

The Melbourne-based Nautilus purchased the complex of 10 industrial buildings at 93 Burnside Road Yatala, south of Brisbane from receivers in mid 2013 for $10 million.

It has now sold the asset for $17.45 million reflecting a yield of 8.94 per cent.

Savills’ Callum Stenson and Myles Clentsmith negotiated the deal following an expressions of interest campaign that attracted over 50 buyer enquiries and five offers to purchase.

“This was about being prepared to take on the risk profile,” Mr Stenson said. “When they first bought they were looking for something high return, high risk.”

“The complex was in disarray when Nautilus bought it. It had 57 per cent vacancy, there was outstanding infrastructure charges and no certificate of completion,” he said.

“At the time there was plenty of money but limited confidence – people were sitting on their hands, but those who stepped up have reaped the benefits.”

NEW TENANTS

Nautilus spent 18 months fixing the issues, securing new tenants and presenting the 14,500 square metres property back to the market fully leased.

A similar strategy is now being actively taken up by commercial real estate groups such as Lend Lease’s Australian Prime Property Fund.

That fund snapped up an empty ­Bunnings Warehouse in Brisbane in July last year for $21.27 million and Hills Limited’s headquarters for $15.6 million which is to be vacated next year.

Sydney-based fund manager Ringmer Pacific, which purchased the Nautilus asset, said the property has a prime location.

Ringmer Pacific’s Giles Austin said: “The 93 Burnside Road property provides extremely flexible accommodation for local businesses that will be able to adapt to changing tenant needs in this key growth corridor linking the Gold Coast and Brisbane.”

by Matthew Cranston

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