Top shelf investments

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Australia's most exclusive suburbs enjoyed capital growth rates of up to 40% in 2007 but will this strong performance continue? Tim Derham, director of boutique real estate agency Abercromby's Real Estate explains.

Anyone thinking about dipping their toe into the premium property market will wish they did so twelve months ago. With a 30-40% jump in prices in 2007, the value of high-end properties has just entered a new territory.

Measured in monetary terms, we now consider property worth over $4m to fit the 'high-end' descriptor. Two years ago, it was $2m. Clearly, this is a market that knows no bounds. But is such extraordinary growth sustainable? Are high-end property purchases still considered a good investment? And do the conditions for growth still exist?

The answers to these questions are more likely to be found when we peer into social and demographic indicators, rather than economic conditions such as the interest rate rises that consume most property analysts' forecasts.

Why? For starters, people in the position to fork out $4mn plus for a property are relatively immune to the climbing interest rate. At the upper end of the market, buyers do not gear themselves as dramatically as those who are trying to gain a foothold at the lower end of the market. A hike of one or two percentage points is barely a blip on their fiscal radar.

Existing in its own economic bubble, then, the growth in value of high-end property is attributed to another very simple equation: supply and demand. This little ratio is helping executive properties defy the property market slow-down that is being witnessed in most localities around Australia.

Not enough to go around
So is it a matter of more people having the money to buy high-end properties, or less of these properties being listed on the market?

In the City of Stonnington, for example- which takes in the affluent suburbs of South Yarra, Toorak, Armadale, Malvern, Malvern East, Glen Iris and Kooyong - the number of sales in 2007 was significantly lower than previous years.

Only 957 properties were sold last year, compared to an average of 1400 in each of the five previous years. This isn't because people aren't buying properties, but because homeowners are more reluctant to sell.

Of course, both factors have an impact, but I would argue that dwindling supply is the main cause of the skew. Over the years, because of escalating stamp duty, agent fees and other costs associated with selling, many people think twice about selling their luxury home.

These well-heeled empty-nesters are ready to downsize from their $5 million family mansion into a stylish apartment in an inner suburb. Yet when they do the maths, they realise that they won't have much left over once they've moved. With less financial incentive to sell up, they decide to stay on for a little longer.

This behaviour of cashed-up baby boomers is set to continue for another twelve months, at least. With economic uncertainty ahead, and with many of them still counting the losses from falls in shares and superannuation funds, they are not willing to take the risk and let go of their biggest asset just yet.

This is why we haven't seen quality, high-end properties come on the market as regularly this year.

Demand still strong
On the flipside, demand for high-end properties still remains strong. In fact, with the recent slide on the sharemarket, people want to "live in their money" more.

Think about it. Your principal place of residence is a tax-free haven, so it makes complete sense to put your hard-earned profits into a bricks and mortar paradise that you can enjoy every day of the year.

All of the executives who made serious money over the past three or four years - what with skyrocketing bonuses and an over-performing sharemarket - are now taking this money and looking to purchase property. Not for investments, but for life.

We have found that the buyers of high-end properties are getting younger, which reiterates this trend. These stockbrokers and bankers have worked hard, been paid exceptionally well, and now want something to show for it.

Add to this trend the rising migration rates into inner urban areas of capital cities, and the demand keeps rising. Driving this trend are the West Australians who have profited from the mining boom and want their slice of eastern states' real estate.

As long as we continue to see strong demand for upper end property with a lack of quality stock, prices will continue to climb skywards.

Is there any room for investors?
With the increased demand for high-end properties, is there room for investors to enter the market, and is it worth it?

In our experience, investors are not attracted to the top end of the market simply because the returns are next to nothing. Current rental yields remain at around 2% net - not very attractive for an astute investor.

One rental property on our books, in an affluent inner suburb of Melbourne, is listed for $3000 per week. Our client paid $5.6 million for it. The rental income would barely make an impression on repayments.

In addition to the reality of diminished returns, investors must also contend with capital gains tax, costs of maintenance and the huge interest paid on loans. Suddenly, investing at this level becomes something of a headache.

So who does invest at this end of the market? Someone must, because executive rental properties exist.

We mainly deal with Australian expats - those high-flyers who have moved overseas to work for merchant banks and other esteemed institutions. They still want to buy their slice of real estate in Australia, and have it ready for when their children are of an age to start school.

While they are overseas setting themselves up for life, they rent their properties out. These people aren't too concerned with the returns - rather, they view it less as an investment and more as a stop-gap for the five years or so that they are away.

The good news for any investors in prime properties is that vacancy rates are extremely low. Right now, they are about 1%, reflecting an extremely competitive tenancy market.


Tim Derham is Director, Licensed Estate Agent & Auctioneer of Abercromby's Real Estate. Visit website www.abercrombys.com.au

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