July 2016 - The Search for Yield (Cashflow)

By Rich Harvey, Managing Director propertybuyer

As the market continues to moderate, there will be more focus on yield by investors seeking to maintain strong cashflow. Investors need to consider the flight to quality and how to respond to falling rents.

This month we consider where to find yield and ways to future proof your cashflow. Please book in to our next seminar on July 20 on Regional vs Metro Markets.

We also look at the impact of the May budget on taxes, superannuation and pensions. Camperdown is our suburb of the month and check out inspiration corner to put some zing in your day!

This July update includes:

1. The search for yield (cashflow)
2. Seminar - Regional vs Metro Markets, Wed 20th July
3. Major changes to tax rates, superannuation and pensions

1. The search for yield (cashflow)

Rental yields for both houses (circa 3%) and units (circa 4%) in Sydney and Melbourne are now at record lows. This is not surprising given the dramatic growth in prices over the last three years.

So how do property investors respond to areas where rents are falling? How can you future-proof your portfolio if you own investments property in areas where rents are stalled or declining?

First, let's look at the latest figures from CoreLogic which show that over the past 12 months, rental rates have increased in Sydney (+0.4%), Melbourne (+1.7%),

Hobart (+4.6%) and Canberra (+1.9%). Rental rates have fallen over the past year in Brisbane (-0.3%), Adelaide (-0.4%), Perth (-8.6%) and Darwin (-16.2%).Hobart and Canberra are the only capital cities to have recorded stronger rental growth over the past year compared to the previous year.

Over a ten year period it is a vastly different story. The combined capital cities show that the average annual change in rents was 4%.

Why are we seeing lower rental growth than previous years?

• Wages growth has been the slowest on record
• Population growth has slowed
• Low interest rates driving higher levels of housing investment, and
• Significantly higher levels of housing construction - most of which are units.

CoreLogic point out a very salient point from their most recent June report Rental Review Snapshot:

"With housing supply, and subsequently rental supply, continuing to rise as growth in wages and the population continues to slow, it is unlikely we will see a turnaround in rental markets in the short-term. As a result, renters will continue to have more choice and may actually be able to move into superior rental accommodation for similar or even lower costs. Over recent years landlords haven't had much incentive to push yields higher due to the low cost of debt and strong capital gains. However, with capital gains starting to slow, investors may place a renewed focus on rental returns which will be difficult in the face of falling rents and increasing rental supply."

This flight to higher quality stock and higher vacancy rates in lower quality stock has been the norm in commercial property markets, but previously in residential property, new/ modern units and older, boutique blocks in quiet streets were more or less separate markets.

Now we are seeing that apartment renters are likely to move towards higher quality properties as modern apartments often have superior locations and increased access to amenities. The price differential is also decreasing due to the large amount of new stock coming on the market.

With capital growth slowing in the major capitals we are likely to see investors place more focus on yield. Brisbane is a major city that is primed for more growth and delivering stronger yields.

We are actively sourcing good quality properties in the Brisbane market where we find houses for between $300k to $400k delivering up to a 6% yield. When you add a granny flat, we can push the yield to 7%-8%. With apartments, you need to be very selective about where to buy in Brisbane as there are pockets of oversupply and areas where units are in high demand. We are also seeing strong rental demand in Newcastle and have completed several dual living and duplex projects for clients there.

Within the capital city markets, lower yields will also drive investors to consider renovations to boost yield. New kitchens, bathrooms, fresh carpets and fixtures will make your property stand out from the crowd when leasing.

Here's my tips for chasing yield:

• Consider the supply of properties coming to market - watch for potential oversupply
• Yield is also a reflection of risk. Property in mining areas have suffered a serious decline but were previously showing massive yields
• Use a proactive property manager that knows the local market for leasing
• Set the rent appropriate to market rates - three weeks vacancy can swallow up a $10 increase in a heart beat
• Get independent advice on which areas and property types deliver the best rent and growth.

It's important to remember both sides of the property coin when investing - yield and growth.

Yield is the cashflow that helps you service the loan repayments (or deliver positive cashflow), while capital growth is the bedrock of growing your wealth. I often get asked which one is more important....the answer is BOTH. But they are important in different ways. Each property investor will have individual financial circumstances that are unique to them and they will need to set specific goals and strategies that reflect their income and equity levels.

If you would like help trading up your home or growing your property portfolio then please call my friendly team of buyers agents on 1300 655 615 today or email your wishlist to discuss your requirements.

Rich Harvey is founder and Managing Director of www.propertybuyer.com.au, Australia's most awarded Buyers' Advocates.  Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, every time. Visit www.propertybuyer.com.au or call 1300 655 615.  

2. Seminar

Regional vs Metro Markets: Where can you maximise your returns?

Wednesday 20th July, 7-9pm (from 6.30pm registration)
SMC Centre, Sydney

You are warmly invited to our mid-winter seminar where we look into the future for both regional and metro property markets.

Now that Sydney and Melbourne have peaked, you may be wondering "Where can I select a location to maximise my property investment returns"?

To answer this compelling question and many more, we have assembled a special panel of speakers to help you understand the pros and cons of each market.

Limited seating is available so book early to reserve your spot today!

Topics covered at this special event include:

• What are the radically different dynamics of regional and city markets?
• Which has the highest capital growth potential?
• Where are the cash cows in each type of market?
• Where can you find both?
• Where should you buy?
• When should you sell?
• Discover the Seven Steps to Property Success
• Where we are at in the current property cycle?
• The prospects for Metro and Regional markets
• Why picking a strategy before a location or a property is critical
• How to select "Investment Grade Property"
• Strategies that work for both regional and metro markets
• How to finance multiple properties despite tougher lending criteria
• What are the New Lending standards exactly?
• What the Banks are doing and reacting to market conditions?
• How and where can investors secure finance?

We have three fabulous speakers all experts in their field including:

John Lindeman, Director Property Power Partners
Rich Harvey, Director propertybuyer, and
Clint Ducat, Finance Strategist Investor Loans Network

Date: Wednesday 20th July 2016

Time: (6.30pm registration), 7.00pm start to 9.00 pm

Venue: SMC Centre, 66 Goulburn St, Sydney (Ionic Room) Cost: $19 single, $29 double ticket

Reserve your ticket today to avoid missing out.

3. Major changes to tax rates, superannuation and pensions

The recent Federal Budget signalled some major changes to Tax rates, Superannuation and Pensions. With these proposed changes comes opportunity to review and revisit your circumstances to better understand the impact.

Please remember that, at this time, these measures are proposals only and require the passage of legislation to become effective. These measures may be subject to change through the implementation process

If you are a Chan & Naylor Wealth Planning client then we will be in touch to discuss this with you in your next review meeting, however in the interim, please find below the budget summary.

Tax - Company tax cut
A reduction in the company tax rate from 30% to 25% will be phased in over 10 years. The tax rate for all companies will be 25% by 2026/27.

Tax - Personal
The current $80,000 threshold above which each $1 earned is taxed at 37 cents will be increased to $87,000 from 1 July 2016. The higher income cut-in means tax payable by middle income earners will be reduced from 37 cents to 32.5 cents for all income earned between $80,001 and the new threshold of $87,000. This equates to a tax saving of around $315 a year (ignoring Medicare levy) for those on incomes between $80,000 and $180,00.

Superannuation
The Government will enshrine in law that the objective for superannuation is "to provide income in retirement to substitute or supplement the Age Pension."

Contribution Caps
The concessional contributions (CC) cap will be reduced to $25,000 from 1 July 2017 and a lifetime non-concessional contributions (NCC) cap of $500,000 will apply from 7.30pm on 3 May 2016 for all individuals under age 75.

NCCs already contributed on or after 1 July 2007 count towards the $500,000 lifetime NCC cap, however NCCs over the lifetime cap (before commencement) will not result in an excess. NCCs in excess of the $500k cap after commencement can be refunded and if not refunded will incur penalty tax.

The lifetime NCC cap will include after-tax contributions made to defined benefit accounts and constitutionally protected funds. Where a defined benefit member exceeds their lifetime cap, ongoing contributions can continue but the member must, on an annual basis, remove an equivalent amount (including proxy earnings) from any accumulation account they hold (limited to the amount of NCCs made since 1 July 2007). Contributions made to a defined benefit account will not be required to be removed. Members who do not have NCCs available to be removed will be treated equitably under further government consultation.

Notional (estimated) and actual employer contributions will be included in the CC cap for members of unfunded defined benefit schemes and constitutionally protected funds, from 1 July 2017. Members of these funds will have the opportunity to salary sacrifice. Existing grandfathering arrangements will continue for members of funded defined benefit schemes as at 12 May 2009.

Catch-up Concessional Contributions
Individuals with super balances under $500,000 will be able to bring forward previously unused concessional cap amounts from 1 July 2017. For example, if an individual contributes $20,000 in the 2016/17 financial year, they will be able to make an additional $5,000 CC on top of the $25,000 CC cap in 2017/18.

The unused amounts can be carried forward on a rolling basis for a period of five (5) consecutive years. It must be emphasised, this will only apply to amounts accrued from 1 July 2017.

Tax Deduction for Super Contributions Extended
Individuals up to age 75 will be able to claim a tax deduction for their personal superannuation contributions up to the CC cap from 1 July 2017, regardless of their employment circumstances.

Super Contributions Tax - High Income Earners
Individuals with adjusted taxable income (ATI) of $300,000 currently pay an additional 15% tax (total of 30%) on concessional super contributions. The income threshold will be reduced to $250,000 from 1 July 2017.

How this works in practice:

• If ATI is $240,000 and concessional contributions (CCs) of $25,000 are made; 30% contributions tax will apply on $15,000 of CCs and 15% will apply on the remaining $10,000 CCs.
• If ATI is over $250,000 without CCs, all CCs will be taxed at 30%.

The $250k threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the additional tax. Existing exemptions (such as State higher level office holders and Commonwealth judges) will be maintained.

Removal of Work Test
The work test (40 hours in 30 consecutive days) will be scrapped for individuals aged between 65 and 74 who wish to make super contributions. Individuals age 65-74 will also be able to receive spouse contributions.

Retirement Income Balance Cap of $1.6m
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017. There will be no restriction on earnings on the cap amount. Amounts in excess of the $1.6 million cap transferred (including earnings on the excess) will attract the same tax treatment as excess non-concessional contributions (excess unrefunded NCCs are currently taxed at 49%).

Accumulated super in excess of $1.6 million will be able to be retained in a member's accumulation account (with earnings taxed at 15%). Members already in pension phase with balances in excess of the $1.6 million cap will need to roll back the excess to accumulation by 1 July 2017.

Similar tax treatment will apply to members of defined benefit funds for pension amounts over $100,000 from 1 July 2017. The Government will consult with industry on the implementation of this measure.

Transition to Retirement
The tax exemption on earning on assets supporting transition to retirement income streams will be removed from 1 July 2017. The ability to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.

If you would like to know more about how we may be able to help you plan for your future, call us on 1300 99 77 34 or email your inquiry to financialoptions@chan-naylor.com.au for a complementary initial consultation.

If you would like to know more about how we may be able to help you plan for your future, call us on 1300 99 77 34 or email your inquiry to financialoptions@chan-naylor.com.au for a complementary initial consultation.

David Hasib is the Driector of Chan & Naylor Wealth Planning www.chan-naylor.com.au. Contact David at financialoptions@chan-naylor.com.au.

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