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Research

Where opportunity knocks

Peter Esho provides an analysis of a location offering the best investment potential for SMSF members.

The Reserve Bank of Australia’s (RBA) rate cut in May is starting to have a large positive impact in the property investment market. But that’s the point of the exercise – to encourage investment and drive asset price inflation. There is no other explanation as to why the RBA and other central banks around the world are cutting rates. The RBA wants the price of assets to rise and residential property is the largest asset class in the country.

According to research house RP Data, the total value of residential property in Australia is estimated at around $6 trillion compared to $2 trillion in super assets and the around $1.5 trillion total value of stocks listed on the Australian Securities Exchange.

Sydney and Melbourne are leading the price charge. I don’t need to tell you that; everybody living in these cities can see for themselves. Those living in other states have heard the stories. Another weekend, another dump selling for so many millions of dollars. Everybody is shocked, newspapers sensationalise it and then a few days later it happens again.

There are two types of people who respond to those sales and prices. The first are the pragmatists – those who seek to explain this by the mixture of debt, tax and low interest rate policy around the world. We are in this camp.
The second group are the dreamers – they continue to concoct a property price collapse. They have been doing this for the past 20 to 30 years and every year they are wrong.

The first group usually has money to invest or clients looking for investment. The second group don’t think about alternatives, they just cling on to the hope that prices will collapse and somehow that will be good.

We constantly meet clients in our business who work hard, save their money and are appalled by the return they are getting from cash. So our job at Esho Property Group is to find the highest-quality property investments we can that fall within the $400,000 to $700,000 price range and are located close to the major metropolitan cities. This is near impossible in Sydney, but still manageable. In Melbourne it’s a little easier, but the market is more fragmented in terms of development and there is considerable supply that will take time to soak up.

We look at opportunities in Sydney, Melbourne and Brisbane. Over the past two years, we have been able to identify great opportunities in the inner-city Brisbane market – suburbs like Teneriffe and New Farm that are iconic, desirable among owner occupiers and well within our price range criteria. But with rising building costs, these locations have experienced strong price momentum in the past six months.

So we’re now looking at the northern Gold Coast corridor and, in particular, house and land offerings. We think a brand new house and land package in the order of $500,000 with a 5 per cent return is good value as long as it fits in a master planned community, built by a reputable team and on a flat block. We don’t like apartments on the Gold Coast. House and land only at this stage.

Coomera Town Centre

According to consulting firm Urbis: “Coomera is strategically located between the Gold Coast and Brisbane. Gold Coast North provides a vital link between two of Australia’s largest cities. Boasting strengthening employment, tourism and education sectors, as well as ongoing large-scale infrastructure investment, Gold Coast North has recorded one of Queensland’s strongest increases in population growth in recent years.

“From a local perspective, the ensuing development of the highly anticipated Coomera Town Centre will provide a further catalyst for ongoing investment and set the benchmark for a new wave of commercial, retail and residential development across the northern suburbs of the Gold Coast.”

Urbis also notes the Coomera Town Centre Master Plan is intended to create a transit-oriented activity centre that focuses on an active street life with a network of public streets and open space areas, with a major Westfield Shopping Centre. The town centre itself will be the main retail, commercial and employment centre for the Pimpama-Coomera area, with large amounts of residential land expected to be developed around these core areas.

The Coomera Town Centre will service a catchment of about 130,000 people by 2026, with population within the area forecast to reach 50,000. Development of the area will create around 1200 construction jobs. The Gold Coast is one of Australia’s fastest-growing regions, with population growth of 2.3 per cent a year forecast, compared to 1.6 per cent across Australia for the equivalent period.

Seven key infrastructure projects

We note around $9 billion of current and future planned infrastructure projects for the area. According to Urbis, these have been summarised as:

Coomera to Helensvale rail duplication (under construction) $163 million

The Brisbane rail line was extended from Beenleigh to Coomera and Helensvale in 1996, with further extension through to Varsity Lakes. In March 2016 work will begin on the duplication of tracks between Coomera and Helensvale stations to significantly improve train service capacity and reliability. The train connection allows commuters and visitors to access Brisbane CBD and Brisbane Airport. An estimated 26,000 workers commute to Brisbane each day on the train.

Gold Coast light rail stage 1 (complete) $1.8 billion

Commencing construction in January 2012, the Gold Coast light rail project was one of the largest public transport projects in Australia. Stage one was completed and began operation in July 2014, providing frequent trams, stopping at 16 stations, along a 13-kilometre route from the health and knowledge precinct in the north to the commercial, retail and recreational centres of Southport, Surfers Paradise and Broadbeach in the south.

Gold Coast light rail stage 2 (under construction) $500 million

Construction commenced in April 2016 for stage two of the Gold Coast light rail extending the service from the Parkwood health and knowledge precinct north through to Helensvale in just 11 minutes. This is an important transport link for Coomera, allowing just a six-minute connection via heavy rail to Helensvale and then to the coast via the G-link.

Gold Coast University hospital (complete) $1.76 billion

The Gold Coast University Hospital was completed in late 2013 at a cost of $1.76 billion. It provides a floor space of 170,000 square metres for clinical teaching and research facilities combined with specialised health services. Made up of seven main buildings, the facility provides a final capacity of 750 beds.

Commonwealth Games $786 million

In preparation for the 2018 Commonwealth Games, Gold Coast City, the Queensland government and federal government will invest over $786 million in new infrastructure and upgrading of existing facilities between now and 2018. The games will leave a legacy of world-class sporting venues.

Coomera Exit 54 interchange upgrade – Pacific Motorway (under construction) $74 million

The upgrade of Exit 54 along the Pacific Motorway will provide the road infrastructure needed to enable the successful development of the Coomera Town Centre to improve traffic and ease congestion. The new interchange will incorporate a new bridge to the north of the existing bridge over the Pacific Motorway for eastbound traffic, as well as a northbound exit loop ramp. Roundabouts would also be upgraded with signalised intersections. The project is expected to be completed in late 2016.

Commera indoor sports centre (under construction) $40 million – The new indoor sports centre at Coomera will feature eight mixed-use sports courts and purpose built gymnastics centre. Design and construction will generate 130 full-time jobs, with more than 1000 workers expected to play a role in delivering this world-class venue before the project is completed in 2016.

Population is key

According to Urbis, population estimates from the Queensland government identified the population within the Gold Coast North catchment increased by more than 88,600 people between 2001 and 2014, equating to about 6817 additional people a year. Looking forward, the region is projected to house an additional 192,000 people by 2036, equating to 8758 additional people a year or 7.1 per cent a year.

Increasing population is expected to support housing demand and drive increasing sale price and rental growth in and around the Gold Coast North.

As a result of limited developable land entering the market over the past decade, the Gold Coast local government area (LGA) and more specifically Gold Coast North are well positioned to accommodate for a significant increase in greenfield development. In the 10-year period ending December 2015, Gold Coast North realised a cumulative undersupply of residential land, resulting in pent-up demand equating to more than 10,000 new dwellings being required in Gold Coast North.

Gold Coast North has registered a significant shortfall in the supply of new dwellings to accommodate the future population forecasts, with new dwelling approvals consistently recording under that of the number of new dwellings required in the past five years. Moving forward, Gold Coast North may require at least 3000 new dwelling approvals per year, on top of what is already a healthy demand for new residential dwellings within the catchment.

Excluding traditional housing, the current supply of new medium and high-density residential buildings (encompassing semi-detached, terrace homes or townhouses; flats, units or apartments) have also remained low, equating to around 20 per cent of the Gold Coast LGA’s medium and high-density residential supply. As the Gold Coast North population increases and investment from state government, private and public investors continues to grow, so too will the requirement for higher-density residential alternatives in Gold Coast North.

Summary: on the radar but quality is key

The investment thesis is starting to look attractive, particularly when compared to the price and yield comparisons in Sydney and Melbourne. The key is to finding a high-quality offering in these growth pockets because when the interest rate cycle does turn, only a handful of prospects will be able to benefit from higher inflation. Inferior products, which can sell during strong markets like we are in currently, will be vulnerable.

That’s when our comprehensive 26-step research process, which we wrote about last quarter, plays its role. If we can’t find a project or offering that scores at least 80 per cent on the aggregate of these steps, we simply won’t recommend anything to investors – even if the Urbis statistics do point in the right direction.

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