Property Investors asked to reconsider rush into superannuation
13/04/2012 
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Existing property investors are being urged to reconsider rushing the sale of their investment property to take advantage of superannuation changes, as property market fundamentals improve and the share market continues to defy gravity.
As llower-than-expected inflation figures released this week have bettered the chance that interest rates won’t change this year, and record low rental vacancy rates in most capital cities have cleared the path for investors to move into investment property, not out.
Analysts said there was still good value to be had in the Australian share market, because earnings were supporting valuations, but risks were growing. The Australian share market has piled on three years of double-digit growth and is up nearly 2 per cent in January, sparking murmurings about “over-valuation excesses” in sectors like media, resources and retail. There are also concerns about high corporate debt associated with a rush of private equity deals as hot money pays ever higher prices for assets in a toppy market.
At the pessimistic end of the spectrum, Chris Pidcock, head of equity strategy at Goldman Sachs JBWere, said in a recent note the prospective price/earnings ratio (PER) for the market, adjusted for inflation, and the median PER for the large-cap industrials, had blown out. “In both cases, valuations are clearly reaching historically high levels.”
Nevertheless, economists like Shane Oliver, chief economist at AMP Capital, said Australian shares were likely to continue providing strong returns in the next six to 12 months, so there is no reason to exit shares on the expectation of lower returns.
“Valuations are reasonable, profit growth is expected to slow but will still be solid at around 10 per cent, and capital flows into the share market are likely to remain strong, propelled by takeover activity and robust superannuation inflows.”
However, he said a “decent correction” of about 15 per cent was also on the cards.
Craig James, chief equities economist at CommSec, said a combination of a rental crisis and stable interest rates made investment property look good.
“There is a compelling case for property because the fundamentals look so impressive.”
While investors had seen rising rents and the potential for capital appreciation in units and houses, they had been prevented from acting due to concerns about interest rates, he said. As such, “the easy choice” was to stay in the share market. Now interest rates are less of a worry.
“Shares are still a very good bet and will produce good gains over 2007. But it’s now a case that you should not put all your money in shares – you should be looking at property too.”
Mr James said the rental crisis and ongoing immigration to meet the skilled worker shortage (due to our own ageing population) also looked good for investment property.
Investors have been considering selling investment properties to take advantage of changes in last year’s federal budget that allow investors to put up to $1million into their super funds before June 30 to earn tax-free income.
But with the property market fundamentals improving and the risk of high capital gains on investment property, investors are being warned not to rush their decision.
Steven Milch, head of economic research at St George Bank, says the share market “has close to doubled in the past three years”. While shares still look good, he said, “it may be time for a counter-cyclical move where you take some profits from shares and start allocating some to investment property”.
“We believe interest rates won’t rise this year, which, together with low vacancy rates and strong demand, all look good for investors,” he said.
Michael McNamara, property analyst at Australian Property Monitors, says investors should buy wisely for the best capital gains. Locations that appealed to baby boomers and/or areas with strong local economies were best, he said. “Look at areas where people can live close to work and enjoy a lifestyle. This includes areas close to the beach or to the CBD or near universities.
“In regional areas, look for strong local tourism and the existence of government departments or industrial, mining or other agricultural industries.”
Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers.
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