Expert insight: When is the right time to invest in Sydney again?

According to Keshab Chartered Accountants’ Munzurul Khan: “Over-optimism is one of the things which could present a genuine level of risk in the open market at the moment, especially considering how funding and finances is currently very difficult, and it’s only in terms of the acquisition but also in terms of maintaining your portfolio.”

At the moment, Mr Khan said that the market has been divided to two: The new investors who have seen only the past three to five years of the market cycle and the seasoned investors who have been navigating the market for 15 to 30 years.

Having witnessed only the unprecedented boom in Sydney and Melbourne, the new investors are suddenly fearful of the continuous declines in the capital cities, especially as the tighter credit environment continue to impact their ability to grow their portfolio.

“These young-ish investors have seen the last three, four, five years of growth. They’ve bought in Sydney and they’ve done so well, then all of a sudden, price drops by 10 per cent,” Mr Khan explained.

“Arguably, their property has doubled in value – let’s say from $350,000 to $700,000 – then it drops by 10 per cent to $630,000. They’ve still got growth between $350,000 to $630,000, right? But there’s still a bit of a fear factor, a feeling that one needs to be careful.”

On the other hand, seasoned investors, while also affected by tightening credit conditions, are noticeably more relaxed, according to the accountant.

“You have these seasoned investors who have been investing for say 15 years, 20 years, 30 years, and they’re all saying, ‘This is a great time to buy. It has to be a very selective buy on the basis of numbers making sense but it’s a great time to buy nevertheless,’” he said.

Due to this divide in the current market, consumer confidence has significantly improved across the current softening markets, allowing more stable movement and ultimately offering opportunities for investors to continue their wealth-creation journey.

When to buy

Despite the signs of recovery in the Sydney property market, Mr Khan reminded investors that there’s no need to rush into the capital city for its wealth-creation opportunities as it has yet to full recover.

For investors keen to take advantage of opportunities, the accountant advised a significant focus on property values and timing.

Property values

For investors keen to take advantage of opportunities, the accountant advised a significant focus on property values.

In a downturn market, being able to maintain good cash flow and establish a significant cash buffer are two simple strategies that could help investors ride the waves and ultimately thrive in the market long enough to see it fully recover.

Mr Khan has personally watched over his properties’ rental yield to ensure the growth of his portfolio despite the softening of property markets.

In 1999, he bought his first property – a three-bedroom house in Campbelltown – for $120,000. The property yielded a weekly rent of $180 for the first few years.

“To me, that's a good proposition because the rental return was 7.88 per cent, and that’s good value,” according to the accountant.

Fast forward to 2003, the same property was valued at $320,000 but the rent has only increased to $220 a week. The return on the property was barely three per cent, which was a sign that the property market was generally overvalued.

Timing

Apart from understanding the movements of property values, Mr Khan also reminded investors about the importance of timing.

“Property market cycles – rental values, capital value and all of these numbers – don’t move in a consistent wave with each other. They go at different rates. There’s going to be times when the yield is better than the capital growth and vice versa,” he said.

In most parts of Sydney, after months of decline, experts foresee a period of stagnation before yields finally start to improve and prices begin climbing once again.

Ultimately, investors are advised to keep a close watch on market movements in order to strike at just the right time and maximise the wealth-creation opportunities of the recovering property market.

“The market has a habit of going back into equilibrium over a period of time. It all balances out. Generally speaking, the market is a bit tough at the moment, it’s a declining market and it may continue to be for the next few years or so. Then, it will stagnate,” Mr Khan explained.

“Over a period of time, people will see that the increase or decrease of the market is quite independent from rental increase because rent is all about how many renters are there – that’s influenced by population growth and immigration. There will be more and more people looking for home but there won’t be new supply so to speak because the builders are not building.

“Naturally, the rent will start to increase, investors go back to the market and prices start to increase as well. It’s a bit of an interconnected game that goes over a period of time.”

Markets within markets

While the general conditions of Sydney may follow the pattern stated, the accountant reminded investors that there are markets within markets – meaning, some areas across Sydney are already doing better than most.

As such, investors are strongly encouraged now, more than ever, to do their research well so they could maximise wealth-creation opportunities, even in softening markets.

“Education is absolutely critical. It’s only with the right information that you can make informed decisions and it’s only by making informed decisions that you can, hopefully, acquire better assets and build a strong portfolio,” Mr Khan said.

“There is no one market. I can say that the Sydney market is a declining market, but there are also areas in Sydney that represent significant value.

“At the end of the day, you always can find a deal as long as the numbers make sense.”

Tune in to Munzurul Khan's episode on The Smart Property Investment Show to know more about the strategies that could help property investors succeed in 2019.

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