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Market Report

Delivered to UNISON FINANCIAL GROUP By Matthew Baxter

3 March 2015

Disclaimer

• This presentation is provided as general information only and does not consider any one’s specific objectives, situation or needs. You should not rely on the information in it. Opteon (including its subsidiaries) do not accept any duty of care or liability to anyone regarding this presentation or any loss suffered in connection with the use of it or any of its content.

• It is important that you seek professional advice before making a decision or alter your circumstances. By seeking assistance, your objectives can be analysed to determine the value of the information contained within this presentation.

• This presentation is based on our understanding of current legislation. Legislation may change and this may affect the accuracy of this information and its relevance to your personal situation.

• To the maximum extent permitted by law, Opteon (including its subsidiaries), its employees, representatives or any other person accept no liability for any error or omission in this presentation or for any resulting loss or damage suffered by you or any other person.

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Agenda

1. General market snapshot – What’s in store for 2015

2. How have SMSF’s affected the property market?

3. How a valuer can assist in the SMSF acquisition and compliance process

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Who is Opteon Property Group

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• 70 offices nationwide

• Servicing over 96% of Australia’s population

• Over 700 staff Nationally (200 plus in Victoria)

• 500+ valuations per day in Victoria

• 100% Australian owned and operated

• Local knowledge with National coverage

• Over 120 Qualified Valuers operating across Victoria

We specialise in:

• Mortgage Security Valuations

• Residential & Commercial Valuations

• Depreciation Schedules

• Rural Valuations

• Pre-purchase / Pre-sale Advice

• Family Law & Litigation Valuations

• Capital Gains Tax Valuations

• Self Managed Super Fund Valuations

• Market Value Assessments

• Plant & Equipment Valuations

• Rating & Tax Valuations

• Hospitality

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Market Conditions – High Level

What’s the economy doing?

International Economies

China & USA are generally good

Japan, Europe, South America – not so good

Good news though, is if we could pick the economies that are important to our economy they would be China and USA.

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Market Conditions – High Level

Australian Economy • Mining has softened • Iron Ore dropped from $200pt to

$60pt (supply pressure rather than demand)

• RIO & BHP should continue providing good results – smaller miners will struggle (economies of scale)

• Reserve Bank keen to stimulate retail, construction and other parts of the economy to fill the void left by mining (fat chance)

• Debt increasing – but no serious issue (political football more than reality)

• Jobless rate increasing

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Market Conditions – High Level

What’s the economy doing? Victorian Economy • Generally OK • Depends on what sector you are in • Retail soft but optimistic • Construction OK – apartment construction keeping on • Food – anecdotally good but results say different • Manufacturing concern (automotive industry closing) Generally service oriented business are good but manufacturing and retail dodgy

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• Spending patterns

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Market Conditions – High Level

Property

The big 3

1. Demand and Supply

2. Confidence

3. Interest Rates

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Interest Rates

• Market has factored in a further point reduction • Small chance for two cuts this year

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Supply

• Availability of new property

• Sentiment/confidence

• Affordability (to trade up, forced sale, hold)

• Government (zoning/dev’ levies)

• Costs of development

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Growth Corridors

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Investment Follows Infrastructure

Victoria’s Key to staying ahead of the game!

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Moorooduc bypass

Privatisation of Quarantine Station

Days on Market

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Drivers of Demand

• Financial /affordability /economy

• Government policy

• Buyer sentiment

• Population growth/decline (OS buyers)

• Location

• Infrastructure

• Physical attributes (orientation, view, etc.)

• Improvement (age, quality, style, condition)

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Demand

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Who is buying

• First home buyer starting to return to the market

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Auction Clearance Rates

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• Strong results for past 12 months (slightly softening)

• Skewed by inner city results

Low point Noticeable jump in clearance rates

through 2013

The Importance of Residential Real Estate to Our Economy

• Total value pool of asset classes

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REI Index

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Median House prices by post code

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Hot Spots - % Change in Median Values over 12 months

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Melbourne

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Melbourne Vs the others

• Sydney stand out performer for last 2 years • Melbourne not far behind though

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Median Value – Melbourne Metro

• House median $669,000 (annual increase 11.7%) • Unit median $511,500 (annual increase 11.7%)

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Regional Snapshot

• Not the same heat in the market

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Selected South East Median Values

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Rental yields

• Rental; yields have kept relatively constant for past 10 years

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Off the Plan Sales & the Valuation

• Issue surrounds build lead time

• In a falling market purchasers can get caught out with valuations conducted prior to completion

• Apartment valuations (longest lead time) have caused the most issues since 2012

• As values increase the problem should fix itself but the underlying risk is present

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National Land Survey Program of Greenfield Land Markets

• In Casey, the biggest land market in Melbourne, over the September ¼, the average rate of sale from the 36 active projects was 262 lots per month with the median lot price being $225,000 which is forecast to increase to $243,000 over the next 3 years to 2017 with the rate of sale expected to remain around the underlying demand at round 202 lots per month

• In Cardinia, over the September ¼, the average rate of sale was 112 lots per month with the median lot price being $193,000 which is forecast to remain around $193,000 over the next 3 years to 2017 with the rate of sale again expected to remain around the underlying demand at round 112 lots per month

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Residential Outlook

• Entry level housing has performed quite well and is likely to remain stable

• Heat is coming off the inner Melbourne market (which has dominated the growth in the past 2 years)

• Land take up in growth corridors to remain constant

• New residential zones may push more unit/apartment development out (if inner municipalities lock up the availability with Neighbourhood Res zoning)

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Commercial & Industrial Snap Shot

• After GFC most smaller Industrial properties sold to owner occupiers

• Last 2 years investors have come back into the market chasing yields

• Latest Burgess Rawson portfolio auction (Feb 15) provides a good insight into the health of the investment market

• Investment follows infrastructure

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Industrial – Valuers Perspective

• Location

– Road network - linkages

– Proximity to Ports, Rail, Markets

• Design & Construction

– Strong Transport & Logistics based enquiry - generally require higher hardstand components

– Some retail requirements trending smaller but are supported by larger warehouses often closer to inner suburbs or trunk roads

• Investment Criteria

– Industrial is an income focussed asset class

– Can the landlord ‘tenant proof’ the property

• Market

– Industrial generally regarded as trading at fair value at the current time

– There are some latent risks (leasing demand not strong in some sectors/oversupply issues)

– Shortage of good quality properties available for sale (many sold direct under mandate)

– Impact of Ford, Holden and Toyota ceasing manufacture (2017)

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How has SMSF affected the property market?

Residential • Added to the demand • Another vehicle for investors • Not a significant driver compared to Asian investment Commercial & Industrial • We have seen a growing trend of business owners buying

their premises in their SMSF Overall • Investors in general have re-entered the market over the

last few years, SMSF becomes another holding vehicle • Not creating market stress (i.e. demand bubble) in itself

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Self Managed Super Funds

• According to the latest Australian Taxation Office (ATO) SMSF

statistics, SMSF investment in commercial property has remained steady since 2009

• What has changed is the number of investors with an average of 1,200 new investors using their SMSFs to purchase residential property each year. The explosion in limited recourse borrowing arrangements which have increased 1,758% between June 2009 and June 2014

• Property investments by SMSFs make up a total of $80.9 billion of all SMSF investments or 15.22% of total SMSF assets. Of this, commercial property makes 11.72% of SMSF assets and residential property makes up 3.5% of total SMSF investments.

• ATO requirements regarding SMSF – changing landscape

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Why SMSF Invest in Property

• Australians love property (particularly bricks and mortar)

• Good history of capital growth

• Good yield in low interest environment

• It’s tangible

• Leveragable products now available

• Tax advantages

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Where should an investor buy

• Buy where you know • Yield vs Capital Growth, understand what the client wants or is

best • Research recent sale prices to give you an idea of what you can

expect to pay for property in the same area • Make sure the fundamentals are correct, a client should not buy

due to financial features of a property deal, needs to first be the right property

• Are there tenants available? • Research proposed changes in the suburb that may affect future

prices. Things like planned developments or zoning changes can affect the future value of a property. Don't assume that last year's boom will continue this year.

• Seek independent advice

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CGT

• If a CGT event has happened to a CGT asset valuers are in a good position to assist with calculating the cost base

• Opteon have extensive valuation staff able to provide market value assessments on various retrospective dates and circumstances (i.e. apportioning acreage properties)

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Self Managed Super Funds Valuation reports

The ATO provides guidance on the content required in a market valuation report. Minimum requirements that a valuation should: 1. Be replicable – in effect, this means the valuation

should be documented and explained well enough that another person or valuer can understand how the value was determined

2. Preferably be undertaken by a suitably qualified and experienced person in relation to the asset being valued

3. Objectively demonstrate the valuation process undertaken in accordance with valuation industry practices

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Self Managed Super Funds Why assets need to be valued

Asset valuation is a key component in preparing meaningful SMSF financial reports. It has an impact on the returns for members and, ultimately, SMSF sector performance as a whole. A valuation of assets is required to confirm your SMSF has complied with relevant super law for: • preparing the financial accounts and statements of the fund • acquiring assets between SMSFs and related parties • investments made and maintained on an arm's-length basis • disposing of certain collectables and personal use assets to a

related party of the fund • determining the market value of an SMSF's in house assets as a

percentage of all assets in the fund • determining the value of assets that support a member's super

pension

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Does a Trustee need to get annual Valuations

The ATO expects a trustee to consider the value of the assets in your fund each year. Real Estate does not necessarily require an external valuation each year unless: • There has been a significant event that is likely to change the value of

the property • These events may include; a natural disaster; macro-economic

events; market volatility; or, changes to the character of the asset

Consider the use of a qualified independent valuer if either: • An asset represents a significant proportion of the fund's value • The nature of the asset indicates that the valuation is likely to be

complex

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Coming Soon

• Client portal

• Log in online direct to order a range of services

• From basic advice to specialised valuation products (i.e. Retrospective CGT calculations, Rental assessments, Litigation Valuations, Compensation Assessment or generic Current Market Value)

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Data Newsletter

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Data Sources

• ATO

• REIV

• RP Data

• UDIA

• Land.vic.gov.au

• Metropolitan Planning Authority

• Opteon Property Group

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