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Investment Strategies In Australia

For many investors and homebuyers, the classic Australian outdoor life is a dream come true. Carefully chosen property in Australia offers strong potential for investment as well as relocation purposes.


General Factors

The sheer magnitude and diversity of Australia naturally gives rise to a wide selection of property options all over the country. With some 11,200 Britons immigrating to Australia each year, property has long been an option for those seeking a relaxed, classic Australian lifestyle with an abundance of outdoor living, beautiful beaches and a hot climate. In fact, over the years Australia has been regarded mainly as an emigration location but today many investors and homebuyers are purchasing wisely in carefully selected real estate locations of Australia. Good long-term returns are achievable, complemented by an ever increasing demand for rental properties.

Property market trends throughout the country have historically been through their changes and today, homebuyers in Australia are focusing on niche areas where the local economy is booming and the job market is strong. These areas are magnets for large numbers of interstate and international immigrants who are boosting demand for rentals and home purchases.

To demonstrate the changes that have taken place in the Australian property investment marketplace, you need only look at areas such as Sydney: the city went through a peak in late 2003, due, in part to a significant change in interest rates. Today Sydney is experiencing a slump and many experts predict that property prices here are still due to fall by some 20% in the next year. Meanwhile other areas such as the western coast and North Queensland are witnessing their own property booms in compensation. Here homebuyers are finding beautiful properties and lifestyles where their money will go far further.

Economic Factors

Australia's strong economic growth rates are higher than in most OECD countries including the US and UK. Currently the country's GDP is higher than that of the UK, Germany and France for example. There is a low degree of risk in the Australian economy while it boasts consistently strong GDP growth, stable interest rates, rising exchange rates, relatively high levels of employment and a low rate of inflation.

In the main cities unemployment is relatively low and on average the national unemployment figures stand at around 5%. Australia receives many applications each year from those wishing to immigrate and enjoy the high standard of living and great opportunities on offer.

Property prices are generally high in relation to income levels in Australia, creating a strong demand for rental properties. In fact this demand is so high in some major cities that rental prices are firmly set to increase, making any purchase into a buy-to-let property market potentially profitable. While the population grows and incomes rise, the demand for housing now outpaces supply, causing prices to continue rising. Certain areas of Australia still offer great investment opportunity. For example, in 2006 Perth property prices rose by between 36.6% and a staggering 42%, and commercial properties in cities such as Brisbane and Perth are also currently offering many excellent returns on investment.

Political Factors

Australia has been in existence as a democratic Commonwealth since 1901 when six separate colonies joined together to form the Commonwealth of Australia, ruled by Queen Elizabeth II. The Australian government is run along a parliamentary system with a Prime Minister who makes the majority of all executive decisions.

Australia boasts a prosperous Western-style economy with a strong growth rate. Running along a strong two-party political system, it is dominated by the Liberal Party (conservative, centre-right, neo-liberal) and the Australian Labor Party (social democratic, centre-left). Other political parties are the National Party (conservative) and the Australian Democrats (social liberal). In 2007, the Prime Minister, John Howard, is facing strong competition from the opposition Labour party's Kevin Rudd during this important election year.

Natural Factors

One of Australia's greatest attractions is its natural beauty for which tourists and immigrants come from far and wide: landscapes vary from endless sun-baked horizons, to unspoilt beaches, to dense tropical rainforest. Australia is also famous for the remote outback of its interior with rugged mountain ranges and its vast deserts. It is in fact a country of vast contrasts that appeal to all tastes. As the Australian landmass separated from the other continents over 50 million years ago, indigenous animal species have developed within a unique habitat, creating an abundance of wildlife not found anywhere else in the world.

Australia features a wide range of climatic zones from the tropical regions of the north, the arid interior, to more temperate regions in the south. With an amazing average of 3,000 hours sunshine per year, the climate gives rise to a pleasant outdoor lifestyle and healthy living so popular amongst families looking to relocate to Australia.

Foreign Office figures state that 800,000 British nationals visit Australia yearly and some 11,200 Britons emigrate there each year. They seek the classic Australian lifestyle and enjoy a wide variety of active pursuits, including swimming, fishing, cycling, jogging, bushwalking and much more.

Logistical Factors

Australia is well served by its six major airports at Adelaide, Brisbane, Canberra, Melbourne, Perth and Sydney. Just under thirty airlines fly to Australia from the UK alone and budget flights can be obtained from many European locations. Flights time is approximately 18 hours from Europe and normally includes a re-fuelling stop in Singapore or Bangkok. Prices are high at Christmas flights need booking well in advance.

International airports in Australia: Sydney, Melbourne, Brisbane, Adelaide, Perth, Darwin, Cairns and Hobart.

The sheer magnitude of Australia makes internal flights a good option for travellers within the country. National airlines in Australia: Qantas, Australian Airlines, Macair, National Jet, Rex Regional Express, Tasair and Virgin Blue and low cost flights connect with Australia's national airports: Brisbane, Broome, Cairns, Canberra, Darwin, Melbourne, Perth and Sydney.

Short-Term Investment Strategy

Key Opportunity

Carefully selected property in Australia offers high capital growth potential, particularly off-plan units in cities such as Melbourne and Sydney as well as in coastal regions where demand is at its highest for new properties. The growth in availability of apartment units and townhouses has been quite dramatic and off-plan is still considered to be a highly profitable option for investment property in Australia.

Returns have recently been recorded of between 30.6% and 42% per annum in some key locations. Historically, the best performing real estate in terms of capital growth has always been within cities such as Melbourne, Sydney and now Perth while properties close to inner cities and beaches have always performed well.

Investors are purchasing off-plan property as early as possible with a minimum "money-down" payment, then selling prior to completion are gaining substantial profits having made a relatively small capital outlay. As anywhere in the world, off-plan prices must always be a good deal lower than those in comparable completed developments. This gives full power to “flip” investment strategies in which capital investors sell on the unit prior to project completion. It's important to ensure that the reassignment of contracts is permitted in the off-plan project you are interested in and under what terms. Sometimes, though not always, investors may be charged a percentage of the purchase price in order to do so.

Demand for rental accommodation in many areas across Australia is outstripping supply, allowing flip investors to find a ready market from longer term investors wishing to buy into a strong letting market. Ever increasing rental rates and yields are being experienced by shrewd buyers in central or sought after locations in major cities and tourist resorts. With tourism figures ever on the increase, it is forecasted by The Tourism Forecasting Committee that by 2014 some 10,000 extra hotel rooms alone will be required to cater for visitors – all good news for short and long-term investors seeking high demand for holiday property and market buoyancy.

Highly beneficial finance structures are generally in place for the purchase of off-plan property and, depending upon the development, investors need pay only around 10% of the purchase price in the form of a deposit, while the rest is payable when and if they complete. In this way, you could secure a property at today's price without starting to pay for it for 12 months, while of course it's not uncommon for an off-plan property to be bought and sold again prior to completion.

Timescale

Investors in Australian off-plan developments factor in between 18 and 24 months for construction from reservation to completion stages. Short-term investors normally look to profit from a carefully selected, promising market, selling on their unit to mid or long- term investors approximately 12 to18 months after making their initial reservation, regardless of whether or not the project is yet completed.

Payment terms will vary; good projects will often offer terms of around 10% deposit with the balance payable upon completion, allowing short-term investors to operate their strategy with minimum capital outlay. Of course, the earlier the investment is made, the greater the investment returns. Additionally, by entering the project at the earliest possible stage, investors get the best choice of units which will always be first to attract buyers in the future.

Level of Complexity

Short-term strategies offer the lowest level of complexity as the purchase has not yet been officially made; therefore, no property taxes or maintenance or management charges are due. This is a simple capital investment, often with no need to proceed to Purchase Contract, or make any mortgage finance arrangements. Remember to check with the developer if there are any charges made to “flip”, or reassign your contract, and at what stage you are permitted to do so, before you proceed

Risk Assessment

All investors must carefully assess the particular project and units in which they wish to invest. In many cases a wide range of other projects will be under construction and a choice will need to be made. A decision will need to be based on how a particular development or project will outshine its competitors in terms of appearance, location, on-site facilities and the unit itself. Investors will also need to consider issues such as the number of other units available within the particular development, predicted demand as well as competition for the type of property they wish to invest in.

To curb risk, a short-term investor should normally seek to buy the best possible unit, i.e. a corner unit, a penthouse or ground floor unit with a private garden, which will always sell in preference to a standard first floor unit.

Investors need to be clear how their exit strategy is to run. How will the unit be marketed and by whom? How much will the selling agents charge in commission? Should a buyer not be found prior to completion of the property, investors must be confident they can cover payment to completion of the unit and adapt their strategy if necessary. IPIN offers a substantial Investor Care package, which adds significantly to investors' chances of a successful exit.

Short-term “flip” investments are undoubtedly more risky than longer term strategies, but, with careful research and planning in place, off-plan purchase in well located Australian projects offers a sound investment with lucrative returns.

Return

Australian property offers the highest capital appreciation in its newer emerging markets of North Queensland and Darwin and these are witnessing property booms. Here homebuyers are finding beautiful properties and lifestyles in areas where their money will go far further.

Australia still has such pockets of investment opportunity that need to be carefully researched and sought out to provide some excellent returns on investment. For example, in 2006 Perth property prices rose by between 36.6% and a staggering 42% and commercial properties in cities such as Brisbane and Perth also offer many excellent investment opportunities. Meanwhile, it's interesting to note that property in some cities such as Sydney went through a peak in late 2003, due, in part to a significant rise in interest rates. They are now experiencing a slump and many experts predict that property prices here are still due to fall by some 20% in the next year

Shrewd investors have the opportunity to reach the highest figures by selecting prime resorts at pre-release pricing levels, allowing them to invest at below market value.

By reserving at pre-release stage, investors profit from discounted prices and, in many cases, these are subject to successful planning applications, allowing for additional pricing uplift. Reservations on this type of IPIN recommended project allow for full refunds if necessary and secure escrow accounts are in place to protect investors' funds. An earlier than normal reservation of course affords the maximum possible returns on investment on any given project.

Financing

The short-term and flip investment strategies are often purely based on capital outlay as off-plan property normally requires a minimum payment of around 10% deposit payment and mortgages cannot be raised on uncompleted property. The deposit can be invested into an interest bearing account or it can be borrowed using products such as deposit power or bank guarantees.

Investors MUST be confident they can complete the purchase if necessary, even if using a buy to flip strategy and Australian mortgages are widely available on finished property to fund up to 80% of the property price.

IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.

Taxation

Purchasing a property and then re-selling prior to completion is a tax-efficient way to invest as it allows buyers in Australia to avoid any property transfer taxes and side-steps capital gains tax, should they choose to sell on the contract prior to project completion.

IPIN always recommends research into any double taxation treaties in place between Australia and the investor's country of residence.

Medium to Long Term Investment Strategy

Key Opportunity

Many investors question the suitability of Australian property as a profitable opportunity today in view of interest rates and prices that have sky rocketed out of all proportion in some locations.

House prices in most areas are at a record high in relation to income levels in Australia and this has inevitably made property ownership less achievable for at least a third of the Australian population. This factor has increased the demand for rental accommodation, thus creating a ripe buy-to-let market for medium to long term investors. Demand is so high in some major cities that rental prices are firmly set to increase, making any long term investment into buy-to-let property market potentially profitable for medium to long term investors. Meanwhile, high interest rates and the consequent lack of property purchasers are gradually forcing prices downwards. Slow to move properties offer a key opportunity for investors to buy at reduced prices that can be negotiated down.

Demand is also intense for housing priced at over one million dollars, creating a niche market, particularly in major cities and coastal resorts, where interest rate rises do not really affect this wealth bracket.

Housing of all prices is still in short supply in Australia and this factor of course creates great investment potential for buy-to-let purchasers in Australian real estate today.

Western Australia, in and around the city of Perth, is targeted as a property hotspot and many immigrants are considering this thriving and well-served city as an alternative option to previous years when today's relatively overpriced Sydney was their chosen destination. Medium and long term investors are also looking at the great potential of other rising markets in Australia, currently to be found in Darwin and parts of north Queensland.

Timescale

Average construction time on IPIN Global recommended Australian off-plan developments, from project sales release to completion of construction, is approximately one year. Mid to long term investors look to hold onto their units after construction, normally for at least 18 months from initial reservation, either to rent it out and/or benefit from capital appreciation upon eventual resale. Many long term investors use hotspot locations in and around Perth, Darwin and north Queensland to generate significant and reliable rental income over a period of time as sustained rental returns are their main focus, followed by capital appreciation over time.

Capital appreciation is expected to perform exceptionally well over the next 5 years, notably in the newer emerging Australian markets, and the longer investors are able to leave capital in their purchase, the higher their potential long term returns will be. High tourist and immigration numbers and the resulting strength in the buy-to-let market allow investors to reap solid capital growth from their properties, all the while supplementing this income with high rental yields in key locations.

IPIN strongly recommends consulting with an IPIN advisor to discuss your particular mid to long-term investment strategy in Australia in order to ensure your chosen location best suits your needs.

Level of Complexity

In the case of off-plan purchase, full payment for the property needs to be completed at various stages of construction, prior to final completion of the purchase. For mid to long term investors, all costs will be applicable, of around 5% of the purchase price while ongoing costs such as maintenance, community fees and utility bills will also need to be factored into the strategy finance plan. Bear in mind it's advisable to open a local bank account in Australia in order to pay for the property's utilities and other ongoing expenses.

Beneficial arrangements are often to be made with local property management and rental companies that are usually conveniently based on or near the site. These ensure that such ongoing costs are covered and that your unit is rented out regularly. Managed properly, maintaining a property abroad can become no more complex than an investment closer to home.

Key Risks

A medium to long term investment strategy entails much lower financial risk than a short term plan which relies on finding a buyer within a very short time frame. Provided the right investment is made on a quality, well located project with multiple facilities, establishing a rental market and eventually a buyer for your investment should not be difficult. However, as with any investment, patience and money is sometimes required until the end user is found.

High prices and interest rates dissuade some buyers from the market. But many overseas property purchasers who are willing to hold onto their investments for a number of years, are cashing in on a potentially lucrative situation; they can now buy low, rent out their properties in the medium term, and benefit from high capital returns in the long term.

Australia's strong economic growth rates are higher than in most OECD countries including the US and UK. Currently the country's GDP is higher than that of the UK, Germany and France for example. There is a low degree of risk in the Australian economy while it boasts consistently strong GDP growth, stable interest rates, rising exchange rates, relatively high levels of employment and a low rate of inflation.

Bank Guarantees are commonly given by developers in Australia and IPIN approved projects will always be protected by local or overseas bank guarantees.

Property ownership in Australia is mostly sold Freehold, leaving no room for ownership disputes.

Return

Certain areas of Australia are currently offering great investment opportunity. It is interesting to note that in Perth for example, 2006 property prices rose by between 36.6% and a staggering 42%. Commercial properties in cities such as Brisbane and Perth are also offering excellent returns on investment.

Australia has always been a favourite holiday and relocation destination due to its great quality of life and value for money and still today, carefully selected Australian property offers great medium to long term investment potential to overseas purchasers. With a well-established and growing tourist industry and increased economic activity in the major cities from foreign investors, many real estate investments in both residential and commercial sectors represent excellent opportunities for high returns on investment.

Financing

The mortgage market is well developed in Australia and foreign purchasers can obtain repayment, endowment or self-certified mortgages to purchase their property. Variable and fixed rate mortgages are available to cover up to 80% of the valuation or purchase price (whichever is lower) and cover periods of between 5 and 30 years, up to a maximum age of 70. Loans are available at a minimum level of £50,000 (at 80% of the valuation). Currency can be in Australian Dollars, Sterling or US Dollars.

Many off-plan developments in Australia offer installment plans over fixed periods. Charges applicable vary according to developer and repayments are usually index linked. The developer can often offer the most competitive finance options to investors and these are certainly worth considering when looking at mortgage alternatives from their own countries.

If you have property in your own country and would like to borrow against this in an equity release plan, we can introduce you to independent financial advisors who can help you raise the necessary finance.

Taxation

Tax on rental income: Any income that you receive from renting out property in Australia will generally be liable for income tax and will need to be included in your tax return. This income could come from renting out land or buildings, or it could even be income you earn by having private lodgers or flat mates living with you.

Capital Gains Tax (CGT): CGT forms part of the income tax system in Australia and is payable upon realized capital gains. However, for home owners this tax is not charged as the sale of personal residential property is normally exempt from capital gains tax. Gains realized during any period in which the property was not used for personal use (e.g. rental) are, however taxable.
Recent reforms to the CGT system in December 2006 have limited the range of capital gains taxable on assets for foreign investors. This is an attempt by the Australian government to further enhance Australia's appeal as an attractive business environment for overseas investors.

VAT: Goods and Services Tax (GST) is charged at a flat rate of 10% and is charged on the supply of goods and services, including real estate. This is essentially a value added tax (VAT) as it is the consumer or end user who ultimately bears the tax.

Inheritance/wealth tax: Australia does not charge inheritance taxes, although some inherited assets may have CGT implications for the beneficiaries.
Stamp Duty: Investors will be liable for Stamp Duty which is levied on a wide range of transactions, such as agreements for acquisitions of real estate, business and some marketable securities, as well as leases and financing transactions. Stamp Duty is a state tax and is charged either at a fixed rate or on an increasing scale depending upon the value of your investment.

Municipal/Local Tax: Council rates or property taxes typically fund the local governments in all States. Taxes are charged on residential, industrial and commercial properties. In addition, some states levy tax on land values.

For more detailed information regarding tax questions, please contact IPIN who will help put you in touch with a tax advisor to discuss your particular circumstances.




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