As Australian investors become re-acquainted with bear market, recession and deficit, it takes nerve to think long-term. But after 18 months of the global financial crisis, in virtually any asset class, the absence of buyers means that bargains are plentiful – for the cashed-up and confident.
So if you are looking for a bargain, below we reveal fire-sale opportunities across residential and commercial property, business as well as the stockmarket.
“For anyone that feels secure in their job, it’s a great time to be a buyer – everything is in your favour,” says Terry Ryder, founder of residential property website hotspotting.com.au. “There are opportunities everywhere at the moment, both in the cheaper areas and those where the growth prospects are strong.”
Ryder says the “affordable” areas, which tend to be the outer suburbs of the capital cities, are very active at present, and have “real impetus” for prices to rise. “You’re looking at areas where first-home buyers can afford to buy properties below $400,000 – preferably below $300,000. Every capital city including Sydney has got those sorts of places, where first-home buyers are most active.”
The best combination, he says, is affordability and rail links. “Public transport is important, particularly rail. Research is showing increasingly that the suburbs with rail links to the inner city have better capital gains than those without. In major cities like Sydney and Melbourne, where inner-city parking is very expensive, and road tolls are a factor, and just the cost of running a car – it’s cheaper to use public transport and more people are opting for it. That combination is quite a powerful one at the moment.”
In Sydney, Ryder says the Liverpool precinct in the south-west is the stand-out on these criteria. “Liverpool is quite affordable by Sydney standards so it stands out as an area of activity at the moment. It’s strongly targeted by first-home buyers. Liverpool has very good rail links to inner Sydney, but the good thing about Liverpool is that it’s a CBD in its own right, with offices, hospitals, educational facilities and shopping centres etc., so you don’t have to work in inner Sydney for the purchase to make sense.”
The Melbourne equivalents, says Ryder, are Frankston and Dandenong. “Frankston is bayside, it’s quite cheap, there are good rail links and it benefits from the new Eastlink tollway. Dandenong is similar – it’s not bayside, but it’s affordable – and it’s the manufacturing capital of Victoria, the rail links are good, and it also benefits from the Eastlink tollway. You can get entry there for about $300,000, but a $300,000 median means that half the sales are below that figure, so you can buy houses below that. In the north of Melbourne, the Epping precinct looks similarly affordable.”
In Brisbane, Ryder likes the Kallangur region in the north; the Beenleigh precinct in the south, in the corridor between Brisbane and the Gold Coast. “Then you’ve got that whole western corridor heading out toward Ipswich, which is one of the greatest growth regions in Australia at the moment. They are all areas where you can find homes for under $300,000.”
Ryder says Adelaide is by far the cheapest mainland capital, and Hobart is the cheapest capital. “There are plenty of places you can buy for well under $300,000 in those cities. Adelaide has particularly strong prospects because it has the economic activity in the pipeline to drive demand, as well as being very affordable at present, on a nationwide comparison.
“With Tasmania, the change there is that it has population growth – albeit the slowest in Australia. The economy is surprisingly resilient. It’s producing quite good economic data, and that plus good affordability means that it has prospects.”
But Perth is still a “very difficult” market, Ryder contends. “Perth just went too high in 2006, and has been trending backwards ever since. In the last few months prices have dropped on average by 10 per cent, which is the biggest drop in the country. The latest ABS figures show that across the capital cities, prices have dropped about 6 per cent.”
Some very affordable regional areas offer both good lifestyle and value opportunities, he says. “They tend to be overlooked by investors, but places like Wagga Wagga and Dubbo are very solid, and keep on giving steady growth. They have population growth and price growth for real estate. Wagga Wagga has an army base, an air force base, a university, it’s a major regional centre for a wide area and it has all the services. We’re talking about $270,000 as a median price for a house, and $215,000 for a unit.
“Wagga Wagga stood out for me recently because there were figures for the highest applications for First Home Owners’ Grant, in other words first home buyers’ activity, and Wagga Wagga was the only region outside Sydney to be on the top 20. It’s attractively affordable and it’s got all the services immediately at hand,” says Ryder.
Matthew Gross, director of National Property Research, says there are also potential bargains in all the major forms of non-residential property, for investors prepared to do their homework. “Prices have come down, and you’re seeing yields of 6.75 per cent-10 per cent in retail, 7.5 per cent-10 per cent in commercial and 7.5 per cent-11 per cent in industrial.
“Sure, there are risks attached at that higher end, and potential investors have to factor in that leases are not entered into on five-to-seven-year terms anymore, it’s more like three years. But there are good opportunities.”
In a downturn, location becomes even more important than usual, says Gross. “If you’re looking at retail and office property, you want ideally to be in an area as close to the CBD as possible, well-served by public transport, and which has a vibrant café-retail-entertainment scene. In an economic downturn, that kind of environment tends to keep tenants in place.” Good examples, he says, are St. Kilda, Docklands and Richmond in Melbourne, and Annandale in Sydney.
Asset class prospects depend on location, he says. “For example, office property in south-east Queensland is not going to perform as well over the next five years as office property in Melbourne and Sydney, because rents haven’t risen anywhere near as much in that latter as they have in Brisbane and the Gold Coast.”
Retail property has seen “solid demand” in strip shops, says Gross, but while yields are still holding up, the caveat is that rental is usually based on turnover. “If turnover comes off, yields might start to unwind, which is potentially not good for investors,” he says.
Industrial property in outer areas of thee capital cities, where a “good pipeline of stgelopment” exists on the back of infrastructure stgelopment – for example, Eastlink in Melbourne – is attractive, he says, but he cautions that investors often enter the industrial sector through “light strata-style” properties – which is generally the first part of the industrial market to be over-supplied in any recovery.
“The major problem in non-residential property is that in the absence of transactions, determining what is a cheap entry level is like asking how long is a piece of string,” says Gross. “There are a lot of very good opportunities, but you’ve really got to be thinking in terms of quality of tenant and the type of lease terms you can get,” he says.
Buying a business
It is also a good time to buy a business, says Andrew Kent, director of online business marketplace Bizexchange. Kent says the multiple of earnings on which small businesses sell has halved in the last two years.
“That’s because of baby boomer business owners becoming increasingly frantic to get out, not because of the global financial crisis. The GFC has actually hit the volumes of businesses that are put up for sale – the owners don’t want to accept low prices so they’re delaying retirement. But if you have the cash to buy a business now, the price has halved in the last two years.”
The asking price for businesses coming down is a “function of the age of the owners”, says Kent. “Where the owner is 50-55-plus, they have owned the business 20-plus years, that tends to be in the traditional retail, hospitality, trade areas. Their own next generation might not be interested, and the next generation in general hasn’t got the cash, it’s up to its eyes in debt. The number of businesses handed down has been in decline for a while.
“Sole trader businesses – where you ‘become the business’ – are selling very cheaply. If you’ve worked in that industry and know what you’re doing in that business, you can buy very cheaply. The key metric is the multiple of earnings. Over the last 20 years, in small business, the asset have been moved out – they’re leased, not owned. The assets are the multiple of earnings. Over the past two years, that multiple of earnings has halved, according to the Bizexchange Index,” says Kent.
This situation is likely to improve even further from the viewpoint of a potential buyer. Gary Graco, partner at accounting and corporate advisory firm Nexia ASR, says that the average age of private business owners in Australia is 56, and half expect to sell their businesses over the next five to seven years as they move to retirement. Graco expects over the next 12 months to see more ‘forced’ sales of businesses, as finance facilities are tightened or withdrawn.
On the stockmarket
On the stockmarket, with shares selling at their lowest price/earnings (P/E) ratios for 30 years, bargains could be expected to proliferate. Scott Marshall, director of stockbroking firm Shaw Stockbroking, says “almost anything” could be considered a bargain in a long-term sense – with the possible exception of the embattled REITs (real estate investment trusts, formerly known as listed property trusts). But he says an investor would have to accept that the market remains very skittish, and prepared on any pretext to take profits after its recent 25 per cent run-up.
“There are quite a few stocks with strong cash flow, low gearing, good management and a low P/E, and longer-term, there will be a lot of value become apparent. If you’re looking for a bargain, you have to focus on stocks that are well-positioned for growth. In that category I would place Boral and Toll Holdings – which is superbly positioned for both Australian recovery and Asian growth – and I also think that Sonic Healthcare is still a good, solid story.”
Lachlan McLean, investment adviser in the private wealth management arm of Wilson HTM, says investors are keen to return to the stockmarket “to pick up bargains”. But rather than look to use the market downturn to pick up bargains, he says it is also a good time to “think about the portfolio that you want to hold over the next five to ten years.”
Prior to the 2007-2009 market slump, says McLean, Australian retail investors commonly held big chunks of the four major banks. “In many cases they’d owned those stocks for up to 20 years, and the bank holdings had grown to make up the lion’s share of the portfolio. If you were constructing a portfolio now, that overweight wouldn’t be appropriate.”
McLean argues that a portfolio being put together now should reflect “where the growth is going to come from” over the next five to ten years. “We’ve been putting clients into some of the beaten-up industrials, for example Orica, Woolworths, Toll and CSL. We’re not against banks, but we would prefer to hold Westpac and Commonwealth at the moment – you don’t have to hold them all. We’re saying to clients that if there is to be an overweight, it should be in a sector where the growth opportunities over the next five to ten years are the strongest. We think that sector is energy.”
The main exposures McLean is using are the higher-quality energy stocks, with the strongest balance sheets, which means Origin Energy, Santos, Woodside Petroleum and BHP. “Woodside and BHP are a bit pricey at the moment, but on a five to ten-year view, that shouldn’t be a concern. We’re also very keen on the outlook for uranium, because China is signaling a greater reliance on nuclear power, so we like Energy Resources of Australia (ERA) as well.”
In that group of stocks, says McLean, an investor has the “core exposure” to the major growth area that can be expected on the Australian stockmarket. With that core in place in the majors, he says investors can look to pick up some of the small-cap energy stocks that should show good growth over the next decade. In that category, he nominates coal pair Whitehaven Coal (ASX code: WHC) and Felix Resources (FLX), and emerging coal-seam gas players Arrow Energy (AOE), Molopo Australia (MPO) and Bow Energy (BOW).
McLean would also back the resources exposure with mining services providers, such as engineers Ausenco (AAX) and Sedgman (SDM) and Runge (RUL), a specialist provider of IT services to mining companies. “You’re still weighting the portfolio toward that major theme, but you’re spreading the exposure a bit,” he says.
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