Sydney investors must beware of pitfalls
Doron Peleg
02 Aug 2020

While home buyers are in solid position to leverage on the current market conditions, investors who buy rental apartments are taking an enormous gamble with both equity and cashflow risk materially increasing, according to RiskWise Property Research.

RiskWise CEO Doron Peleg also said the serviceability risks for rental properties were mounting and government rental assistance would provide little help with government rental assistance providing little help.

“Obviously, serviceability is a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage,” Mr Peleg said.

“However, the current huge spike in unemployment due to COVID-19 is having a major impact.

“Landlords are obviously under stress because many do not have the funds to cover the shortfall and may have to go to their lenders for leeway on their repayments. And in some areas price reductions are highly likely which then make these properties harder to sell which means some landlords will be trapped.

“Obviously, investors who are very responsive to out-of-pocket expenses, and to the risk these expenses will increase, will put things on hold and we have already seen a sharp reduction in the demand for dwellings.”

He stressed new investors should simply “time the market, do nothing and wait for dust to settle” before they buy and they should chose the property they purchase carefully.

“Once the pandemic is finally over, prices will not increase by 10 per cent within a month. Which means investors have time to make the decision whether to buy a property.

“In the meantime, they can prepare with the financial and research plans and be in a good position when they are ready to buy and it is right time to do so. This is the key … that prospective investors are in a position of wait and see.”

He said over the past few years, investors had already dealt with a variety of major events associated with rental apartments, including unit oversupply, credit restrictions and more recently construction defects, and now it was COVID-19’s turn to hit with price reductions and risk to cash flow and serviceability.

“If someone needed additional evidence that rental properties carry a higher level of risk, in the past few years what we have seen is a series of events that resulted in price reductions due to oversupply of units in many major cities, followed by the credit restrictions on local and foreign investors and then the potential changes to negative gearing and capital gains tax,” Mr Peleg said.

“Last year the news of construction defects created major reputational damage to the whole industry, even in areas which weren’t affected, and now we have COVID-19 which also has a potential impact on property prices and serviceability.

“Also, with Australia closing its borders and the now dire economic projections, it is highly likely there will be a significant reduction in external migration.

“Projections are forecasting further high unemployment and underemployment and this is the first problem for the majority of people when they buy an investment property because the key driver is long-term capital growth and not cash flow.”

He said while houses, from an investment perspective, also carried an elevated level of risk at this point of time, generally the cohort of renters, especially in the more established suburbs, comprised families and, in many cases, those with permanent full-time jobs.

“The bottomline is investors need to be careful at this point of time. First, they should ensure that financially they are in a very strong position to service the mortgage or to potentially address longer periods of vacancy or provide a discount on the rent. Then, if they do want to invest, they should pay a discounted price for the unit to reflect both the risk for a price reduction and the cash flow risk associated with the property.”

However, Mr Peleg said home buyers were in a much better position especially those with a long-term holding strategy as they could negotiate aggressively for high-quality houses, that usually enjoy very strong demand and are sold through an auction campaign at premium prices.