GENERAL EDUCATION SEMINAR

“Property – Past, Present and Future”

10 October 2017 | The Epping Club

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Housekeeping

♦ This is generaladvice

♦ The information discussed in this presentation should not be used without seeking professional advice specific to your own personal circumstances

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Agenda

♦ Market and economic update

- Jerome Bodisco, Head of Investments, Profile

♦ Property Outlook 2018

- Robert Harley, Former Property Editor, AFR

♦ Short coffee break

♦ Property considerations in personal financial planning

- Todd Stanford, Senior Financial Planner, Profile

♦ Panel discussion and Q&A

♦ Profile update and close- Sarah Abood, CEO

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JEROME BODISCOHead of Investments, Profile

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♦ Property gives its owner the right of possession, enjoyment, lease / rental to another party and disposal.

♦ Large, fragmented diverse group of property types.

♦ Variable financial characteristics ranging from highly predictable income producing properties to speculative assets with high growth potential.

♦ High unit costs and relatively high transaction costs.

♦ Lots of ways to access – Direct property, REITs, equities, managed funds, hedge funds, ETFs.

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CHARACTERISTICS

♦ Due to their pattern of income generation property is viewed as a defensive asset class.

♦ Inflation hedge. Cash flows (rents / leases) may increase over time allowing it to prosper in favourable economic and demographic environments.

♦ REIT returns tend to exceed bond returns and are competitive with equity returns.

♦ Returns are largely driven by asset specific supply and demand influences and have low correlations of returns vs equities and bonds.

♦ Range of property types and locations allows for diversification.

♦ Real estate offers the opportunity for skilled investors to identify and capture value.

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WHY INVEST IN PROPERTY?

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TYPES OF INVESTMENTS

♦ Direct Property

♦ Residential and commercial properties, farmland and timberland.

♦ Investors buy the physical asset outright and are responsible for the

maintenance, rental agreements and tax implications of owning the

property.

♦ Advantages:

♦ Choice

♦ Direct control

♦ Tax timing benefits

♦ Less volatile returns than listed property.

♦ Key issues: lack of liquidity and high transaction costs.

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TYPES OF INVESTMENTS

♦ Listed Property (Real Estate Investment Trusts)

♦ Investors hold shares in a fund or trust which uses the proceeds to invest in

a portfolio of real estate assets e.g. Westfield, Charter Hall, Lend Lease.

♦ Investors love REITs due to the income heavy nature of the asset class.

Trusts by law have to distribute between 90% to 100% of its earnings.

♦ Typically long duration asset / steady cashflows.

♦ Advantages:

♦ Liquidity

♦ Easy access

♦ Lower transaction costs

♦ Disadvantages:

♦ Equity like volatility

♦ No franking credits

♦ Distributions taxed at individual rate

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HISTORICAL INVESTMENT PERFORMANCE

Source: Russell Investments

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THE SEARCH FOR YIELD

Source: Bloomberg, REIA, RBA, AMP Capital

♦ 27 years of continuous expansion but lower than previously

♦ Interest rates are at historical lows.

♦ Unemployment is 5.6%. Employment growth best in years.

♦ Business conditions the best they’ve been in a decade.

♦ Huge pipeline of infrastructure projects.

♦ Rising cost of living pressures – energy prices are going through the roof!

♦ Very little wage growth and soft retail sales.

♦ Household debt has the RBA extremely worried.

♦ Australian share market moving sideways suggests lower expectations.

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AUSTRALIAN ECONOMIC OUTLOOK

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HOUSE VIEW - CHINA

♦ Australia is highly dependent on China’s economic

performance with 25% of final exports making their way to

China.

♦ Over recent months the Chinese manufacturing sector has

returned to a period of growth. Economic growth is still

very strong at 6.9%.

♦ Over the years China has invested heavily in Australia.

Demand for housing ranging from student accommodation

(apartments) to trophy homes has been strong.

♦ China has recently cracked down on capital flight a lot of

which has found its way in the real estate sector.

♦ According to the Ministry of Commerce, Chinese direct

investment in property fell by 82% in the first half of 2017.

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HOUSE VIEW - US

♦ US growth rebounded strongly in the June quarter to

3% which is the strongest result in 2 years.

♦ Solid jobs market with low unemployment rate.

♦ Both manufacturing and non-manufacturing continue to

expand.

♦ Fed expected to raise interest rates in December.

♦ Trump’s new tax cuts puts pressure on Australia to

follow suit to be competitive.

♦ No major direct link with Australian housing but

growing tensions with North Korea could mean

Australian involvement and potentially adverse impact

on our economy.

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HOUSE VIEW - EUROPE

♦ Growth in the Eurozone now has a genuine head of

steam and is the strongest in recent memory.

♦ Stronger Global Growth and Industrial Production

has seen strength again in commodity prices after a

mini correction early this year.

♦ Unemployment rate continues to trend downward

dropping to +9.1%.

♦ Synchronised growth across Europe / Asia and the

US is expected to benefit Australia’s economic

growth prospects.

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AUSTRALIAN HOUSE PRICES

• Australian house prices have increased by approximately

6% p.a. since 2010 and over 40% since 2009, reaching

historically high levels.

• Sydney median house price now $1.2m. Melbourne <$1m.

• The $1.2m question: Is it time to buy or sell?

TODAY

♦ Sydney House Median Price = $1.2m

♦ Deposit required = $240,000 (20%)

♦ Loan Amount = $960,000 (P&I)

♦ Stamp duty = $51,762

♦ Total upfront = $291,762

♦ Mortgage Rate = 3.74%

♦ Loan Repayments = $4,440 pm

♦ Average earnings = $4,716 pm

♦ Average Sydney rent = $2,160 pm

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CASE STUDY

TOMORROW

♦ Sydney House Median Price = $1.2m?

♦ Deposit required = $240,000 (20%)

♦ Loan Amount = $960,000 (P&I)

♦ Stamp duty = $51,762

♦ Total upfront = $291,762

♦ Mortgage Rates go up 1% = 4.74%

♦ Loan Repayments = $5,002 pm

♦ Mortgage Rates go up 2% = 5.74%

♦ Loan Repayments = $5,596 pm

♦ Low interest rates and availability of financing.

♦ Limited housing supply in places where the jobs are.

♦ Strong population growth and international migration over the past 15 years.

♦ Foreign demand. Overseas buyers account for approximately 11% and 7% of new and established home sales, respectively.

♦ Incentives to buy and invest drive up prices! – negative gearing, capital gains tax discount, FHB grants, stamp duty concessions.

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WHAT’S BEHIND HOUSING (UN)AFFORDABILITY?

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WHAT COULD GO WRONG?

Threat #1: Rising interest rates

♦ Rising interest rates may cause mortgage repayments to

become unaffordable -> Mortgage stress.

♦ Interest coverage ratios remain strong but could deteriorate

quickly if interest rates rise.

♦ When looking at Australian house prices from a historical

perspective, rising interest rates have usually been

associated with lower house prices and falling interest rates

with rising prices.

♦ Over the short term, the RBA has a stable cash rate outlook,

but they are getting nervous. Interest rates will rise sooner or

later!

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WHAT ELSE COULD GO WRONG?

Threat #2: Unemployment rises / No wage growth

• Rising unemployment could see house prices and household

wealth fall.

• Households fall under economic stress as income drops.

• So far so good. Employment growth is looking good.

• Australian business conditions are at 10-year highs. Rapidly

falling business conditions is a sign that employment in the

economy is at risk.

• Currently, the strength in the business conditions does not

suggest that a large fall in unemployment is just around the

corner.

♦ As long as we don’t have a recession and unemployment and interest rates remain low, it’s hard to see huge declines in the Australian market (>10%). A correction is likely but not a crash.

♦ Property market showing signs of cooling. Auction clearing rates falling. Banks are getting tougher with borrowers. Foreign investors are looking elsewhere.

♦ Property has delivered outstanding returns over the last 10 and 20 years but it would be a mistake to blindly rely on that trend continuing. AREITs fell 55% during the GFC!

♦ Profile has a neutral outlook on property. Valuations are stretched in some markets. Managers are positioning themselves for a correction in some markets.

♦ Property still has a place in your portfolio but remember right asset and right price. Be patient. Be cautious. Do your homework. Keep your powder dry.

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WHAT DOES IT ALL MEAN?

Kerr Neilson’s final bid of

$8.25m not enough to win

auction for 2 bedroom house at

McMahon’s Point.

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Property Outlook 2018

Robert Harley

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Gretel Packer’s New Potts Point Penthouse

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Dwelling Values:

January 2000 – March 2017

Source: CoreLogic

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Lessons in commercial property

Westfield

Chermside

High Street

Maitland

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Who hates property owners and investors?

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Short break

for coffee

and tea

PROPERTY - THE FINANCIAL OVERLAY

Todd Stanford CFP CA F Fin B Bus(dist)

Senior Financial Planner

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INTRODUCTION

Jerome – property as an asset class &

economic/market flyover

Robert Harley – property past, present

& future

Property – ownership & recent changes

(with a focus on direct property)

Committee for Economic Development of

Australia Report

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Contents

1. Where it fits in a portfolio

2. What is its purpose?

3. Recent changes – 1 july 17

4. Ownership considerations

5. Funding options & equity release

6. Key takeaways

WHERE DIRECT PROPERTY FITS IN A PORTFOLIO

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♦ Investment (not lifestyle) has a place

♦Growth asset – need capital growth

♦Lumpy asset - so often ‘quarantined’ to manage more liquid assets separately

♦Net rent matters, not gross yield

♦Emotional attachment

♦ ‘White elephant’ risk

PURPOSE

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♦Main residence

♦Lifestyle (e.g. holiday home)

♦For the kids

♦Pure investment

♦Your business premises

♦To be developed

Emotional Attachment

Use of the property is the key determinate of

the most appropriate ownership structure.

HELPING THE KIDS

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Are you relying (or have relied) on

inheritance to purchase a home?

GenY (16-34) – 26%

GenX (35-54) – 16%

Baby Boomers (55+) – only 8%Source: Slater and Gordon Lawyers

Considerations

(1) Formally document gifts to kids as a

loan if at risk child

(2) Treating kids equally – may need to

equalize things out in your Will

(3) Ownership – tenants in common?

(4) Transferring below market value

(5) Impact on your financial wellbeing Generation Rent(Millennials)?

RECENT CHANGES – 1 JULY 2017

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Housing Affordability Measures

♦ Downsizer contributions - $300K

♦ Limited tax deductions on travel to inspect property & depreciation

♦ Vacancy fee – 6 mths unoccupied,

$5K p.a., VIC proposal 1% CIV 1/7/18

♦ Tax Non-residents – several changes, removal of CGT main residence, withholding CGT, 50% capping in new developments etc

♦ Limiting IO loans – 30% banks books

♦ Investment loans – 1% dearer

First Home Buyers

♦ First Home Super Saver Scheme (FHSSS)

NSW

♦ Stamp Duty Concessions

♦ First Home Owners Grant (new homes)

♦ Duty abolished on LMI (all buyers)

♦ No more 12 mth stamp duty deferral for investors

Draft legislation currently before

Parliament for both measures

RECENT CHANGES – HOUSING AFFORDABILITY

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♦ Downsizer contributions for age 65+

- Applies to contracts exchanged on or after 1 July 2018

- Home is your main residence for CGT purposes

- Owned by you or your spouse for at least 10 years

- Must be 65 or over at time of contribution

- Cap in total is lesser of $300K & sale proceeds

- Spouse can contribute up to $300K as well

- No work test, excluded from NCC cap of $100K

- Counts towards $1.6M Total Super Balance

- Contribute in 90 days of disposal & can be in parts

- Only available once for home located in Australia

RECENT CHANGES – FIRST HOME BUYERS

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♦ NSW Stamp duty abolished - new & existing homes up to $650K

♦ NSW Stamp duty gradually reduced on new & existing homes up to $800K.

♦ NSW LMI duty abolished – was 9% of premium (for all home buyers)

♦FHOG new homes only - $10,000 if building new home up to $750K- $10,000 for completed new home up to $600K

♦FHSSS now have draft legislation- FHSS contribution $15K per tax year (CC or NCC) up to max $30K (all up)- Earnings taxed at 15% within super- Apply for release to purchase first home (contract entered into within 12 mths)- Property must be occupied as main residence for 6 months at least- Released amount assessable with non-refundable 30% tax offset- Not means tested (excluded from ATI)

RECENT CHANGES – NSW FIRST HOME BUYERS

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Saving in LMI only

Sweet Spot

NEGATIVE GEARING STILL OK…...FOR NOW

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Amount can be offset against

other assessable income

Remember still

making a cash loss

– need capital

growth to be viable!

Must have cashflow to

ensure debt is serviced.

OWNERSHIP

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1. Sole owner

2. Jointly

3. Tenants in common

4. Tenants in common with an SMSF

5. Family discretionary trust

6. Unit trust

7. Hybrid trust

8. SMSF

9. Private company

10.Partnership

OWNERSHIP – KEY CONSIDERATIONS

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♦ Proposed use of the property

♦ Tax Effectiveness

♦ Asset Protection

♦ Simplicity and cost effectiveness

♦ Succession/death & exit strategy

♦ Multiple parties involved?

♦ Do you need to borrow – banks don’t like lending generally to companies and trusts.

OWNERSHIP - INDIVIDUAL

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♦ Sole owner– simple & low cost– entitled to 50% CGT discount & main residence exemption– ability to negative gear– forms part of your estate on death

♦ Jointly (50/50)– As above– Non-estate asset (passes to survivor on death)– Ability to split net rental income 50/50– Careful with loan ownership (should also be 50/50)

♦ Tenants in Common– As with jointly, but your share forms part of your estate– Can be held in any portion (not just 50/50) & with an SMSF

♦ Partnership– Similar to jointly (partners are jointly and severally liable)– Contractual arrangement to share profits

OWNERSHIP - COLLECTIVE

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♦ Family Discretionary Trust– Provides some personal asset protection– Entitled to 50% CGT discount– Ability to split net income of the trust to multiple beneficiaries– Negative gearing losses are trapped in the trust and only useful if

trust has other assessable income to offset– No main residence exemption– No NSW Land Tax exemption threshold (currently $549,000)– Non-estate asset (asset owned by trustee)

♦ Unit Trust – As above for family trust– Advantageous where multiple investors involved (incl SMSF)– Fixed units do form part of your estate

♦ Private Company– Not eligible for 50% CGT discount or main residence discount– Provides some personal asset protection– Ability to retain profits (however tax is usually payable on exit)

OWNERSHIP IN A SMSF

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♦ 70% of all SMSF assets comprised 3 types of investments:

- 25% in cash and term deposits

- 30% in direct Australian shares

- 15% in direct Australian property- 11% non-residential- 4% residential

♦ Overseas property 0.06% only

♦ Borrowing 3.68% of total SMSF assets

Source Australian Taxation Office. As at 30 Sept 2016.

Tougher now with $1.6M Total

Super Balance caps (per member)

HOW DOES A SMSF ACQUIRE PROPERTY

♦ Straight out with cash (pooled, rolled in, contributed)

♦ Co-own ‘tenants in common’ with a member (does not need to be 50/50)

♦ Part cash, part debt (SMSF borrows 65% - 70% of the property)

♦ Purchase units in an ungeared unit trust (that in turn holds the property)

- Insufficient funds alone in super- Looking to acquire land to develop or subdivide- Allows the transfer of units (ownership) across to the SMSF over time (rules apply)

♦ Indirectly – via managed fund, or listed property ETF (Jerome)

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PROS & CONS OF DIRECT PROPERTY IN SUPER

PROs

♦ Super helps as source of funding for a deposit

♦ It can be tax effective- 15% max on net rent- 10% on capital gains if sold >12 mths- 0% on both in pension phase (if <$1.6M)

♦ Pay-off loan with pre-tax dollars(up to $25,000 p.a.)

♦ Business real property works well if a business owner (secure your premises, contribution caps don’t apply for market rent, free up borrowing facilities to use elsewhere for expanding the business)

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CONs

♦ Super law restrictions – sole purpose test (no personal or related party use), hard to renovate if little cash (unable to use borrowed funds) etc

♦ Total Super Balance Caps - $1.6M

♦ Not optimal for negative gearing

♦ Higher set-up & ongoing costs

♦ Forced sale of asset (to meet minimum mandatory pension, member leaves etc)

♦ Tenancy risk an issue if need cash

♦ Borrowing in SMSF is complex & high margin for error

FUNDING OPTIONS & EQUITY RELEASE

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♦ Third party Loan- Various options (variable, fixed, IO, P&I, offset account, LIC etc)- Avoid lenders mortgage insurance (require 20% deposit)- Refinancing to draw down on equity for new property

♦ Related party borrowing- must be commercial (refer ATO Guidelines for SMSFs)- from private company (Division 7A conditions – 5.30%p.a.)________________________________________________________

♦ Reverse mortgages - Type of loan using equity in your home as security- No repayments whilst living in your home- Higher interest rates, compounding debt (18/9/12 capped)

♦ Equity release products- Sell share upfront (<65%) of the future value of your home- Must be over 60, no mortgage, main residence and land value of the

property is 60% or greater of total market value of the home.

On $1M home with

10% deposit = $20K

KEY TAKE-AWAYS

1. Purpose or use of property is key

2. Use tax and state laws to your advantage

3. Consider ownership at start (and if SMSF is feasible)

4. If borrowing aim for a 20% deposit if at all possible.

5. Negative gearing alone is no panacea – must have capital growth

6. Try not to buy on emotion – do the numbers!

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https://youtu.be/xLoFfbWQ5T4

Ellen's Real Estate Tips (2 min video)

Any

Questions?Panel Discussion

Change of asset consultant

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• Institutional grade investment consultant• Established over 30 years• Relevant substantial clients (incl. Future Fund, First State

super etc)• Genuine ‘real returns’ focused investment philosophy and

credentials• Global presence

• 900 investment professionals• Advise on assets > $3 trillion

• Significant scale and pricing advantages in Australia

1 Dec 2017

Team update

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Promotions

Rachael Arnold –

Financial Planner

Anita Snehi –

Senior Client

Services Officer

New Associate Financial Planners

Viv Rudra

Michael Zaia

Andrew Squires

Danielle Berry –

Client Services

Officer

Truc Vo – Project

Manager

Technology – convenient appointment booking

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Acquisitions

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To-Do

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♦ Keep calm!

♦ Do the research (eg. CEDA report)

♦ Consider ‘downsize’ super contribution

♦ Review ownership of direct property

assets

♦ Carefully plan any family assistance for

property purchases

♦ Review affordability of negative gearing

/ super property strategies in rising

interest rate environment

♦ Talk with your planner!