Property Cycle

A Property cycle can be seen as a logical sequence of recurrent events reflected in demographic, economic and emotional factors that affect the supply and demand for property subsequently influencing the property market.

The property cycle generally recognises 4 recurring phases the Boom, Contraction, slump and recovery.

Boom

• Rents rise to levels which place significant financial pressure on
  
  tenants
• The time it take for a property to sell after being listed for sale reduces
  
  markedly
•  Property prices rise
• Yields fall as prices rise proportionally more than rents rise
• There are few mortgagee/forced sales
• Property finance is easy to obtain and finance companies release a number
  
  of new lending products making borrowing easier
• People borrow against their increased house values and spend this money on
  
  consumer items (Tv’s, Boats, Holidays etc)
• Increase number of property seminars competing for investor dollars
• Property is a hot topic in the media. Initially there is much speculation about how price growth will continue, but later in the Boom the media turns its attention to the reduced affordability of property
• There is a lot of discussion about how this boom will never end i.e “its different this time”  and expectations that there will be no slump phase

Contraction

The Contraction phase typically start a long time before most people realise the property market is in the slump phase, this is because of the delay between the shifting trends of “key drivers” and the impacts that are evident in the property market itself. An interesting note is that contrast to popular belief property values
do not necessarily fall during a slump, values may simply stall for a lengthy period.

• Yeilds fall further
• Increased vacancies of rental properties
• Interest rates begin to rise
• Oversupply in the market
• Demand reduces

Slump

• Reduced cash flow for investors (Although not always)
• Property price growth stagnates and/or property values falls
• The length of time to sell a property increases markedly
• Increase number of mortgagee/forced sales
• Property finance is more difficult to obtain
• There is much “doom and gloom” about property values being too high in the
  
  media
• Many property investors experience lower cash flow and sell down their property portfolios to some degree, or completely

Recovery

• Increased rents and cashflows
• The length of time to sell a property reduces
• Property prices begin to increase
• Much confusion in the medis reigns about whether recent property value growth is sustainable
• Many protential property purchasers delay buying because they evidenced value falls or a slow market in the proceeding slump

The Property clock below depicts the different stimulus or “Key Drivers” effecting the market. As you can see the green represents when finance is easy to obtain and red is when it becomes more difficult due to harsher lending policies and difficult valuations.



Find out more about property cycle here http://australianpropertyagency.com.au/nras

NRAS, What's that?

The National Rental Affordability Scheme (NRAS)

NRAS Is a Federal Government initiative to encourage the construction of new affordable housing in Australia. The scheme provides Federal, State and Territory Government incentives of $10,350 per annum for ten years to an investor.


The Commonwealth Government incentives is made up of a refundable tax offset of $7,486 p.a. This means it will reduce the amount of tax paid in any year and the Government Incentives are indexed annually and available for a period of ten years for each approved NRAS Property.


The State Government incentives are non-assessable, non-exempt income of $2,587. This means that the amount is not included in your income (no tax payable).


NRAS properties are for sale across a number of states, in prime real estate locations and growth corridors to provide for those who need affordable housing in the growing rental market.

For more information, visit us at www.australianpropertyagency.com.au/nr as/

National Rental Affordability Scheme (NRAS)

National Rental Affordability Scheme (NRAS) is an Australian Government incentive to individual Investors to help fund 50,000 Affordable dwellings costing under $600,000 for the Rental market.

NRAS Incentives improve cash flow and profitability of property investment over traditional investment property with the same depreciation and capital growth benefits.

Purchase price of the NRAS property does not affect the NRAS Incentive payment which is fixed, so lower value properties may represent better investment returns given similar growth factors.

Community Housing groups tender for NRAS Incentive allocations and developers provide suitable properties to satisfy the NRAS criteria that are then sold directly to NRAS Investors.

In 2013, NRAS Incentive payment is $10,350 TAX FREE ($7,763 from Federal Government via ATO and $2,587 by State Government) and increases by Housing CPI to $120,000 over 10 years.

NRAS properties are rented to approved Tenants at 20-25% less than market rentals to increase affordability and Tenants must maintain properties to required standards to retain rental savings.

Tenants can earn between $45,000 and $135,000 depending on family size and composition and have 12 months to vacate if they no longer satisfy approved NRAS status or can buy the property.

Independent NRAS Property Managers select approved Tenants and manage properties on behalf of Investors so properties can be purchased Interstate for diversification of risk with confidence.

Rents are increased annually by CPI with independent market rent reviews in years 4 and 7 and Tenants are reluctant to leave as they will have to pay higher market rents for non NRAS homes.

Major Banks now finally offer NRAS finance up to 80% but only a few Banks permit NRAS payments to be used in serviceability calculations limiting loan values available to many Investors.

Self Managed Superannuation Funds (SMSF) can now borrow up to 80% to purchase NRAS properties and gain tax refunds and nil Capital Gains Tax when property is sold in Pension mode.

To June 2012 only 8,678 NRAS properties have been allocated and a total of 31,872 reserved by Housing consortiums but NRAS Scheme will conclude by 2016 so Investors need to act soon.

NRAS properties can be sold on the open market to other Investors or alternative property found before the end of the 10 year term and the new Investor retains residual NRAS Incentives.

NRAS – How It Works

Property investments rely on leverage and Capital Gains to maximise investment values.

Select properties with good capital growth potential as Capital Gains will deliver best long term investment returns.

NRAS properties must satisfy selection criteria based on need and growth potential for approval and should be suitable investments.

NRAS – How Housing Consortiums Work

The Federal Government benefit currently is $7,763 and the State Government payment is $2,587 for a 2013/4 total payment of $10,350.  The Housing Consortium and Property Manager charge fees for their service but the property is independently owned by the Investor.

SMSF Benefits by buying NRAS

The strategy is to maximise the tax-free NRAS incentive on a well maintained property with growth potential and sell the asset post retirement in pension phase when the capital gain is exempt from tax.  SMSF is the beneficial owner of the NRAS property and receives all taxation and NRAS payment benefits.  During NRAS, the property may have extra negative gearing benefits if financed from the reduced rental income.

SMSF must have the sole purpose of providing retirement benefits for members through its investment strategy.  SMSF can buy any residential real estate as long as its members do not live in it or lease it to a related party and it is not purchased from a related party.  NRAS property must be rented to NRAS approved qualified tenants at less than market rents for 10 years to obtain maximum NRAS incentive payments.

At the end of 10 years, the property earns normal market rental returns but remains an SMSF asset and provides tax free pension income to SMSF members.  The residential rental market represents a good long-term investment with the opportunity for significant capital gains.

Trustees of an SMSF can invest in and buy NRAS property and receive NRAS tax-free incentives for 10 years and normal property depreciation tax benefits.  Owners control tenant selection and NRAS properties are managed by independent professional estate agents.

Tenants have strong incentives to maintain the property to retain leases at less than market rates and tenant turnover is much lower than in the main rental market. Market rent reviews are carried out by independent valuers in year 4 and year 7 with annual increase each year based on Housing CPI increases.

SMSF can only have one property per Custodian Trust when financing an NRAS property with a limited recourse loan and Banks often require a Company Trustee for the Custodian Trust.  A SMSF can own several NRAS properties with mortgage finance if there are separate Custodian Trusts for each property and the rental and SMSF income is sufficient to service the loans.

Property real estate traditionally provides safe long-term investment returns with little volatility.  Employer superannuation contributions plus the rent and NRAS incentive payments can pay off the mortgage and the loan is limited recourse to any other SMSF or personal assets.  As an SMSF asset, the property has asset protection benefits in the event of individual bankruptcy.

A Custodian Trust “holds” ownership of the property title for legal purchases with the SMSF as “beneficial” sole and primary beneficiary.  SMSF has the right (but not the obligation) to acquire real ownership by making payments after acquiring the beneficial interest.  For tax and NRAS purposes the SMSF “holds” the property.

The Federal Government component of NRAS is received as a refundable tax credit when the SMSF lodges its annual income tax return.  The State Government component is a non-taxable cash payment in September each year.  Both payments are not taxed and received as full benefit.

Tenants can earn income up to $125,960 per year while the maximum for Government social housing tenants is $58,292.

ATO’s new SMSFR2012/1 holds that if property acquired is a single acquirable asset the deposit and balance payable at settlement can be financed under a single limited recourse borrowing arrangement (LRBA).  This is also the case for off-the-plan purchases if the contract is to purchase a single title vacant block of land along with the construction of a house as a “package” on that land before settlement occurs.  The contractual arrangement is for the acquisition of land with a completed house on it and settlement occurs after the house construction is completed.