Bank the Strata Money

Money makes the (strata) world go around!

But, things are different for strata corporations (compared with people and other organisations) since strata corporations do not have the flexibility and choice individuals do about what to earn and spend and strata corporations do not have profit or social good objectives to work towards and guide finances like business and not-for-profit organisations.

Rather, strata corporation finances are a closed loop of setting budget for anticipated expenditure, collecting money from owners when needed and spending it appropriately.  At the end there should be (all things going well) nothing left over and no shortfall.  If there is that surplus or shortfall is taken into account in budgeting and collecting.

This is also the pattern for sinking or reserve funds but simply over a longer period so it’s less obvious than annual budgets (and often owners and managers do not hang around for long enough to recognise it).

When it goes wrong (usually because there’s a shortfall of funds) the following unpopular things become necessary.

• Planned activities like repairs, upgrades, legal actions, etc need to be deferred.  This delays things, can add to cost and, in the case of important repairs, can expose strata corporations, executives and managers to legal liabilities.
• Creditors don’t get paid on time.  This can also delay service or product delivery, incur late charges, spoil relations between strata corporations, managers and creditors, cause the strata corporation to have to change suppliers (or find cheaper suppliers).
• A special levy has to be raised to cover the shortfall.  This makes everyone unhappy (especially those on fixed incomes, like pensioners and investor owners).
• The next cycle’s levies (usually the next year) needs to be higher than they should to catch up the shortfall.  This reduces yields on investments, puts extra pressure on resident owners and makes the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.
• The money needs to be borrowed to cover the shortfall and repaid over time (effectively) converting a one off special levy to make up the shortfall into a special levy to repay the loan.  This also makes future levies higher than they would be: reducing yields on investments, putting extra pressure on resident owners and making the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.

So, a few things seem critically important to get this process right (or as right as possible).

Better Budgeting – Getting the estimated expenditure as right as possible is very important and this involves properly assessing what needs to be paid for (and when), estimating the likely cost, provisioning for some unknown but likely costs (like legal fees, emergency repairs, dispute costs, levy recover expenses, extra management time, etc) and having supporting data, material or reasoning to explaining the estimates.  

Owner Information – Explaining the strata corporation's financial position, the expected future expenditure, the underlying basis for those estimates, the need to raise the correct amounts and the consequences (short, medium and long term) of not doing so to owners when they have to decide about strata levies can make all the difference.  It’s inevitable that owners will want lower strata levies so this desire needs to be managed since no-one really wants to save a bit of money now if they have to pay more than the saved amount later.

Timely Strata Levy Collection – Collecting strata levies from owners in sync with the expenditure is the most critical aspect of effective financial management since the usual quarterly levy cycles mean that (on average) 25% of the strata corporation's annual funds should be paid at the beginning of each quarter and spent during those 91 days.  Strata levies that are unpaid into the second or third quarter can cause cash-flow pressure and if the number of owners in arrears is high enough, a cash-flow crisis.  If 10% of the owners don’t pay for 2 or three quarters the strata corporation is 7.5% behind cash-flow needs before the year is over.  

Getting Interest – Where there are levy arrears strata corporations should always insist on recovering interest because it’s a penalty on owners and will help ensure more timely payments in the future and it’s a bonus for the strata corporation.  That’s because in most cases the strata corporation does not suffer any penalty when it defers expenditure, uses reserves to pay for things or manages to avoid penalty interest from creditors.  So, in effect the strata corporation gets 110% of the levy when it will only have to pay 100% (and not more) of it’s bills.

Stopping Leakage – When a strata coporation has collected owners’ levies it needs to make sure the money is preserved so that there is no leakage (and ideally the money increase by the inflation rate).  Leakage can occur in many ways including bank charges, lower than market interest rates, poor management of investment funds, incurring late payment and other unnecessary charges, fines, making small (and apparently inconsequential) payments, etc. 

Covering Shortfalls – When things don’t go according the budget it’s important to deal with (and cover) the shortfalls.  Typically that occurs when something ends up costing more than expected, unpredictable things occur or there’s some legal or other action.  And, usually strata corporations cannot choose to defer or avoid the activity.  In such cases, unless the inevitable shortfall is covered the annual budget will run out before the year ends.  Using reserves is only a temporary fix as the reserves will need to be replaced anyway.  In those cases decisions need to be made about whether to have a special levy, borrow money or change plans and/or re-allocate expenditure … and made promptly.

Accurate Reporting – If the strata corporation's financial position is properly recorded and reported then everyone will know what has (and has not occurred), understand why and the impacts and be better placed to make better decisions in the future.  Unfortunately, most of the prescribed financial reporting is inadequate and often confuses owners since it is typically a mixture of cash and accrual accounting, does not explain cash-flows, does not involve a quasi-balance sheet and does not properly compare actuals to budgets or track things over multiple periods.  It’s no wonder owners, executives and managers aren’t making the best financial decisions in strata corporations when they get low quality reporting. 

Since it’s 2011 I’m sure we can do a lot better with strata scheme money than we’re doing and allow owners , executives and manager spend time worrying about more strategically important decisions in their strata corporations.

So, see you at the bank with the strata money.

Francesco ….

How many times do I need to tell you ?

Are you listening ???

The future of real estate is strata, community and other group titled property. 

No doubts !

No questions !

No arguments !

And, wherever you look at the data, it just proves it more (and more).

Recently information published by RP Data reveals the following interesting high density facts.

• 15 years ago only 25% of capital city home sales were units or apartments whilst today they account for about 35% of home sales
• Despite the proportion of unit and apartment sales moving down since 2005 (after the last significant property boom) from 2009, due to the First Home Owners Grant and sharply dropping interest rates, first home buyers returned to the market resulting in a rebound in demand for units and apartments
• The proportion of unit and apartment sales in the combined capital cities is, as you would expect, higher than across the rest of the nation
• As at August 2010 unit and apartment sales across the combined capitals accounted for 35% of sales compared to the 30% nationally
• In Sydney and Melbourne, there is an even greater proportion of unit and apartment sales. In August, unit and apartment sales in Sydney accounted for 43% of all dwelling sales and 37% in Melbourne

The following graph shows volumes of house versus unit and apartments sales since 2001.

Contact me if you want a full extract from the article.  And, get on the high density craze with me.

Francesco ….

Reckon Aussie real estate is Tough ? Try Somalia …

Over the last 24 months I haven’t stopped hearing about how tough the Australian real estate sector is these days - with interest rates up by 1-2%, property values stagnating, no finance for projects and a lack of new stock for development.

But, it’s really just whinging when you look at what’s happening elsewhere in the world.

For instance, in Somalia where the internal warfare for power over the last few years has resulted in some major real estate sector impacts like –

• more than 1.5 million people (out a 9.0 million population) have been forced to leave their homes
• over 51,000 people have adandoned their homes in the capital, Mogadishu, because of bombing and violence
• most displaced people have to live in makeshift camps in the safer rural areas
• there aren't too many buyers for real estate where the violence exists (that's a tough selling market !)
• the safer areas are controlled by rebel groups (and I'd call that a seller's market ...)

But despite that some property developers are thriving, making money and providing for the housing needs to many.

The Wall Street Journal has a short article on this phenomenon (here) which explains that developers  -

• are buying people’s abandoned homes in cities like Mogadishu for 20%02% of their former values in the hope of refurbishing them and re-selling them when the war ends
• are doing deals with rebel groups to develop forested and rural areas to build new housing
• importing building materisls and contract workers to build new housing
• building affordable housing at different price points for families and others who need somewhere new to live

It’s really amazing what’s going on and for once  (at least) I think it’s time to thank the developers for helping people with their housing needs when no-one else can.   

And, so what if they make a profit ?

See you in a war zone real estate market.

Francesco …

Investing in Strata

A recent article by Monique Sasson Wakelin in the SMH Domain called Investment: What’s best? A house or an apartment? Makes some interesting comments about the benefits of investing in apartments.


Monique focuses on capital growth, reveals that over the last five years some apartment prices in Sydney and Brisbane have grown faster than house prices.


The median price for Brisbane apartments grew by 42.5 per cent while houses grew by 38.2 per cent.


In Sydney, the median price house growth was 30.1 per cent, which was ahead of the median price apartment growth of just 10.5 per cent. But for when we look at inner Sydney apartments price growth was higher 33.6 per cent.


And, in Melbourne, prices growth for houses and apartments was almost dead even at 55.3 per cent and 54.4 per cent respectively.


She concludes that “With a budget of $800,000 or more for a city property, a house is usually the better option. At $700,000 - $800,000, depending on the location, either option will work. Under $700,000, an apartment is usually a better investment.”


I have to agree and add that from a rental income perspective I think strata investment is also better in most cases since –

• the yield is generally higher compared to similarly priced houses (since you buy less house amenity than apartment amenity for the money)
• the operating costs are lower since you own less building and open space
• the operating costs are shared with the other apartment owners lowering them further and supporting you when things are tight
• more ownership costs are likely to be tax deductible since they are included in administrative fund levies

So, see you at the next apartment auction.

Francesco …

Dogs Breakfast of Property Taxes

A recent article in SMH Domain by Michael McNamara called Property Taxes a Real Dog’s Breakfast says that “the taxation arrangements for purchasing and owning property in this country are an absolute dog's breakfast and governments seemingly aren't prepared to do anything about it”.

 

I agree completely and the article’s focus on the following issues.

• Stamp duty is a regressive tax that has increased to levels that make property transfer a significant cost.  Plus the rates of stamp duty vary in every state making for intra-state complications.
• The federal governments failure to take up the many recommendations in the Henry Review on Taxation as they relate to real estate.
• How poorly the NSW government has used section 94 contributions by developers to manage development.
• The manifest policy vacuum and in-action by the last few federal government.

I’d add a few more too, like …

• The use (and ending) of first home buyer incentives to stimulate parts of the property market.
• How land supply has been strangled forever in NSW.
• The failure to ensure that high and medium density targets are met in urban centres.
• The lengthy delays in uniform electronic land titling and electronic conveyancing initiatives. 

Not sure what to do next apart from complain.  But it’s important to realise these issues are hampering the real estate sector.


And, this dogs' breakfast of property taxes is a bit dry and chewy for me.

Francesco ….

Affordable Housing takes a Hit (to the benefit Strata Land)

Housing affordability is one of the most challenging issues facing those in charge of property development in Australia (and many other places).

And, housing affordability has taken a hit recently.

The housing affordability index dropped to the lowest level in 20 months during the June quarter as interest rate rises and price increases put real estate out of reach of first home buyers and the Housing Industry Association-Commonwealth Bank housing affordability index dropped 9.1 per cent to 108.3 in the June quarter from 118.8 in the March quarter.  This is the lowest its been since September 2008.

The affordability index factors in interest rates (which moved up twice in the June quarter to 4.5 per cent) along with household incomes and house prices.

Comparing the cities and states –

• Sydney affordability dropped by 9.1 per cent
• Victorian affordability dropped by 6.7 per cent
• Queensland affordability dropped by 7.4 per cent
• South Australian affordability dropped by 8.7 per cent
• Western Australian affordability dropped by 2.1 per cent
• Hobart affordability dropped by 2.4 per cent
• Canberra affordability rose by 6.6 per cent (as home prices fell 8.9 per cent)

Interestingly average monthly mortgage repayments in Sydney are $3430, and $3291 in Melbourne … that’s a lot of money compared to what we were all paying 18 months ago.

Anyway, despite the bad news about reduced housing affordability there is some good news for strata.

More expensive housing means that demand shifts to cheaper housing and cheaper housing is going to be strata title … leading to increased demand and  supply of strata apartments … resulting in more strata schemes, more lots, more owners, more managers, more suppliers and more high density rea estate business and social interactions.

See you in more affordable strata housing soon.

Francesco …

What makes for a good investment apartment ?

It’s obvious from research and anecdotal knowledge that strata apartments attract investors and that investor form a large stakeholder group in Strataland.

But what makes an apartment a good investment (as opposed to a good place to live) ?  Or are they the same thing ?

In a recent article in SMH Domain Carolyn Boyd wrote about Investor Tips for Units and identified the following things –

• Location of the apartment in relation to work, lifestyle and transport
• Amenities in the apartment and the building and nearby
• Large or small blocks (although she hedged on which is better)
• Outlook from the apartment
• The size of the sinking fund

Now, it’s hard to argue that these are all important but at the same time it’s not a sophisticated anaylsis.

So here are my 7 factors that will make an apartment potentially more attractive to most investors.

1.   Location – But location in relation to the things likely residents want.  The best suburbs and places are clearly going to get higher rents and lower vacancy rates but they will also cost more and therefore give a lower yield.  So location needs to be matched to the resident market.  Smaller inner city apartments need to close to professional work locations and low cost fun places since they will be occupied by white collar workers who spend their incomes.  2 and 3 bedroom suburban apartments need to be close to public transport for the couples who occupy them to get to  and from work cheaply and close to schools and day care facilities for the younger families they have.

2.  Useful space – The more space in the apartment the better but it also has to be useful.  A large corridor adds space but can’t be used so look for sizable and useable bedrooms, bathrooms, kitchens and living spaces (plus make sure the parking space can actually fit a normal car).

3.  Good quality fittings - Although everyone wants designer interiors in the real world for most people they would rather have a stove, dishwasher, taps, drains and lights that work all the time.  And, doors, windows and cupboards that open, close and store things properly.  Plus after years of tenant use only quality fittings are still functioning without needing regular repairs.

4.   Stable Strata Financial Affairs – Whilst lower strata operating costs are desirable for investors since they increase yields, it’s more important that strata operating costs are stable and vary only a little from year to year.  It’s no good making an extra $1,000 one year because strata levies are lowered only to have to pay $2,000 more (or worse) the next to make up the shortfall. 

5.  Simpler Buildings – The more complex features there are in a building the higher the operating costs and unless the rent is proportionately higher because of those features, investors will be worse off.  So the simpler buildings are best unless you can get higher than average rents for the extras.

6.  Good Strata & Property Management – Getting slightly lower strata levies or slightly higher rent is nice but if it comes at the risk of a crisis because of poor strata or property management the gains will be lost very quickly.  A strata problem that adds $500 to your next year’s levies will be 2-3 times the strata managers fees and not having a tenant for 2 weeks more than normal is a 4% revenue loss in that year. 

7.  Good Tennants – Obvious isn’t it !  Good tenants pay rent on time, stay longer, accept fair rent increases and look after the property.  And other tennants do the opposite – costing you money every time.  What makes a good tenant is debatable but at least investigate potential tenants properly to make the best decision you can.

What do you think ?  

Do you have others factors and/or do you disagree ?

Francesco …