Chapter 19:
Resort property
Much has been written about Resort Real Estate. In previous books and newsletters we have covered the subject in detail especially noting some of the dangers.
Buying property while on holidays has always been a no no. Do not do it, we have warned with good reason. So often a client has taken off to Queensland, or some other exotic place, and returned the proud owner of a home unit or the like in the area of their vacation.
IT CAN BE A DISASTER
Many may have done so and the investment proved a worthwhile one. For many others it has been a disaster.
Even two weeks in a location is insufficient time to carry out proper research to establish market value, market rent or any of up to twenty five factors that need to be considered before making a purchase. Nor does it give you the opportunity to consult with appropriate experts that you might normally rely on in your home environment.
THE TWO BEST EXAMPLES
In the past, the real estate markets in resort areas have been comparatively weak. But that is changing. Tourism both domestically and internationally is on the increase. Many of the resort areas of past years have become major destinations for migration. The best examples of this are the Gold Coast and the Sunshine Coast of Queensland. These two locations are attracting more permanent residents. The Gold Coast is now the sixth largest urban area in Australia.
The solid growth in population has given some strength to the real estate market in these areas which, when coupled with their tourism appeal, make investment a more worthy idea than it has been in earlier years when those markets were more tourism reliant. In recessions and soft property markets values in tourism reliant areas seem to be abnormally affected.
A property market where a large proportion of the real estate is made up of second homes, even third homes in some cases, or rental resort properties, softens quickly in any downturn. It becomes unnecessary or a burden to owners who may have problems in other areas of finance. It is usually the first to be sold. If it carries a mortgage it often becomes a liability that must be eliminated, sometimes at the bank’s insistence.
If the economy is in recession, many owners in resort areas attempt to sell, dumping more property on a market where buyers are scarce so exacerbating the problem and prices slump further.
We are not painting a pretty picture here, so investment property in resorts has to be well founded in terms of location, market strength and financing.
This is why we refer to the Gold Coast and Sunshine Coast as two areas that have now emerged as candidates for consideration.
The Gold Coast has that rare combination of urbanisation and tourism that does make it unique.
TOURISM DEPRECIATION ALLOWANCE
We have continually pointed out what a significant advantage the building depreciation allowance is in its application to the purchase of residential investment real estate by providing tax concessions that enhance after tax returns.
In 1987 the Government reduced the building depreciation allowance from 4% of construction cost to 2.5% per annum for standard residential property.
RESORT PROPERTY IS DIFFERENT
In 1979 the then Government introduced a short term travellers building accommodation allowance for new construction at 2.5% per annum.
Short term building accommodation is generally considered to be accommodation that is used overnight by tourists.
Since then the allowance has been varied up and down but since February 1992 sits at 4% and is claimable for an unlimited period, not just for forty or twenty five years as is the case with other property building allowances.
THE EMERGENCE OF STRATA TITLED RESORTS
The 4% allowance has a profound effect on after tax results. Accordingly many developers have seized the opportunities we are now seeing with the emergence of strata title resort apartments in holiday areas.
They usually consist of one, two or three bedroom apartments with swimming pools, gymnasiums, tennis courts and conference facilities, with on site management to market the accommodation and operate the resort.
Although income can be inconsistent, because of high and low season demand, income on an annual basis can be higher than the long term rental rate.
Outgoings are also higher because of the servicing costs such as maid service and greater wear and tear but overall the net income can be attractive. When overlaid with the higher 4% per annum building allowance, it can produce good after tax results.
When borrowed funds are employed, the annual holding cost can be extremely low, even against 100% borrowing.
TOURISM DEMAND - THE WILD CARD
The success of this type of venture will depend on many factors that are fairly obvious but the wild card is tourism demand, which can be volatile. Many people can justify this kind of investment by personal use during periods of low occupancy.
Although there are resort areas around Australia that have produced good incomes and growth over the years they are few. The emotional draw of luxury real estate in exotic locations can be strong but in most cases should be resisted.
The Sunshine Coast whilst it is attracting more permanent residents has another unusual advantage in that residential development is being restricted by Local Government who wish to place a ceiling on population growth. It too has excellent tourism appeal.
While we place the Gold Coast on top of the list as a resort investment area, that does not mean it does not have its risks. It is still subject to the same demand supply pressures like any other property market. It also has to cope with the large numbers of real estate marketing companies that fly large numbers of Southerners to the Coast, who spend one day inspecting one developers stock, making purchases based on little information and often at inflated prices.
The demand for housing on the Coast in recent years has been extraordinary and many developers have taken advantage of the publicity this phenomenon has received building large housing tracts to cater for this market.
As a result the market tends to be over supplied when affordability is week or the economy is slow. The investor should be wary of purchasing without a sound knowledge of the supply demand factors as well as the previously mentioned research that should be undertaken.
Notwithstanding these comments, the Gold Coast has matured as a strong growth area with an infrastructure that will help it to compete with the other major urban areas of Australia in the future.
The most significant change that has occurred in resort real estate is again that best kept secret, the building depreciation allowance.
There are a number of excellent resort areas within Australia that are worth a look. But do not be emotionally motivated if you wish to make a sound choice. Apply all the tests first. It will be worth the effort for worry free ownership in the future. Even then we often advocate to our clients the view that it may be prudent to defer consideration of resort style property until a solid base of standard residential property has been established in their portfolio.
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