Redrow Homes tell us the home trends likely to rule next year.

There’s a new season beginning in the world of interiors following the major design weeks in both London and Paris. Emma Brindley, Redrow’s head of interior design, brings us her annual round-up of the hottest home trends for 2019.

Emma has produced us with advice on how to really introduce these trends into your own home – from colours and materials to furniture and accessories. Just remember – you heard them here first!

Colours combine

Whether you’re looking to add richness and depth or keep your palette minimal and contemporary, there are new colours emerging across the spectrum.

Matte black will be 2019’s key colour and this will be reflected across all interiors trends while rich, earthy tones will also be prominent with baked reds, dusty orange and terracotta creating a beacon-like glow in your home.

A spectrum of colours from violet to maroon also add warmth, while shades of pink are a great perennial choice from brighter millennial pinks to apricot tints and blush hues.

Yellow is continuing to trend with tones as diverse as mustard and acid, while blues in many shades from vibrant cobalt to pastel blue are also popular choices.

Bright or unusual colour pairings are also coming to the forefront, favoured by designers in the form of bold geometric patterns.

Trending textures

Once you’ve chosen your colour scheme, it’s time to look at the key furniture and accessory trends that will take you into the new season and beyond.

Materials and textures range from raw and rustic to smooth and refined, although most are still heavily influenced by the beauty of the natural world.

If you’re a fan of using sustainable materials then you’ll enjoy the continuing trend for natural fibres and woods.

We’re seeing bamboo leaves and mango wood in tabletops and other decorative pieces, while cork, wicker and woven plant fibres such as seagrass will be everywhere from kitchens, chairs and room dividers to planters and lighting.

Natural greenery will continue to be a key trend and the emphasis will be on patterned foliage.

Careful craftsmanship is very important to 2019 interiors and the exquisite imperfections of raw wood should be celebrated in both large items of furniture and smaller accessories.

You could also look to introduce textured and tactile elements with organic folds, creases and curved edges – think accessories made with folded paper, card or wood.

Continuing the theme of rich texture, velvet is here to stay and an ever popular choice for chairs, stools and cushions.

Materially different

Stone and crystals will come through in a range of surprising pieces, while frosted, opaque, ombré and ‘oily’ effect surfaces will also provide a soothing mood for interiors.

For example, milky glass and frosting will be seen in accessories such as vases and bowls.

Terrazzo, a composite material created through setting marble, quartz, granite or glass chips within concrete, is going to be hugely popular for flooring and wall treatments, particularly using colourful speckles.

Likely to be similarly popular is the trend for marbling and moulded recycled plastics that are playful in style, with flecks of colour being layered together in bold, simple forms.

Metallics are here to stay with brass and gold remaining prominent, while soft silver also emerges to create a look that’s fresh and sleek.

For more interiors and trends advice, follow @redrowhomes on Instagram or Redrow Homes on Pinterest. Redrow is creating new homes at more than 130 locations across England and Wales. To find your nearest development visit Redrow.

The world of real estate has changed drastically since the turn of the century.

Back then, property investment as a wealth creation strategy was really only in its infancy. Today more and more Australians are interested in property. Real Estate Agent

Over that time the role of real estate agents has changed.

In the past, agents held much more power.

They have access to data such as past property sales and local values, as well as details of properties for sale.

Remember back then agents usually just advertised listings in newspapers and their shop windows.

Within a few short years, property listing portals became common place and that meant  the balance of power changed with buyers having easy access to data.

Also, the days of agents driving prospective buyers to properties soon came to be a relic of a bygone era.

So, with so much change in such a short period of time, what does the next decade herald for the real estate sector?

1. Agent value

While there is no doubt that the role of sales agents has changed dramatically that doesn’t mean that an agent’s intrinsic value in a transaction has disappeared. 

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You see, the main value that selling agents have always brought to the table is their ability to negotiate between the seller and the buyer.

Because they are not emotionally attached to the property like sellers are, they are able to suggest a price that both parties are happy with and bring a protracted negotiation to a conclusion.

Whereas, left to their own devices, private sellers generally struggle to accept that buyers don’t view their property as a castle like they do.

While agents will communicate with both buyers and sellers differently in the future, for example social media, videos and virtual tours, I believe  a good agent will continue to help both buyers and sellers achieve the results  they desire.

2. Cut-price commissions

Over the past decade or more, the era of cut-price sales commissions has entered the real estate industry.

We’ve seen agencies like Go Gecko and now Purple Bricks set up shop offering a reduced sales commission for a reduced level of service.

There will always be sellers who are motivated by price and this means these types of agencies will likely always be around.

But remember the old saying: prices what you pay – value is what you get!

House For Sale Buyer Agent Investor Buy


You see…the cheapest agent is the one who gets you the best price, not the one with the lowest commission and who likely works on a quantity over quality model.

Sellers loose out in a number of ways.

I’ve found these cut-price agents are less motivated to get their vendors the top price.

And many of these cut-price fees include a non-refundable levy that must be paid regardless of whether they sell the property or not.

That is contrary to the standard commission structure that is only paid when a successful sale has been completed.

At the end of the day, while cut-price agencies might grow in number because of technological advances, most vendors that use them will probably end up with a cut-price result.

3. Free data

One of the biggest changes in the property investment space in the past 20 years has been the rise and rise of data.

When I first started out, there was very little available to help investors research the various property markets.

Today, there is more “free” online data than you can poke a stick at, but much of it is inaccurate.

It’s too easy to stumble into the wrong information.

Take the online property “valuation” reports – these are generally inaccurate (as often on the upside as on they are on the downside) as they have no idea of the condition of the property in question.

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Similarly, sellers can be misled by those “find the best agent in your area” websites, which make their money, and therefore we can assume their recommendations, based on commissions paid to them by agents looking for listings.

While the volume of available free data has skyrocketed one thing that hasn’t changed much is the ability to analyse it correctly.

Most buyers lack the expertise to understand what the numbers in front of them are really saying and how best to interpret them.

To be blunt: they lack the perspective to know what’s important and what’s not.

This is most obvious when lists of “best performing” suburbs are released, which some people confuse with signposts of where they should invest next.

My strategy is about buying investment-grade properties that will  continually outperform the averages, that doesn’t  change to suit the short-term changes of the market.

I only invest in the type of property and location that has “ always worked” rather than looking for what “works now” – you know the next hotspot or get rich quick scheme.

My research and that of our team at Metropole involves analysing leading indicators- signs of what will happen in the future, rather than the type of content freely available on the internet which tend to be lagging indicators – a record of what’s already happened.

So what’s ahead…

It is no secret that we’re in an age of rapid technological change that is having a significant impact on the types of jobs that people do.

The continual evolution of the internet, social media and technology will clearly cause disruption in many industries, including the property industry.

  • Your FutureBuyers will have more power being have to search and research properties and loans  online.
  • More buyers will use buyers agents to protect their interests, just like vendors have selling agents on their side
  • Electronic conveyancing is now happening through the Pexa portal with close to 1,700,000 property transactions having now been completed through this E-conveyancing network.
  •  How we handle our money and online banking is going to evolve. The day of cheques being written for deposits will soon disappear and it is possible that Bitcoin will play a role in future property transactions

However I don’t see real estate agents jobs being replaced by artificial intelligence any time soon.

And I’m not even going to go down the route of making a joke about the level of real estate agents intelligence!

You see…when it comes to real estate I believe that the sector will evolve and change but that the buying and selling of property will always remain a skillset that requires the expertise and knowledge of experienced professionals.

WHAT CAN YOU DO TO STAY AHEAD?

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions. 

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If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

What goes up must come down, which seems to be  true of our property markets at present.

Now that doesn’t mean that they’ll come down with a bang – but rather a whimper in some locations and just changing down a gear in others.

With the Sydney and Melbourne property markets having experienced significant price growth over the past five years, property investors are not guaranteed of ongoing strong growth in the next few years.  Melbourne property skyline

But that’s not necessary a bad thing.

Why do I say that?

Well, a rising tide lifts all ships – and one of the worst things that can happen to a beginning investor is to get it right first time – it gives uneducated investors an over-inflated sense of their own ability.

Some will get caught out over the next few years, while those following a sound investment strategy will win the day and will also produce solid results regardless of the state of the market.

In fact, there are multiple property markets around Australia, defined by geographic location, price point and type of property, which are all currently at different stages of the property cycle.

So let’s look at 9 ways you can outperform a slow or mediocre market.

1. Outperform the averages

Here’s the thing: you are not buying the market, but a particular property in the market.

When I say that I mean that sophisticated investors buy properties that will outperform the averages.

And those types of properties are ones that I call “investment grade.

You know…the ones that offer a level of scarcity, in locations with multiple growth drivers and that will always be in strong demand from owner-occupiers, who drive up prices because they buy emotionally.

2. Don’t try to outsmart the market 
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Too many novice investors try to outsmart the market by buying in areas they “believe” will perform well at some stage in the future.

In my mind this is speculation, not investment.

That’s because these locations are often the more affordable ones on the outskirts of the city, which they mistakenly think will one day be worth millions.

But they’re wrong.

While all segments of the market tend to do well in an upswing – unless there’s an oversupply – during softer market conditions it is these more affordable areas that are most likely to suffer, especially as interest rates increase.

That’s because these are likely to be first home buyer or blue collar suburbs which are more inters rate sensitive and where wages are going up by less than the CPI, if at all.

3. Inner- and middle-ring wins the race

In my experience, it is the inner- and middle-ring suburbs of our major capital cities that remain resilient in the face of soft market conditions.

That’s because there is always strong demand to live in these areas by people who have the financial means to do so.

As long as they have good jobs, and there’s no sign that our employment sector is wavering, they will desire to upgrade to a more premier or gentrifying suburb that usually have many lifestyle attributes.

And they’re prepared to pay to achieve their property goals.

4. Free advice isn’t free

Everyone likes free stuff, don’t they? light-bulb-with-drawing-graph_1232-2775

But free investment advice is normally never free – in fact, it often comes with a hefty learning fee.

In a market upswing, you’ll see many such “advisers” offering insider intel on particular properties.

What they don’t tell you is that they’re usually getting paid a commission to spruik it to you.

When a market is flat, that is the time to get good solid advice from people who have invested successfully in multiple market cycles.

Not someone who happened to make some money during the latest Sydney boom because everyone did, including the investors who didn’t know what they were doing.

5. The horizon matters

I’ve said it before, growth financial independence though property investment takes time – a long time.

In fact, the power of compounding only really starts to show its true colours after about 10 or more years.

That’s why it’s so important to keep a long-term perspective and follow a long term investment strategy that will help you reach your goals.

It’s equally important that you develop the ability to ignore short-term market fluctuations.

Just because a market is experiencing a fallow patch doesn’t mean you should sell up before you “lose it all”.

No – what you should do is ignore it and keep your eyes firmly on the horizon, which evens almost everything out in the end.

6. How do you select an investment grade property?

Over my decades of investing successfully, I’ve developed and fine tuned strategies which ensure that I only buy investment grade properties for myself and we use the same strategies for our clients at Metropole.

These are called my top-down and 6 Stranded Strategic approaches and follows a series of steps that include:

1. Buying at the right stage of the property cycle. I look at the big picture – how the economy is performing and where we are in the property cycle.

2. Then I look for the right state in which to invest – one that will deliver future economic growth which will lead to jobs growth and population growth . 17034015_l

3. Then within that state, I look for the right suburb – one that has a long history of outperforming the averages. I’ve found some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period. And one that is likely to continue to outperform because of multiple growth drivers.  Obviously those are the suburbs I target.

4. Once my research shows me the suburb to explore, I then look for the right location within that suburb.

5. Then within that location I look for the right property, using my 6 Stranded Strategic Approach. And finally I look for …

6. The right price. I’m not looking for a “cheap” property (there will always be cheap properties around in secondary locations). I’m looking for the right property at a good price.

To ensure I buy a property that will outperform the market averages I also use a 6 Stranded Strategic Approach, which is a property that: 

1. Appeals to owner occupiers. Not that they should plan to sell their property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish. location map house suburb area find

2. Below intrinsic value – that’s why I would avoid new and off-the-plan properties which come at a premium price.

3. With a high land to asset ratio – that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.

4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area as mentioned above.

5. With a twist – something unique, or special, different or scarce about the property, and finally;

6. Where you can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.

7. Location is non-negotiable

One of the most interesting things about successful property investment is that it doesn’t have to be exciting.

What I mean by that is that there are fundamentals that are tried, true and tested and that you can rely on to deliver capital growth.

One of the most important factors is location because it will have a major influence on your property’s performance.

As up to 80% of your property’s performance will be determined by its location , why would you even try to pick the hotspot the “next” up and coming hot spot, when there are a large number of capital city suburbs that continue to outperform the averages?

Never compromise on location – it really is as simple as that.

8. Know your finances economy-property-market-grow-wealth-house-dream-first-home

Far too many Australians become investors by chance and don’t have the correct ownership or finance structures to underpin their portfolios.

Instead, smart investors begin their investment journey with their eyes open and with a clear financial structure to see them through the ups and downs of market cycles.

One of their most important tools is a financial buffer, perhaps via a line of credit, which can keep their cash flow flowing during any rainy days they may encounter during their journey.

9. Never set and forget 
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Another bugbear that I have is the term “set and forget”.

Successful property investment is never something that you should just forget about.

In fact, the very best investors regularly review and assess their portfolios annually to evaluate its financial performance.

One question that I regularly suggest you ask yourself is: “If I knew then what I know now, would I have bought that property?”

If the answer is no then it may be time to jettison any under-performing assets so you can buy investment grade ones instead.

There’s no point hanging on to a property that is dragging your financial future down.

The bottom line Property Investment Checklist 300x199 300x199

By now I hope you’ve realised that successful property investment doesn’t really have much to do with the market at all.

By following a proven strategy that helps you identify investment grade properties in inner- and middle-ring city suburbs you can regularly outperform the averages.

That way you’re not relying on a market upswing to make money because your well-selected properties will be doing that for you – even when the wider market is struggling.

Banks need to be thoroughly prepared for AASB 9, with proposed changes to negative gearing set to have a material impact on loss provisioning and profitability, according to RiskWise Property Research.

Accounting Mechanism With Gears

Under the new financial instruments, accounting standard banks will need to make provisions under an ‘expected credit loss’ (ECL) model, rather than the incurred loss models used previously.

Where banks identified an increase in credit risk, a loss allowance must be recognised in respect of a residential mortgage before it became past due.

The ECL impairment model must incorporate detailed macro-economic modelling and consideration of multiple forward-looking scenarios.

For residential lending, mortgage books need to be better analysed and in more detail across each portfolio.

Changes in tax legislation to create further challenges.

Wargent Advisory CEO Pete Wargent highlighted the potential impact of changes to negative gearing and capital gains tax legislation, if the ALP succeeds at the next Federal election, as one possible challenge for loss provisioning. Taxes

“Extensive RiskWise modelling shows that, nationally, dwelling prices would fall by 9 to 12 per cent should the proposed changes to tax legislation be voted through and, under AASB 9, banks will need to consider such forward-looking information in their models,” Mr Wargent said.

“This could soon become the base-case scenario as the Federal election approaches and banks need to prepare accordingly.

In addition to the obvious impact on each of the loan portfolios, banks will need to accurately assess the risks associated with future lending decisions.”

Regional modelling essential

Mr Wargent said although the proposed changes to tax legislation would be applied nationally, there would be meaningful variations in performance at the regional level. 

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“RiskWise models show that, by SA4 region and dwelling type, there will be significantly different impacts, and banks must use similarly detailed models or risk failing to comply with the standard,” he said.

“Even at the regional level the findings were often markedly different for houses and units, with material impacts in certain areas of highly concentrated rental stock that isn’t family-appropriate.”

Weaker housing market conditions already reflected a deterioration in buyer sentiment.

Our models have also assessed potential impacts on the price of new dwellings and consequently loss provisioning for construction loans needs to be updated where the risk of default increases.

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All these changes require lenders to manage this process in a thorough and timely manner to assess the impact on each of the SA4s regions.

External auditors will need to review ECL models and should work jointly with independent property research companies to ensure that bank models meet the requirements of AASB 9.

Due to the complexity and inherent uncertainties, the impacts should be reviewed regularly, potentially leading to significant adjustments.

Banks may not have adequate internal models for this complex scenario analysis.

If they don’t act now the impact could potentially be material to financial reporting and, in turn, to share prices.

Since the introduction of the General Permitted Development Order (GPDO) in 2015, the popularity of commercial to residential conversions has increased dramatically and with parliament granting permissions, meaning that more and more offices (and warehouses up to 500M2) can be repurposed in this way, it’s imperative that those carrying out the works know exactly what’s involved before commencing.

So, let’s have a look at the subject in more detail.

How are commercial to residential conversions funded?

When considering the financial clout needed to fund this kind of building work, it is most prudent to go heavy on the cost in your appraisal, as conversions of this kind can often come with unexpected issues. This is a particularly important aspect to focus on, as the way development conversions are funded has witnessed a changed since the amendment to the statutory planning laws was made some three years ago.

Before its implementation, the overwhelming majority of projects of this kind were funded by straight short-term development finance on vacant commercial properties where work commenced immediately. However, post GPDO 2015 some developers are choosing a hybrid of traditional commercial finance and development finance, all wrapped up as one arrangement.

So prevalent is this kind of proposal now, that development brokers have specific financial products that address this very specific kind of need, allowing many more developers to take on this kind of project.

What are the resale yields of commercial to residential conversions?

The viability of an office or warehouse to residential conversion should most certainly not be taken as a given and there are a number of variables that will determine whether it is a prudent job to take or not. The locality of project is one important aspect, as well as the state of the local buy to let market, so having in depth knowledge of both is key to making an informed decision.

Sure, homes designed for multiple occupancy do provide higher yields, but homework must be done to ensure that the numbers add up.

Do ‘permitted development’ commercial to residential conversions need planning permission?

One of the beauties of the current permitted development laws is that, as the title would suggest, planning permission is not required. However, this will not always apply in some local authorities that are focussed on the protection of the availability of office space, so it’s important to check the facts surround the particular property with a planning consultant you’re proposing to develop before diving in.

Many Agricultural buildings also don’t require planning permission for residential conversions, but considerations such as site contamination that can occur in certain commercial operations must be determined to ensure suitability for development.

Also important to note is that planning permission is required to changing the style of windows, move doorways and apply cladding. Complying with maximum local acoustic levels during the development is also important.

Another important consideration which planners will look is flood risk. If the Property is at risk your permitted development rights may not translate into a prior approval which is necessary to obtain from planners.

If you don’t want your commercial to residential conversion to hit possible snags, all of the above (and more besides) have to be taken into consideration.

Why do commercial properties make such good investment opportunities?

Despite the complex nature of determining viability for certain commercial properties to be converted for residential use, this kind of project can potentially offer extremely high yields for investors and there are a number reasons for that:

  • The commercial property market is quite saturated and as a result, values tend to be lower than residential ones
  • The majority of commercial sites tend to be in desirable areas that link well with transport and local amenities – a great selling point for residential homes
  • Commercial properties are often left vacant, meaning that the owner is not earning from it and is sometimes more willing to offer it at more reasonable price to get it sold quickly
  • Business premises will invariably need to be completely refitted on the inside, offering the freedom to convert into high quality homes with a higher ROI
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Source: Royal Institution of Chartered Surveyors, “Q4 2017: UK Commercial Property Market Survey”, 2018.

Exactly how do ‘Permitted Development’ rights apply?

Firstly, it’s important to understand that legislation of this kind is regularly amended and keeping yourself abreast of the amendments is a shrewd move for any would be developer.

Secondly, it’s so important to grasp that a permitted development property only ‘permits’ for a change of use and not for the actually conversion itself, which will have to be applied for separately. So, don’t enter into a project until you’re absolutely sure that all permissions have been granted or you could end up in a very smart, purpose built residential property that no one is allowed to live in.

In Summary

What this article set out to do wasn’t to put developers off of the idea of commercial to residential conversions, rather it was to highlight the factors that many miss when making their grand plans. What might seem like doom mongering now, would seem like very valuable and insightful advice for someone who is in the midst of a job they are invested in, but can’t proceed with because of a lack of due consideration when they started.

We hope that we have helped in some way to fill in any blanks you might have had on the subject and that your commercial to residential project goes completely as planned!


Property flipping is an enticing strategy for new and experienced investors alike. ‘Flipping’, ‘Buy-to-Sell’ and ‘Trading’ are all phrases used to describe the same strategy. Buy-to-Sell is a good one to use as it describes the activity perfectly; properties are purchased with the intention of selling on at a profit, predominantly after programme of refurbishment.

So why might you want to flip?

Trading property is a relatively short-term cash flow strategy and something that can generate what we like to call ‘chunky money’. Successfully executed flips can make tens of thousands of pounds from one deal which could then be used to fund income producing assets such as a rental portfolio. Traders often flip property through a Limited Company and pay corporation tax on company profit which can be more appealing than the rate of income tax. It is important to note that this article is not intended to give you financial advice so you should check with a qualified professional before making investment decisions.
So how do you ensure that your flip is a success? Well, there are some key things to consider before jumping straight in with both feet. Flipping can be a lucrative and repeatable strategy but only if certain basic conditions are met.

Three things to research and explore before committing to a purchase are location, property type and circumstance:

Location

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When thinking about the place or location to flip properties, it is important to think about who is going to purchase the property from you. What kind of things do they want? A garden, off road parking and an ensuite may all be on the wish list but if it’s in a high crime neighbourhood then that might not be the best project for you to choose. If you are going to flip a three bed semi-detached house and are aiming to attract first time or second time buyers, then amenities and infrastructure are going to be just as important as the actual property itself.

Think about ease of access to get to work or school. Is the property accessible by road, rail or bus, but without being right on the side of a noisy motorway? Location is key to getting a timely sale. A property in an area that could be perceived to be undesirable will obviously stick longer than the worst house in the best street which has been brought up to standard.

Property type

A two or three bed house will have universal appeal to a wide variety of buyers, whereas a seventh floor flat might be more niche. This could affect the amount of time you are holding the property, which in turn will affect your bottom line when you take into account utilities (council tax, water, electricity, gas, insurance). Bungalows can also be a good type to flip if you can add genuine value through refurbishment or extension. Often your buyer will want a property that they can move straight into rather than do up over time.

Circumstance

The perfect storm for flipping property is when someone needs to sell urgently and you are in a position to act quickly. Fast transactions help not only you as a trader to secure your next project without a long chain, but also helps the vendor to move a property on and reduce their outgoings. Often, there is value to be added to properties that come to the market after someone has died, the owner is facing repossession or the property has been tenanted for a long period of time and not maintained. Competition can be fierce for these deals when they first come to market so don’t be tempted to get into a bidding war with people who are happy to overpay because they are a) less experienced and want less profit, b) intending to move into it themselves or c) fools that haven’t done their costings correctly.

Provided that the property requires a programme of updating or modernisation, profits can be achieved if you can secure the property at the right price, manage the refurb well and achieve a good sale value. If you can’t negotiate a good price, refurb to the required standard within budget and achieve the right ROI; walk away. There will always be other properties.

How to flip a property

Before committing to a purchase, it is vital that you have done your due diligence on the projected sale price and have been realistic with the price you will achieve. It would be foolish to assume that you’ll get £30k over and above other sold comparables (comps) just because you’re a nice person. You must compare apples with apples and you can use Rightmove.co.uk sold prices to check the sale price achieved recently by other properties nearby that exactly match what yours will be like when completed.

Once you know the end value, you should then work out the cost of the refurb by getting multiple quotes. You can either instruct a main contractor to do the whole project, or project manage individual tradespeople yourself. The latter is the more time intensive option but more cost-effective way. Don’t forget to include professional fees, stamp duty, buying and selling costs and utilities into your cost of sales, plus the interest you pay on any finance you require to fund the purchase and works needed.

Traders will often look for a minimum return on investment (ROI) of 20% when considering a Buy-to-Sell project. You should also assess the opportunity cost of proceeding with one property over another. It is surprising how many new traders will buy a property, do the works and then hope for a profit at the end. It is this kind of ‘finger in the air’ flipping that can lead to unrealistic expectations, overspend and upset. To increase certainty in your business you will need to be specific with your figures, pleasant with tradespeople and unemotional with your decisions. Only once you know all the costs can you work out how much you can offer for the property to make your required ROI.

Conclusion

Every flip is different but the foundations which underpin how to maximise the profit in every deal remain the same:

  • Buy for ‘market value’, or less!
  • Add value or complete the refurb to the highest standard it warrants, given the relative cost and profit potential.
  • Sell it for the best price achievable (but don’t be greedy!).
  • Don’t pay any more tax than you have to.

Now, this is an over simplified list of actions and you may be thinking, ‘well anyone can do that’ and quite honestly, you’d be right. The truth is anyone can; the reality is most people don’t. The majority of people in the world stick to one income stream – usually a job – and don’t give flipping property a second thought.

If you’re reading this article though, you’re probably on the path to flipping greatness and we wish you every success.

Tasha & Karen

Tasha & Karen

Buy-To-Sell Property Experts at Progressive Property

Tasha and Karen have been trading (buy-to-sell) properties for well over a decade and have a multi-million pound portfolio of single lets, high-end HMOs and holiday lets. They started out by literally having a go; there was no training available at the time so it was a matter of teaching themselves as they went along. Although this is not the way they would recommend that you start, it has given them the experience and knowledge needed to understand what is actually involved in a flip. They love to work with people who are motivated and want to make a real difference to their lives, which is why they have partnered with
Progressive Property to run their “Buy To Sell Bootcamp” which is a 2 day intensive course teaching others how they too can change their lives through property.
Tasha & Karen

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Analyzing The Office SectorDaniel Ismail, Analyst at Green Street Advisors, joined us on the podcast to discuss what is currently happening in the office sector.

Daniel is the lead analyst for Green Street’s office team and has been with the firm for two years. His research contributions include initiating coverage of JBG Smith (the spinoff of Vornado’s D.C. assets), deep dives into West Coast office market health, and extensive work on Gateway vs. Non-Gateway markets and office leasing economics.

Daniel started his career with Green Street as a research intern during graduate school. He has a strong background in fundamental research, asset allocation, commercial real estate, and investment manager due diligence. Prior to joining Green Street in 2016, Daniel was an investment analyst for four years at the Automobile Club of Southern California, where he covered equity and fixed income investments for insurance, pension, and corporate portfolios.

Daniel earned an MBA from the Anderson School of Management at the University of California, Los Angeles. He graduated with a Bachelor of Arts in Business Administration and a concentration in Accounting and Finance from California State University, Fullerton. Daniel is a CFA Charterholder.

Daniel’s Links

To learn more about the research done over at Green Street Advisors, you are invited to check out The Green Street Blog and to sign up for Green Street’s Newsletter.

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Transcript

Tyler Stewart – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as the basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing please consult your advisors. Hey listeners, Tyler here, before we start today’s episode I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free, six-week course on the fundamentals behind commercial real estate investing. That’s realcrowduniversity.com, thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – Tyler, I’m good. And guess what, it wasn’t us that started talking about the weather today.

Tyler Stewart – No, it wasn’t.

Adam Hooper – It was not.

Tyler Stewart – It was Danny Ismail, from Green Street Advisors. He phoned us in from Newport Beach where apparently it wasn’t as perfect as it usually is in Newport Beach. So we kind of took pride in our Portland sunshine today.

Adam Hooper – We did. We did. Really technical conversation today. A lot of really good information. Danny with Green Street, they are a real estate analysis firm that covers private markets, public markets, everything in between, so he’s got a really unique insight into what makes the current real estate markets tick.

Tyler Stewart – Yeah, they’re a research company and Danny does a lot of the research in the office sector. We got the information straight from the source.

Adam Hooper – Yeah. So again, forewarned it does get a little bit technical, up front, but I think there’s a lot of really good information in there in the distinctions of how the public markets work, how valuations there might inform the private markets. We took a detour into talking a little bit about office, again that’s Danny’s specialty is the office market. So we talked about some trends that they’re seeing there, gentrification. We talked a little bit some of their favorite markets going forward, some markets that have been maybe a little bit more you know restricted in growth. And he gave us the forecast for kind of where he sees growth going forward in 2019 and beyond.

Tyler Stewart – All together just a great episode from the analyst really giving you the nuts and bolts of the research.

Adam Hooper – Yeah, and I guess I would request listeners out there if you have questions or comments or anything you want us to followup on? Is this too technical? Do you like it technical, let us know? Send us an email to podcast@realcrowd.com. We love that feedback. Always again, ratings, reviews, iTunes, Google Play, SoundClound, wherever you listen to us. So with that Tyler I think we should probably get to it.

RealCrowd – This podcast is brought to you buy RealCrowd. The leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd, invest smartly.

Adam Hooper – Well Danny, thanks for joining us today. From Green Street, which office are you located in right now?

Danny Ismail – We have three offices at Green Street and I’m in the Newport Beach office.

Adam Hooper – Ah nice.

Danny Ismail – Which normally has a pretty nice view but today’s a bit cloudy. I always feel like a jerk complaining about, you know, the weather in Southern California. But when we do get a foggy day, I do you know, miss the beach and miss the views a little bit.

Adam Hooper – We’ll relish in our sunshine here in Portland then. We’ll take it. So why don’t you tell us a little bit before we get into some more macro trends on the where we at in real estate, with the cycle and then specifically want to dig in on some conversation around the office market today. Can I take us a little bit back and how did you get in with Green Street? And a little bit about your background and how you got into the real estate game before we dig in?

Danny Ismail – Yeah, so in a prior life I was working in investment management. I was doing portfolio management for insurance and pension assets. Really high-level asset allocation type work for a few years. But while I was getting my Masters at UCLA I came across a posting by Green Street for an associate role and the more I dug into real estate and publicly traded REITs, the more I realized it made a good fit with my interests and with my experience in investment analysis. So joined Green Street shortly thereafter and have been covering the office sector for a few years and most recently made of head of the office sector and am leading the research on that sector.

Adam Hooper – Nice. And tell us a little bit for our listeners out there who may or may not have heard of Green Street, why don’t you give us just a quick overview of what Green Street does, what services you guys provide to the industry?

Danny Ismail – So Green Street advises as a commercial real estate research firm founded over 30 years ago with three main product lines. The first is our real estate analytics product which is essentially a platform that helps private market investors answer the question of does New York Office make a better investment than San Francisco apartments? So helping to answer those really high-level strategic questions. The second is probably what we’re best known for is our sector in REIT research which I’m a part of. So we cover over 120 publicly traded REITs across the U.S. and Europe. And we have the unique position of analyzing both the public and private market real estate markets. The third is our advisory group which is a consulting group which helps a variety of companies solve problems, across the world, solve real estate projects. Such as a retailer thinking about their real estate footprint or whether a company should convert into a REIT.

Adam Hooper – Got it, so you guys really have a cross section of all different areas of the industry right? Whether it’s all the way down to private to public and everywhere in between.

Danny Ismail – Yeah, I mean it’s really covering the entire gambit of commercial real estate. One important note is we’re an independent shop so we don’t have a brokerage or investment banking arms. So you know we can truly provide objective and unbiased advice and actual insight to our clients.

Adam Hooper – Good, and I’d be curious as we talked about this a little bit you know all the deals that are on RealCrowd are, and most in the space generally, are going to be private deals. So not a lot of either, I’ve seen a couple non-traded REITs, nothing public REIT that I know of in this space so I’d think it’d be curious to kind of get as we talk through these things kind of compare and contrast the differences which you might see in the public market versus how that would compare to what we might see more typically in the private markets as we kind of go through the conversation today. So we know Green Street obviously again for the research side and some of the stuff on the private markets, but maybe comparing and contrasting and let’s start with that. Between public and private do those market cycles behave identical or is there a lag of one or the other? Is one leading the other? Just broad market cycles, how do public and private markets tend to interact in the real estate space?

Danny Ismail – That’s an interesting question principally given how publicly traded REITs are traded today. So on average the publicly traded REIT market is trading at, call it a high, single-digit to their underlying property values. So essentially REIT investors are pretty skeptical about commercial real estate valuations, essentially saying they’re too high. And historically REIT investors have gotten this right. So a big premium has generally, in the REIT world, is generally predictive of property appreciation and the opposite is true there. So discounts have generally been predictive of property deprecation in the private markets. This linkage has broken down a bit in the last few years so REIT investors has been bearish for a few years now and although what we’re seeing is property appreciation hasn’t slowed down over that time period, values have been going down broadly. A few sectors where that’s been true but across the private real estate market values have been relatively flat for the last few years. And in REITs those discounts aren’t equal across all sectors so while the public market discounts most REITs, apartments, office, and retail trade at the larger discounts relative to their private market values. Interesting fact is that New York Office REITS trade up the biggest discounts since the global financial crisis which you wouldn’t really get that sense if you look at the private market for New York Office. Manufactured home parts and some of the niche sectors traded some pretty big premiums. And one of the main takeaways when we observe this you know this is a prime time

Danny Ismail – for a lot of the public guys to be selling their assets in the private market. So as I mentioned in general the public REITs are trading at a near double-digit discount to that underlying real estate it creates a good opportunity for these public traded REITs to sell at 100 cents on the dollar in the private market and either buy back their shares or retire debt at the company level. Fortunately not too many people are taking advantage of that today but it’s a dynamic that’s been in effect for the last few years.

Adam Hooper – Interesting. And so then investors that are looking at investing or acquiring assets in the private market those values are, well let me go a different way to question this. Do discount to REIT valuations drive private-market value or does private-market value drive the REIT valuations? Or are they completely uncorrelated?

Danny Ismail – Well eventually they should be correlated. Because the REIT is essentially a look-through or a pass-through to the private market. And generally as I mentioned earlier that the public REIT investor simply because you know you’re trading a lot quicker, you’re getting daily pricing of essentially that real estate it should be predictive of property pricing. But that linkage just hasn’t happened and when it will? That’s hard to say, as I mentioned New York Office has been trading at double-digit type discounts for the last two, three years now in the public market. In the private market you still see a healthy bid for those assets, you still see skinny cap rates and some pretty big trades. So eventually the public market is saying that commercial real estate valuations are too high though what it’ll take on the private market side to see it catch up to the public market is just hard to say.

Adam Hooper – And are there any data points or trends or indicators that you guys are watching that would suggest a change in either of those evaluation metrics?

Danny Ismail – On my end, on the Office side, so the Office sector, particularly gateway Office companies have been trading at the widest discounts in the public REIT land. I think if you were to see some of the bigger companies go away and really take advantage of that disparity between the public and private market pricing it could have a bit of a collapse in terms of that NAV cap that if public market investors thought that the REITs were serious about closing that gap that maybe you can have a bit of that disparity shrinking. Though what that catalyst will ultimately be is pretty hard to say. I mean we’re in fairly unique times in the economy given we’ve had ultra-low interest rates for a better part of this cycle. The cycle’s gone on longer than I think most people would have predicted. So it’s a pretty unique time that if you were to have looked back three years ago you would have said oh, well it looks like the public market is getting ahead of the private market, but we haven’t seen that convergence happen.

Adam Hooper – So we recently had David Pascale come on and we were talking about federal funds rate and how some of those key you know lending rates affect real estate and potentially going into an inflationary environment here. How did the public markets react differently than a private market would in an inflationary environment or an environment where you have rising cost-of-capital, essentially?

Danny Ismail – Green Street, you know we have a tool that we combined both the signals provided by the public REIT market as well as the corporate bond market. So when we look at the cost of debt we look at the yield on corporate bonds as well as the yield on junk bonds. So right now, traditionally, commercial real estate should provide you a return slightly above that of corporate debts and slightly inline with that of high-yield debt. Right now commercial real estate returns about a 110 bps higher than that of long-term, B/AA rated bonds. And about 40 bps less than that on high-yield debt. So you combine that and commercial real estate looks relatively fairly priced to fixed income. And that’s despite you know, a fairly decent rise in rates this year. But with respect to REITs, as I mentioned earlier, given that big discount the commercial real estate market and private market looks a bit expensive relative, given the signal by the private REIT or the signal by the public market. You tie this altogether and you would assume that given those factors that it starts interest rates rising, big discounts in the public market that property appreciation would get signaled to, or excuse me, that signal would be for the private market to decline, but Green Street’s opinion is just given the amount of debt on the sidelines, given how long this has happened, given how much capital there is to put to work it’s hard to see private market values doing anything different than what they have been doing over the last few years which is essentially not changing very much.

Adam Hooper – So to relate that to, I guess again, kind of a tough question, not the crystal ball but like in terms of relation to overall market cycle reaching a maturation point? Do you guys foresee anything that could trigger a pull-back in value or a correction? Or kind of more of the same fairly steady, maybe some slight growth going forward?

Danny Ismail – Yeah, you know generally we agree with you. It is very long in the real estate cycle, but if you look at fundamentals across most of the major property sectors, you know you’re generally looking at inflation type growth. I mean if you look across the metrics on the economy whether it be unemployment, consumption, the fiscal and tax stimulus. You know Office using job growth, venture capital, I mean all those factors continue to point to a pretty healthy economy so while we think that you know the overall cycle is long in the tooth it’ll be more of a deceleration of property price appreciation and financial growth rather than you know any near-term, immediate correction because the pillars of the economy are simply incredibly supportive of commercial real estate today.

Adam Hooper – Do you see that as differing across product types or that’s generally you know office, retail, industrial, fairly similar dynamic across all the different product types out there?

Danny Ismail – I think it’s, that was a general statement for commercial real estate in general. I think if you look at the individual property types, I mean there are some sectors that are in a better position today than others. I mean I can point to two at the opposite end of the spectrum industrial looks incredibly healthy today just given the tailwinds of ecommerce and the amount of reconfiguration of supply chains and overnight delivery and the immediacy that consumers are demanding of internet commerce. And the opposite end of that retail has generally been, has struggled the last few years. We’ve written down retail commercial property values on our end about 15 to 20% for malls and strip-centers. So generally tougher as you drill down into the sectors you can point to several headwinds and tailwinds for various sectors, as I mentioned for industrial and retail. But in general commercial real estate in general, probably will continue to trade sideways over the next few years.

Adam Hooper – And then with office it’s maybe we can dig a little bit more into office considering that’s one of the areas that you focus on primarily. Some of these changes that are happening with creative offices, and coworking and shared office space. Just the notion of how users interact with office space, right, how is that impacting some of your predictions or valuations or thoughts around that going forward.

Danny Ismail – On the office side I mean the biggest trends as you mentioned, you know creative offices or open office, however you want to define it. The biggest impact that we’ve seen on office fundamentals has been on the densification of office space. So let’s say in 2010 you signed a lease for 100,000 square feet for your employees. Then in 2018 you’re renewing that lease, well let’s say you no longer have the same amount of employees or even more you’re taking up say 15 to 20% less square feet, and you’re actually just packing in your employees in a smaller space. It’s a stat that doesn’t show up in the supply grow stats but if you think about it it’s essentially a tight of shadow inventory that’s been hitting most major office markets. And I’ll point to New York, which is you know a few weeks ago WeWork became the largest tenant in New York, and they tend to run their office space much denser than a traditional office company, a traditional tenant would. So you look at New York fundamentals over the last few years while supply growth has been elevated relative to recent history, supply growth in New York the last few years has been around 1% of inventory. That shadow supply via densification and the reconfiguring of office spaces in Green Street’s opinion has had a pretty big impact in terms of fundamentals. You really haven’t really seen net-effect of rent growth over the last year over year and for the next few years it continues to look like a tough environment simply because if you’re getting that same amount of job growth but your tenants are taking less space

Danny Ismail – you need to have essentially more, a higher amount of employment growth to compensate for that increased utilization. So it creates a real drag on office fundamentals that isn’t apparent in the commercial real estate if you just look at inventory growth stats, but it’s a type of hitting growth that’s had a huge impact over the last few years.

Adam Hooper – Is there any way, do you guys track or do you have any gut feel for where we’re at in that densification process? I mean is it still on the front-end of that? At what point does densification kind of reach it’s max, right? It seems like it continues to be more and more, again started with creative office, open office and now you’ve got WeWorks, again this coworking space, how far does that go?

Danny Ismail – Yeah that’s it, that’s a question we’ve been trying to answer on our end for a while. Green Street has you know a variety of data that we can look at but the issue has always been attempting to tie the total amount of employees to the square footage of a region. Generally those are two disparate data sources. You’re looking at either the Bureau of Labor statistics combined with you know one of the major brokerage houses or Green Street’s data and generally those don’t tie very well. But our gut feel in talking to both the publicly traded REITs and the private operators is it feels like we’re in the later innings of this, but it doesn’t seem like a trend, it seems more of a paradigm shift that people and employers will just be shifting more to, denser office configurations. So maybe call this cycle, you know what 15 to 20% denser configurations, on average, for your average tenant. How much further that has to go, that’s a tough question to answer. It depends on the type of tenants and how they’re using the space. Our gut is at Green Street is you know best estimate given the available data, has a little bit further to go but I don’t think it’ll be as drastic as you’ve seen over the last you know call it five, six years.

Adam Hooper – Yeah. And then once that kind of reaches max density, if you will, do you anticipate that some of those more traditional fundamentals of supply and demand and that impact on returns I guess, will return back to more fundamentals or will this have a shift on how we look at some of those key metrics?

Danny Ismail – Well I think it’s interesting because missing in this conversation is a CapX. So if you have an office space that is not, or own an office building that is not yet setup to accommodate that kind of denser configuration. We recently dug into CapX and we think that CapX in the office sector is by far the most onerous in all property sectors and that includes hotels. We use a normalized CapX estimate. We’re estimating that close to a third of your NOI is an appropriate amount to reserve as CapX reserve. If you think about that in terms of returning to normal fundamentals it seems like, well for those landlords that are setup to do that might enjoy some benefit but for those who are not they’re going to be struggling to keep up and have to put a lot of money into rebuilding simply to get market like or close to market-like returns for their assets.

Adam Hooper – Yeah, I want to kind of roll that back a little bit. So for listeners out there that might not have heard some of these terms before. So CapX is Capital Expenditures. So when you’re, an office tenant moves out and you need to reconfigure the internal offices or paint or carpet, you know kind of the improvements within the space, right, that’s what you’re considering a CapX Capital Expenditure for re-tenanting that office space, is that correct?

Danny Ismail – Correct, so essentially as you mentioned we have two buckets, the first being what you just mentioned sort of the tenant turnover. That anytime a tenant moves you have to clear out the space and reconfigure it to whatever they’re needs are. And the second would be maintenance. Just the normal maintenance that you have to put into a building to kind of keep it at the competitive level. So if you had an A type building what do you need to spend to keep it up roughly the same type of quality in the market.

Adam Hooper – Okay and then you said roughly one-third of NOI, Net Operating Income, is appropriate for a CapX reserve. So basically as an owner of a property the metric that you guys are looking at is roughly one-third of my annual net operating income. I should have that amount of cash in a reserve somewhere to cover these maintenance and re-tenanting costs, essentially?

Danny Ismail – Correct. So our methodology in terms of how we got to that figure. So where we sit, where Green Street sits in commercial real estate land is we have assets in both the public and private market data. And we have a pretty long time series through multiple cycles of both the publicly traded REITs and as well as access to the private market data. Both of those point to that one-third number I just mentioned so it sounds like an incredibly high number.

Adam Hooper – It’s really high yeah.

Danny Ismail – I know, yeah. And when you say that hey, the office business is a more capital intensive business than that of hotels you know it kind of raises some eyebrows, but you just look at the data both by the publicly traded REITs and the private market that’s what it’s pointing to. You know when Green Street put out that number I was expecting more pushback, you know from some of the public or private market guys and actually been the opposite. The feedback that we’ve received, now that seems pretty appropriate.

Adam Hooper – And how does that compare to other product types if you’re looking at multi-family or industrial I’m assuming is way, way less than that but hospitality, multi-family how does that compare?

Danny Ismail – So across property sectors as I mentioned office is by far the most expensive in terms of CapX. You look across the property sectors.

Adam Hooper – Oh it sounds like you’re shuffling paper there, you’re finding numbers for us. I like real numbers.

Danny Ismail – I’m getting specific numbers. Just ’cause I didn’t want to speak out of line for some line a sector heads here. So if you think about apartments or the resi type assets, that’s close to one-third less, or excuse me a third of office CapX. As I mentioned if office CapX is about a third of your annual NOI. Apartments or resi generally closer to 10%, so low-level digits. So when you think about your total returns that has a massive impact.

Adam Hooper – Right.

Danny Ismail – On your projected IROR, as I mentioned Green Street has been in business for 30 years, one of our hallmarks is we consistently think that both the public and private market underestimate the true cost of owning commercial real estate for a full-cycle. And we think the directionality for the office business as I just mentioned the headwinds given by densification or the WeWorks of the world all point you in that direction of it going higher. And lost within this is rising construction costs. You know it’s not getting any cheaper to build a building or to construct the materials of the building. So all this is contributing to rising capital expenditures across the board.

Adam Hooper – So I guess you said, since hopefully you have more papers there, you said about 10% reserves for multi-family. What does you guys see in hospitality or industrial? Do you have that?

Danny Ismail – Yeah. Hospitality would be among one of the more expensive ones. So not quite as expensive as office, so around that one-third mark but closer to that data point. Industrial will be significantly less than that. So call it about half of what you would for hospitality or an office building.

Adam Hooper – So similar to multi-family for industrial?

Danny Ismail – Correct.

Adam Hooper – Okay, good. That’s great info. That does seem shockingly high, a third of your NOI for CapX reserve. That does seem high but again when you think about it all the costs that go in with maintaining that. I guess do you think that will change I guess as the densification reaches that saturation point? Right I mean you can only open up your office in terms of creative office. Right, I mean that’s one of the benefits is you theoretically have a much lower, at least on the re-tenanting side, a much lower re-tenanting cost. Maybe not so much the maintenance side. Or maybe that offsets, right? The lower re-tenanting costs is your maintenance now increased because you’ve got more people in there? Have you guys looked at how that’s going to change with this densification trend?

Danny Ismail – Well, what’s interesting is that you know just giving a backdrop of the economy you’d assume that re-tenanting costs would be going down. You know fairly low unemployment, you’d think that pricing power which is essentially re-tenanting costs, right. Giving a concession to a tenant would be declining in this time, in fact it’s been the opposite. It’s actually been more costly to re-tenant over the last few years than at the beginning of the cycle. And it’s hard to see what causes that reversal, you know even if you’ve built out or reconfigured your space to be more accommodating to an open-office configuration. The next tenant that wants to move in there doesn’t want to do, you know, completely different. And reminds me a bit of a government subsidy or a government entitlement you know that once you give it away, once you start giving it you can’t take it back.

Adam Hooper – Right.

Danny Ismail – So it’s hard to see what causes that reversal. Because certainly you would assume at this point in the cycle that it would be the opposite. That you would be seeing more pricing power favoring office landlords, but you just haven’t seen that.

Adam Hooper – And do you see similar trends across urban office versus suburban office? Or are those two different dynamics?

Danny Ismail – Yeah, what’s interesting is when we revisited our CapX estimates is that where we increased our estimates the most has been more in the gateway side. So New York and D.C., CapX both on the maintenance side have increased over the last few years and again that’s both in the public and private market side. Suburban side we’ve always been more cautious on in terms of our CapX estimates. But it’s been surprising that on the gateway side one would assume just given urbanization and you know the growth of cities that office landlords may not have to give away as many concessions or put as much into their buildings to keep them competitive relative to their suburban peers, that hasn’t happened this cycle.

Adam Hooper – And are there between again kind of gateway or suburban do you see much difference in the outlook for overall trends, you know we’re kind of talking inflationary growth rates, do you see that different in one geographic location or the other?

Danny Ismail – Yeah, I would say in general we bucket how we favor market office fundamentals into three distinct groups. So our favorite markets would be the West Coast gateway markets, so I don’t think we touched on this in this conversation, but tech related job growth has really been the driver or a significant driver of commercial real estate returns, particularly office returns this cycle. The net absorption by tech-related, office job-growth has just dominated the stats. So the San Francisco’s of the world, West L.A. and Seattle all strike us as having some of the best fundamental growth over the next few years. We follow that by what we call our sunbelt markets. So Atlanta, Austin, Nashville, Charlotte, simply because it’s a really strong demographic trends, expansion by major employers strike us as another second strongest sub-group of office fundamentals in the country. And our least favorite markets are as I mentioned earlier, just given rising CapX and densification are East Coast gateway markets. So that would be New York and D.C., just given the amount of supply hitting those markets rising onto CapX and just relatively flat net effect of rent growth, those markets are probably going to be tough in the next few years. And if you look over at the public markets the public market agrees with that view. As I mentioned New York office REITs have been trading at some of the worst discounts to their private market values since The Great Recession.

Adam Hooper – So potentially a buying opportunity in the public markets then if again if you believe in the overall fundamentals and long-term growth, the discounts to asset value could potentially be a buying opportunity?

Danny Ismail – Absolutely if you were a believer in those markets and were making an allocation to office real estate in say New York, you know when you have some of these big, well-known companies trading at over 20% discounts to the private markets you’re essentially getting very similar or the same exposure at 80 cents-on-the-dollar. Right, that’s an extremely appealing deal relative to paying full price on the private market.

Adam Hooper – Yeah, and have you seen much institutional capital going outside of the gateway markets?

Danny Ismail – You know we’ve seen a little bit of that but not in a wholesale way that would be implied by the public market. So as I mentioned the public market has been heavily discounted to be New York centric REITs, but in the Sunbelt, REITs have been receiving relatively favorable pricing in the public market. So they’re trading closer to the private market values. But we really haven’t seen, we’ve seen a little here and there but not in a wholesale way that just given the demographic trends in our opinion relatively more attractive IRs we haven’t seen that happen in a big way. I think it’s tough for say particularly foreign institutions to make a big commitment to say Atlanta or Austin. You know when you’re pitching to your investment committee presumably it’s a lot easier to pitch a New York office building than one in say Nashville or…

Adam Hooper – Austin?

Danny Ismail – Yeah it looks better, the pictures look better generally on your annual reports, when your doing office tours you’re generally hitting the major markets, you know the San Franciscos, New Yorks, Austins, D.C.s of the world. In our opinion that created a pretty big bid for, you know New York Office over the last few years has been foreign buyers. But in the public market has been telling or at least sending a pretty strong signal that you know returns look a little bit better or a little bit closer to reality in the Sunbelt markets.

Tyler Stewart – Speaking of trends when you look at the West Coast market it is on the rise and the East Coast market may be on the decline. Historically do you have any data for how long those trends can last?

Danny Ismail – Yeah, well historically I mean this is a bit of a shift because New York is generally, over the last say 20 years, has historically outperformed in terms of an office market. So really one of the things that we spend some time here internally has been looking at supply barriers. And what are true supply barriers in these markets and as I mentioned New York outperforming historically has generally been because it’s basically flat to no supply growth over that time period. And now with the opening of Hudson Yards on the far west side and also because of densification you’ve seen New York underperform over the last few years. And it’s hard to see what causes a reversal in that trend. As opposed to that on the West Coast, San Francisco and West L.A., you have true high barriers to meet new supply in those markets. So in San Francisco with Prop M you know an artificial limitation on the amount of new office space that you can have constructed in the city each year. And in West L.A, I went to UCLA and if you’ve ever driven around L.A or lived in L.A., it’s just a horrible market to put any new supply in. Incredible amounts of nimbyism, terrible traffic. It’s really hard to envision any type of meaningful supply growth west of the 405 anytime soon that you know is not in a specific concentrated area, like Fly Vista was. So just really true barriers to supply that we think will continue to have that trend of West Coast office outperforming that of the East Coast. Where you just have structurally lower barriers to supply. As well as the demand drivers seem stronger on the West Coast as well

Danny Ismail – where you just have, that’s where you know tech and media are centered. Venture capital flows the strongest, so it’s hard to see what causes reversal in terms of those geographic areas.

Adam Hooper – Yeah, that’s good. And we’re here in Portland which is seeing I think a lot of the similar dynamics. Maybe not as institutional or a lot of public market activity here but I think that’s a similar trend that we’re seeing here in Portland for sure and other. We had I guess on the podcast talking about these kind of technology hubs, right. The change of economies from more physical labor based towards this knowledge based economy, I think where we’re seeing that again has a lot of those core fundamentals for office growth going forward.

Danny Ismail – Right and I think you’ve seen that you know in some of the markets I just mentioned not doing as well as the West Coast being some of the more old economy whether it be financial services or real estate, insurance, you know lag in kind so as you mentioned the more tech-centric economy.

Adam Hooper – Good, well as we’re about to turn the corner here, 2019, what does your crystal ball say for us?

Danny Ismail – Yeah, as I mentioned you know the economy still seems on pretty strong footing and you know just the amount of, in terms of whether it being tax cuts or fiscal stimulus or you know just incredibly low unemployment rates it still seems like the economy will be supportive of commercial real estate. As I mentioned it seems like most, you know this is across all markets, all sectors, but it seems like demand and supply are roughly in check. So it seems like inflation like rent growth will be the story of ’19. In terms of property values, as I mentioned, both the public REIT market as well as the commercial bond market are both pointing to roughly flat values that we’ve seen over the last few years. But I think some of the trends that I’m paying attention to on the office side is that it still seems like office using job growth remains healthy, we saw a bit of a deceleration heading into ’18, particularly in some of the more tech-centric markets you mentioned. But just given the amount of venture capital as healthy as the tech sector seems to be it seems like it’ll be another very similar to ’18 in terms of fundamentals and property appreciation.

Adam Hooper – And are there any indicators or statistics or market trends out there that we can maybe share with our listeners that you guys keep a special watch on that might be a leading indicator either it’s the good or bad, of some of these things we’ve been talking about?

Danny Ismail – Yeah, traditionally as I mentioned the public market would be a leading indicator, excuse me the public REIT market would be a leading indicator of the private market. But that linkage is broken down over the last few years and if anything at least in the office side discounts to underlying private real estate values have widened this year. Which is a bit surprising given how healthy the economy has been. So that’s been one of the signals that we continue to watch. The others are your traditional how well is the tech sector doing? So over the last few years venture capital funding has been either at record or near record highs. And really if you see a pull back or a decline in terms of the amount of funds either invested or being raised by venture capitalists I think that would be a decent signal of hey is there something going on here? Is there a lack of available opportunities or is the tech sector cooling off? I think that would, excuse me, we think that would be an interesting stat to continue to monitor. And of course interest rates as well, you know sometime today I think we’ll get a notification that the FED raised rates again and of course the pace and the velocity will continue to be worth monitoring as well.

Adam Hooper – Perfect those are some good things to keep an eye out for for listeners out there is for seeing what 2019 brings us. Well, Danny I don’t know if you have any information about how listeners might be able to learn more about Green Street? I know you guys do a lot of webinars have some educational materials out there, if you want to take a second to do that we’ll include links in the show notes for where people can get to those resources?

Danny Ismail – Yeah, so we have a lot of resources at our website at greenstreetadvisors.com and we recommend signing up for emails to be alerted to any research or insights that we offer. We’re also on social media, so LinkedIn and Twitter. Follow us there and keep aware of what we’re publishing.

Adam Hooper – Perfect, again we’ll have links to all that for our listeners. So is there anything else that we didn’t cover? Anything else you want to add or ask us for the show today?

Danny Ismail – Yeah, I think one thing we didn’t cover, you know I mentioned a few times just how big the discounts are in the public REIT world is you would assume that there’d be more M&A activity and you’d have bigger institutions buying out some of these REITs, I’ve seen a bit of that early in the ’18, its cooled off a little bit over the last few months, but you know we think that’ll be another factor to keep an eye on into 2018, ’19. Is are you seeing this big institutions actually committing capital and capitalizing on the big discounts of the underlying private real estate market? ’cause again that’s another indication of where the private real estate market is going is if no one is buying these big REITs at these big discounts what does that spell for the underlying private market value?

Adam Hooper – Suggesting that again a bigger institution might come in, acquire the REIT stock essentially and then be able to liquidate that in the private market and then you’re building in that delta when you buy the REIT, essentially right?

Danny Ismail – Correct, yeah it should be have made a pretty favorable world for continued M&A, whether or not that continues, Green Street thinks it will, but again another trend to look into 2019.

Adam Hooper – Well maybe we’ll have you back on here as we get to 2019 and see where we at with that.

Danny Ismail – Yeah, that’d be great.

Adam Hooper – Perfect, alright Danny, well thank you for your time, we appreciate a lot of really good information today. Listeners out there as always we appreciate reviews and ratings on iTunes. If you have any questions please send us an email to podcast@realcrowd.com and with that we’ll catch you on the next one.

Tyler Stewart – Hey listeners, if you enjoyed this episode be sure to enroll in our free, six-week course on the fundamentals of commercial real estate investing. Head to realcrowduniversity.com to enroll for free today. In RealCrowd University real estate experts will teach you the important fundamentals like the start-with-risk approach. How to evaluate real estate sponsors. What to look for in the legal documents and much more. Head to realcrowduniversity.com to enroll for free today. Hope to see you there.

RealCrowd – This podcast is brought to you by RealCrowd. The leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd, invest smarter.

Auctions can be a great way to buy and sell property. Many perceive that this route involves extra risk, is complicated or requires specialist knowledge. But for many it can be a great way to access property ripe for development to which value can be added provided you know the rules and understand how the process works.

Why would people buy at Auction?

Lots of people buy at auction because they are looking for a repossession, a plot to build a house on or are fed up of being gazumpted such can be the experience of buying through an estate agent, especially in a hot or crowded market. It can be a good location for investors to find properties with tenants already in situ and auctions usually offer a good choice of stock meaning lots of properties are available to look at in 1 place reducing time on viewings and on the road.

Often properties which are not mortgageable, are unusual, have issues (which can usually be fixed) sell through auction. This offers the informed an opportunity to buy something cheap, fix the problems and increase the value of the property meaning it could be sold for a profit or remortgaged and rented out to return equity to the buyer for more purchases. Lots of people looking for individual properties which are out of the ordinary like ex windmills or lighthouses buy at auction as properties like this often arn’t offered through estate agents.

How to find the right one

Prior to visiting the auction it is usually best to go and visit the property and if you are inexperienced to get a survey done. If no viewings are allowed I usually try and pay the tenant a viewing fee to have a look around, this means you will get to see the internal condition of the property when others may have not meaning you may get a bargain. Work out what type of property it is and look on Rightmove sold prices to work out the value of it compared to other properties in the area. A great place to use to search all of the auctions is EIG Property Auctions It will collate all auction property in all areas onto an email which you receive regularly so you wont miss any of the properties coming up in the auctions for sale.

You will need to pay a solicitor to go through the legal pack and dig out any issues, they will often do this for a few hundred pounds for you.

Lots of institutions will look to sell through auction such as local authorities and banks to prove that they offered the property publicly and in a transparent way to get full market value for it so that they cant be criticised later.

Offers Prior

It can be a good idea to put bid in prior to the auction day. You often get deals this way. If the auction house wont put the bid forward (lots wont as they want to sell the property in the auction room to generate more interest in the room, put the offer to the sellers solicitor who is much more likely to pass the offer on.

The Auction Day

Lots of people will go to the auction in person due to the excitement in the room and ability to see who else is bidding. You will need to register with the auction prior to going along and supply ID/meet their requirements.

Some people bid via telephone or proxy bid via post or internet. This can be a good timesaving trick but its important to make sure all of your paperwork is in order beforehand so contact the auction at least a week before to satisfy their registration/bidding requirements. You will also need your solicitors details and a 10% deposit which can usually be supplied via bankers draft, cheque or bank transfer. Remember that if you win the lot and the hammer comes down you will exchange contracts that day so cant pull out!

Some also ask other people to go along and bid on their behalf which is possible as long as the correct forms have been completed with written consent and ID.

It is important to insure the property from the point when the hammer goes down on the property/exchange to avoid unnecessary risk. Its also a good idea to read the addendum to make sure you havent missed anything as the auction catalogue is likely to be out of date as new information becomes available.

You can usually tell if the bidding has reached the reserve price as the auctioneer will sometimes say “on sale” or “I can sell it” and will look more interested. If the property dosent meet the reserve it wont sell.

If the property is about to be sold you may hear “going, going, gone’” at which point the auctioneer will bang the hammer to close the sale.

After the auction

If the property dosent reach the reserve price this can be a great time to bid after the auction as this may be the sellers last chance to get rid of the property and therefore may be negotiable. It is a good opportunity to offer low as lots of bids are accepted at this point.

Completion of the Sale

The sale is usually completed 28 days after the auction day. Mortgage lending usually wont be quick enough so bringing can be the only option. Even then it can be tight so cash is defiantly better for an easier purchase.

Selling your property via auction

Lots of people like selling their properties through auction as there is no chain, it is quick, there is much less chance of a buyer messing you around as you get a 10% deposit on the auction day which the buyer will loose if they pull out.

The best way to choose an auctioneer is the one which will market your property best. Usually the sale commission isn’t the ideal thing to focus on, another £10k sale price will make it worth going to the best auctioneer who pushes your property the hardest.

Make sure you enter the property at least 6 weeks before the sale to allow time for the pictures to be done and auction catalogue to be prepared correctly.

Get your solicitor instructed at this point to prepare a legal pack, you will need to pay for this regardless of whether the property sells. You may get offers before the sale, respond quickly to these and dont be afraid to accept if you think they are as much as you will get. However, most wont be and therefore many people will look to let the lot run to the room as more interest is likely to generate more bids and a higher price. Keep the property in the auction until contracts have been exchanged as some buyers will pull out.

You need to set a reserve which is the lowest price you will accept for the property. Buyers wont be told this reserve but may become more interested if they see the auctioneer say “I can sell the property” when bidding is going if the bids go over the reserve in the auction so its an idea not to set it too high.


Beginner's Guide To Real Estate Investing

Would you invest in real estate in today’s market? There are people who tense up at this question, their thoughts focused on a looming housing crisis.

Investors know better. They know that portfolios are not built overnight. They have a strategic long-term plan in constant action, one that dictates what to do and how to do it when the markets turn. One man’s crisis is another’s opportunity.

Adam and I recently sat down with Paul Kaseburg of MG Properties Group to talk about how to create these opportunities. As Chief Investment Officer at MG, Paul’s been involved with the purchase of over 12,000 units totalling $1.7 billion in total consideration. He emphasized that it all came down to strategic planning.  

Develop the Mindset of a Healthy Investor

Paul’s first piece of advice for investors is to stop chasing the one perfect deal and start developing a personal plan that fits your own tolerance for risk.

“Investors must first talk to their financial planner, their accountant, and their attorney to make sure they understand their own situation before going out to make investments,” Paul says.

Real estate must be seen as an allocation and not necessarily as a way to go in and pick the highest returning deal you can find. 7 years since the true recover of the 2008 financial crisis, short-term strategies have become a bad habit, where we got used to pumping money into the highest yield deals without any real appreciation for risk tolerance or risk capacity​​​​.

Instead, Paul wants us to consider the following questions:

  • What does my current investment portfolio look like at the moment?
  • What is my overall timeframe to invest?
  • What is my need for liquidity during this timeframe?

The answers to these questions will help you decide which investments make sense and how much money you have to allocate. It becomes crystal clear where to put your focus, whether it’s core, core plus, value add, or opportunistic deals.

“Once you decide how much money you have, start breaking it up across different parts of the capital stack,” Paul says. “The more you can diversify your product type and location, the less concentrated you are in one area, minimizing your overall risk.”

Your Risk Profile Determines What Asset to Invest In

Once you know where you stand on risk and available capital, decisions become easier to make. Paul says that most institutional investors categorize deals into the following 4 risk profiles:

  • Core
  • Core plus
  • Value Add
  • Opportunistic

Core Investments

Core investments are the least risky of the bunch. They are well-located, newer buildings that attract high-quality tenants. “We’re talking major metro markets with very high household incomes ,” Paul says. “Generally the buildings have been built recently so you’re not risking major repairs.”

Because these buildings attract ultra high-quality tenants with great credit, you get consistent cash flow, but not so much appreciation. “Typically for core investments, we see lower leverage, in and around the 50% mark with yields hovering between 6-7%,” Paul notes.

“They tend to be low, long term return deals,” he adds. The risk with core are the interest rates. “When they go up, you can have an impairment to value, for sure.” Core deals check all the boxes—Good location, good product, good tenant.

Core Plus

Core Plus starts to erase one or two of those checks. “Perhaps a deal is in a great location, but maybe it’s 30 years old,” Paul says. This allows for the cap rates to increase slightly and as a result, you get slightly more leverage.

Paul typically sees Core Plus deals with “6-8% cash-on-cash return over a 10 year period, depending on how the debt shakes out, and IRR is in the 9-11% range,” he says. Core Plus deals are fairly stable opportunities, in stable markets, but are a little bit higher risk than a core deal.

In both core and core plus deals, investors can expect to go long-term. Deals can be held anywhere from 10-20 years. “If you have a deal with an expected low return, there’s no real incentive to get in and out to maximize IRR,” Paul says.

Value Add

Value Add deals are where sponsors start to play a key role. “Value add, for the most part involves some heavy lifting from the operator. At MG, we deal with apartments, and that’s where we go in and renovate units, replace kitchen flooring or lighting, or tackle the common areas,” Paul says.

Beyond physical changes, the building may be mismanaged. These deals require an operator who has a solid vision for the outcome and the business plan to accomplish their goals. Because of the added risk, the returns are also better.

“We start to see the shift over in terms of composition of those returns from cash flow to appreciation,” Paul says. These deals also allow lenders to make decisions based on the investment plan of the sponsor, and not just past performance.

Opportunistic

Opportunistic have great returns and great risk. “Development tends to fall in this category. So do unusual product types or use of real estate like a land entitlement play, ” Paul says. This is where GPs really add value.

It’s all about the vision of what can be created. “Maybe GPs are using their contacts with municipalities to get something approved or relying on their expertise in construction to build something unique.”

It’s really all about appreciation for the most part for those deals. But  you can’t really lever as much either. Sometimes there are capital structures where you can go out and get hard money loans or unique lenders to really put a lot of debt.

They also tend to be shorter term, although there’s situations, for instance, land entitlement, that can take a long time. While these are rare, investors in the opportunistic deals are looking for IRR, so the goal is to get in and do whatever you’re going to do, and then get out.

Narrow down deals by product, sponsor, and location

When you first join a crowdfunding site or attend a local investment group, it’s easy to feel overwhelmed by the sheer amount of deals available. Besides knowing your risk tolerance (discussed in part 1), here are few other strategies you can use to build a well-rounded portfolio.

Build a portfolio by product type

The first decision to make is what kind of product you’re after. “Let’s say you have a $4M portfolio, and want 25% of that in real estate,” Paul says. “$1M in available capital can get you at least 10 deals at $100K each.”

“One way to look at it, is to select two multifamily deals, two office, two retail, two industrial, two self-storage, and disperse the remaining capital across various other options,” Paul says. This level of diversification limits your concentration risk, negating the pressure to select the one product that will beat all the rest.

In the private syndication space, spreading $1M is easy to do. Deals range from as low as $25K all the way to $100K or more. There’s no reason to limit yourself to one type of asset.

Choose a sponsor who shares your vision

Once you know what product you’re after, it gets easier to have conversations with prospective sponsors. Paul highlights that in the current market, investment profits depend more on strategic execution than market forces.

“At MG, it’s really been about the micro strategy in each market, and what’s happening with that specific property, as opposed to just a bet on a larger metro area,” Paul says. This is especially true for value add deals, where opportunities lie in the relationships sponsors have with other industry professionals.

Look for sponsors that view real estate as a long term asset. “That doesn’t mean that you can’t go in and create value. We’re value add players, we do physical improvements, we do operational improvements, but we’re also here to hold real estate for the long term and generate income and capital gain for our investors,” Paul says.

Rely on your sponsor’s expertise about a certain area

“Not one manager is going to be the best at office in core New York City locations and also suburban multifamily in Tulsa, Oklahoma, right?” Paul notes.

Those are generally not the same group. And so, if you’re diversifying, you’ll want to leverage the expertise of respective teams. This can be a relief for busy professionals who don’t have time to visit development sites, and it really is the whole point of investing through a syndication in the first place.

“Part of the fun about real estate is going out and seeing the buildings you are investing in, but ultimately, you are paying the sponsor to know the real estate better than you,” Paul says.

What is your staying power?

If you can avoid the need to sell when the markets are down, the risk of loss goes way down. “As you start to get later in the economic cycle, there’s more of a chance that there can be a downturn,” Paul says. At the moment, we are about 7 years into the true recovery of the biggest economic collapse of recent times.  

Having a plan keeps you disciplined in the face of fear. It also prevents disasters. “If you’re over levered or if you have short term debt and the economy takes a dip, you could end up being forced to sell at a time when the market doesn’t have much liquidity or values are down, and that’s a situation we aim to avoid,” Paul says.

That’s why it’s so important to avoid short-term gains. That is a strategy that can end up getting you in trouble. “One of the ways we look at it is, in real estate, you want to really make sure you have staying power. Staying power means if the market is rough, you can ride it out and wait for a better day,” Paul says.

How to find deals that survive a downturn

The trick is to find sponsors who make it their strategy to find investments that are robust in downturns. “We’re seven to 10 year holders for the most part. Our assumption is there’s going to be a downturn at some point in those 10 years, whether it’s year two or year seven, it’s probably going to happen,” Paul says.

With the disposition volume down, there’s a lot of competition for new deals among sponsors. Sponsors are having to rely on their reputation to close on deals. “There’s a lot of preparation to get those deals awarded, and you need a solid reputation to get them. Then, you really have to follow-through on your plan,” Paul says.

Make it your goal to find sponsors who have a track record of experience. While surfacing their respective websites is a great start, nothing beats a personal conversation where you can ask your most pressing questions.

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Investing in real estate is a long-term game. Unlike the stock market, big capital is used to secure, improve, and dispose of high-value assets. This takes time and meticulous planning to be execute well.

Taking the time to develop a plan narrows your focus and allows you to perform the necessary due diligence on individual deals. That’s when you can start interacting with sponsors and professional advisors to mitigate your risk further.

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*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

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Tyler Stewart is VP of Investor Relations at RealCrowd. All opinions expressed by Tyler and interviewees are solely their own opinions and do not reflect the opinion of RealCrowd. This article is for informational purposes only and should not be relied upon as a basis for investment decisions.

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