Rob Southwell is a Managing Partner at Pitcher Partners Sydney. Rob is a Former Announcing Executive of the year winner and an accounting guru with a passion for property. We chat about Capital growth trends in the market and where opportunities for investors are likely to be.
Mike Mortlock: Welcome to Geared for Growth. This week, we’ve got an awesome interview with Rob Southwell who’s the managing partner at Pitcher Partners Sydney. Rob is an accounting guru, a former accounting executive of the year winner and has a passion for property. We chat to Rob about how he helps his high net worth clients with structuring and asset selection. We talk about what’s happening with capital growth in the market at the moment and where the opportunities for investors are likely to be. Here’s Rob. Rob Southwell, thanks for joining us on Geared for Growth.
Rob Southwell: Thanks for having me.
Mike Mortlock: Pleasure. Now, can we just kick things off by giving our listeners a bit of a background into who you are and what you do?
Rob Southwell: Yeah, sure. I am the managing partner for Pitcher Partners in Sydney. So we are, I guess, mid tier or second tier charter accounting and advisory business. Part of the National Associations so we’re in six locations around the country. About 1200 people, and we’re really focused on the mid-market, which is, I guess is probably the largest sector in Australia and across a wide range of industries, from tax accounting audit to mortgage broking, wealth accumulation, business advisory, recovery, solvency, advisory. You name it, we do it.
Mike Mortlock: Yeah, awesome. Looking forward to diving into some of those, especially the wealth correction and the property stuff. To get us a bit of dirt or a bit of background on your role, what sort of posters did you have on the bedroom wall growing up?
Rob Southwell: I got introduced to good old rock and roll at a young age, so I had bands like Van Halen.
Mike Mortlock: Awesome.
Rob Southwell: You know, Australian rock, Aussie Crawl, and AC/DC, and Men at Work. Then sort of graduated into the heavier stuff as I got older, so I got into Anthrax, and the Metallica, and Guns N’ Roses, and all that sort of stuff.
Mike Mortlock: Getting a bit heavier. I actually found that, not that long ago, that my parents went to an AC/DC concert. I suddenly realise, I think they’re cooler than I am. It’s disappointing.
Rob Southwell: That’s probably one of my biggest regrets in life, that I never got to see them live.
Mike Mortlock: Yeah. Yeah, that’s an unfortunate one. So Rob, how did you first get started in property and what was your first investment?
Rob Southwell: So I’ve always been into property. I’m just really intrigued. Property always appeals to me. I’m one of these people that are constantly looking on domain and different properties, just because I’m really interested in it. My first property that my wife and I bought was Erskineville, back in 2000, just before the Sydney Olympics, and was actually a pretty good time to buy for us. Everyone thought it was going to die a very quick death after the Olympics, but it did the opposite. I think we got a little bit lucky there. But yeah, that was one of those up and coming areas, and that was a two bedroom duplex that we scrimped and saved just to get enough to get the 20% deposit. But yeah, that was our first investment.
Mike Mortlock: And you still hold that one today?
Rob Southwell: Unfortunately not.
Mike Mortlock: I was going to say-
Rob Southwell: I think you’re going to come back to lessons you’ve learned.
Mike Mortlock: Yeah, right. I was just going to say, you’ve probably had two really strong cycles on that one, but at least you got the good first one in, what was it? ’03 or there abouts, it started to take off.
Rob Southwell: Yeah, so those four years after we bought it, it did do really well. We paid $360,000 for that. That place would be worth around three now, I reckon.
Mike Mortlock: Yeah, wow. Wow.
Rob Southwell: It is. It’s just a prime example of the power of that very simple concept of compounding.
Mike Mortlock: Yeah, absolutely. Now Rob, I want to sort of go back in time a little bit if we can. Right now, you’re an executive who’s the head of a multimillion dollar business, but back in the day you were doing a Bachelor of Commerce at the University of Wollongong in the mid ’90s. So can you chart sort of, or track the progress of how you went from there to where you are now?
Rob Southwell: Yeah, so I had done sort of two years full time of a degree and I was getting a bit bored being around a group of people that knew everything and had done nothing. So I actually got a very prestigious job working for a one man taxation above the TAB at Fairy Meadow in Wollongong, but that was my big move. Just getting some basic accounting and tax skills up, and then decided to get something a little more permanent. Switched my last year of uni to part-time and got a full time job. Got a cadetship with the department of education in finance, and that lasted three months. Realised that governments are probably not, wasn’t the place I wanted to be, and landed in a chartered firm, small chartered firm, and that’s when I just started to learn, cut my teeth, on basic accounting, tax, understanding how businesses work.
And then moved on to a larger firm and got exposure to a lot of different industries and working across a lot of different areas. So I did accounting. I did tax. I did some audit work, did some corporate advisory, did some solvency work. I got a real exposure to a lot of different areas, but also got exposed to a lot of different industries, things like pubs and capital intensive businesses. Just was really good experience just to get access and understand the things that make or break these types of businesses. From there, I landed where I, the firm I am today. Where I am today, I’ve been with for, it’s coming up to 18 years this year. At the time, it was a 30 person firm, in a very small office in Martin Place, with a very entrepreneurial group of partners. There’s only four of them, but went through about 10 years of organic growth, year on year, probably 20, 25% a year.
Started with, got involved with starting our own businesses and building things out. So I got to experience being on the other side of actually starting some businesses and actually growing them out, and learning the ins and outs of being a shareholder in a private business. And then we had done a couple of merges over that. We did a smaller one, which was a really good lesson in how to do a merger. And then two years ago, we did a very big merger with another firm and now we are the size that we are today, so. So, it’s been, even though I’ve been in the one place for nearly 18 years, it’s been a journey that always bringing something new and something challenging, so.
Mike Mortlock: Yeah, awesome. And clearly, you’re a business man, you’re an accountant, you’re a tax expert, but clearly you maintain a passion for property. People may recognise you as a regular guest on Your Empire with Chris Grey, one of our esteemed podcast guests. Is that sort of passion for property the result of your own portfolio, or is it to do, I guess, with the power that property has for your business owners and the individuals that you look after?
Rob Southwell: I think the primary driver was really working out what type of investments suited my personality best. In the sense that I have dabbled in shares, I started buying shares when I was younger. There’s a bit of a joke in our house that my first portfolio of shares, I had to sell my Coca Cola shares to buy my wife’s engagement ring. Coca Cola shares probably did better. No, I’m just kidding.
Mike Mortlock: I was going to say, that’s the best investment and you’ve ruined all chance of romance there, Rob.
Rob Southwell: If my wife’s listening, no, that’s the best investment I could ever make. So I had dabbled in understanding investing in general, but I think probably in the last six or eight years, I realised that the way I like to invest in from a disciplined perspective, and it’s probably come about more so just being a little bit more patient, that property is probably the right style investment for me, to work for me over the longer term. And I also have a real passion for property. Shares and things that, I have shares in my self-managed super fund, but the property I really enjoy touching, and feeling it, and seeing it, and viscerally, is a lot more intriguing for me as well. So probably over the last 15 years, property I’ve realised, probably more so in, as I said, the last six or eight years, that property’s more suited to how I … to be better investing over the longer term. You look at graphs all the time and I think the juries out what performs better over 20 years, shares or property. A share guy will say shares and a property guy will say property, but I think it’s probably much of a muchness really. It really comes, for me, it comes down to what works for me.
Mike Mortlock: Yeah, personal preference and as you say, it’s nice to be able to touch something. I think one of the values with property as well is it’s not as liquid as shares. I’ve got into it a little bit myself and suddenly found, because of my personality, I was going to have to be a day trader. Property teaches you a lot more patience.
Rob Southwell: If you were seeing how much a brick of your property was worth day and day in on a market, you’d have a very different attitude to property. You know, and having experienced … I’m, from an advisory perspective, most things that I’ve ever recommended, I’ve actually done it myself. From a LBA, limited borrowing arrangement with self-managed super funds, I’ve done that. I’m recommending things to people, I’ve worked with those people. I’ve very, I want to get involved and see how it works. So for me, it’s something I’m always … I’ve never really just sort of had an opinion about it, I’ve gone and tried and tested it myself. And sometimes you learn lessons the expensive way, but-
Mike Mortlock: Well, you get to pass on to your clients and they get the benefit of that, I guess.
Rob Southwell: Exactly, exactly. And the other thing that I’ve learned from, I guess, the benefit of having been in the role that I have and working with high net worth clients, is probably really coming back to one of the early fundamentals, which I often got presented with Warren Buffet, power of compounding interest, is how powerful patience and time is. And so, I think, it’s really important to have a longer team goal and stick to it, but just be patient.
Mike Mortlock: Yeah, I mean a lot of people are looking for those property secrets with the hot spots, and all that sort of stuff. But one of the biggest, I think, secrets is just be patient.
Rob Southwell: Yeah, and it’s a bit of a joke. I tend to buy in 30 year hot spots. Property areas that have been hot spots for 30 years.
Mike Mortlock: So getting back to the advisory, and you mentioned your high net worth individuals, I guess this podcast is geared to the average investor that may not have access to some of the advisory services that firm like yourself, and experts like yourself, provide. Can you give us a bit of a fly on the wall experience? What firms like Pitcher’s do for those individuals?
Rob Southwell: So at a more, I guess, the accounting level, for want of a better word, the structuring aspect to it, what we tend to focus on first is what are you trying to achieve? So what are the longer term plans? Because there’s no point giving advice if you don’t know what you’re trying to achieve. And what we do a lot, particularly with our clients, is get the structuring piece right. So in understanding their needs, we can determine whether they should be holding something in their own name, which is often done for a high income earner from a negative gearing aspect, or do we do it through a trust because you’ve got asset protection issues, or you might have enough assets in your name so there’s no real tax benefit for it, or you’re holding something just for passive income, through those self-managed super funds, which is a great … People often talk about, “I don’t want to pay any tax,” but don’t pay attention that superannuation, in certain circumstances, is the only place you can get zero tax.
So it’s about trying to understand what they’re trying to do, but that comes for a self-managed super fund, comes with a downside of restriction and access, so that’s why understanding what the clients wants to do is really important. So that’s that aspect, and we do do a lot of that, and then there’s the other side if it, which is through our contacts and our referral sources, is helping clients find assets. From commercial property, for example, working with one of our partners who can find a petrol station that can give a client a yield they wouldn’t otherwise get somewhere else, or access to property syndicates, which are quite usually harder to access, or looking at development opportunities and how to structure them and how to minimise their risk and those types of things. So, it’s really two fold. I guess, the more vanilla stuff is to get, what we call, get the buckets right, put everything in the right buckets. But the second aspect is understanding what they can do and then using our contacts and networks to try and help them find the right assets.
Mike Mortlock: I guess a lot of property investors, they think first about the type of property they’re going to buy, or the area that they’re going to buy. How important is getting that structure right from the beginning, like from an asset protection point of view, and the end result with taxation? How different can the result be based on the structuring?
Rob Southwell: Dramatic. So you can be anywhere from, if you’re doing maybe a mixed development type thing, you could be paying top margin rate of 48%, 49%, down to zero on a super fund in accumulation phase in certain circumstances. So that decision is huge, and we often see clients coming to use, they’ve got the wrong advice or got no advice and end up in that situation. I think that has a dramatic impact.
I guess, I have to overlay that with, quite often challenge clients with why they’re selling assets, particularly for passive investors. I have clients asking me that they’re thinking about selling an asset because it’s gone up, and there’s a bit of an unrealized gain there, and I ask them question why they want to do that, knowing that they’ll probably be back in six months’ time going, “I want to buy another property.” And not fully appreciating that in most circumstances, I use the rule of 30%, which is you’re probably going to pay 25% on your capital gains tax and then if you end up going again, there’s another 5 to 7% to go back into that property as well, plus selling costs. So the tax aspect of it is a huge piece.
I think probably the more important thing though, that I tell clients, is not to focus so much on the … I guess, to pay closer attention to the numbers, first and foremost. For example, most of my properties, the location is the attraction. Once you get comfortable with the location, it’s about doing the numbers and make sure they work for you. So by that, I mean what is realistic in terms of funding the property from a cash flow perspective. Quite often they’re negatively geared. And the second aspect is, what are your expectations around growth, and what is it going to look like over the next 5 or 10 years, and quite often to say, “I think I’ll hold it for five years and see what it does,” and I’ll say, “Well, what happens if it goes up 5 or 10% for two years and then does nothing?” So it’s about managing people’s expectations.
Mike Mortlock: Are they going to get itchy fingers, wanting to lock in that profit and then pay a lot of tax to go and have another go at something similar?
Rob Southwell: Exactly, and rather than, “Well, I actually want to do this a couple of times over on the next 10 years.” Well, it’s about how do you use the equity that you’ve accumulated to get into another property without having, necessarily having to realise the asset.
Mike Mortlock: Yeah. You mentioned that area’s an important consideration for you, and I know you’ve had a lot of exposure with funds management. When it comes to property, how are the experts in the top end of town doing their due diligence on the areas, and the numbers, and the property types, and that sort of thing?
Rob Southwell: I think it really depends. The residential side of it is probably a little less volatile. Say you’re tending to look at long term demographics, things like infrastructure or projects coming into the area. If it’s an established area, what are the general planning restrictions around an area, i.e., if it’s fully built out, there’s an allowance for half of those buildings to be converted into 30 story buildings, you might have a bit of an issue. So I guess it’s just doing some research around what are the general demographics of the area, and if nothing’s going to change, that you’re understanding what you’re buying versus … Say, a lot of areas up the northwest are getting railings and those types of things coming in, which can really make a difference to the value of a property longer term, versus a commercial property, which becomes a bit more of an analytical exercise. So that then starts to focus on, if you’re looking at commercial properties, you’re looking at what are the major tenants, what’s the profile of the tenants, what’s the lease terms, the unexpired lease terms on those properties.
You’re really focusing on the yield, and so it’s a very different aspect. You’re looking at different drivers around that. So it’s more around the tenant, the general area, and what is the risk of not getting paid any rent, basically. But I think sometimes people do overlook the numbers, particularly for new investors. So yeah, it really comes down to … And then, I think the other aspect, particularly commercial or larger residential, is what’s the development opportunity with it.
Mike Mortlock: Just getting onto the infrastructure projects you’re talking about, you’ve been quoted in few articles I’ve seen about that, so obviously you’re practising what you preach there. You’ve got your finger pretty well on the pulse of what’s happening there and across real estate, and I know that your business is broader than that. Is that all just sort of par for the course for yourself, as in your position you’re needing to sort of stay abreast of what’s happening across the state and across Australia?
Rob Southwell: Yeah, I have an interest in it. I mean, I have an interest in macroeconomics, particularly from a New South Wales perspective, because that’s obviously where I live, and the majority of our clients are located, because it does have an impact on our business broadly. But also, I kind of tend to correlate the broader macro-economic conditions to, particularly with property, as to my thoughts around long term growth rates. Again, your point, infrastructure spending and those types of things. I often laugh when, I have to watch my words, but economists are making comments about property markets, because in Australia property markets are pretty diverse. And my first question to them is, when they say that property’s going to dive in value, “Have you sold your house?” And they say no.
So for me, it’s normally about correlating the macro economic conditions, both from running a business but also as a property investor as to my own thoughts on what’s happening. Particularly with property, I think people often overlook, I think one of the biggest drivers for property growth, particularly in places like New South Wales and Victoria is immigration and population growth. And if you look at those numbers over the last couple of years, 85% of, if you ignore interstate migration, 85% of it is going into New South Wales and Victoria. So I’m very much a macro person when it comes to supply and demand. I think that-
Mike Mortlock: And that’s been played out in the property market results, really, quite obviously hasn’t it?
Rob Southwell: Yeah, exactly. Yeah, so you look at places like Brisbane. They’ve been recipients of interstate migrations from people coming from New South Wales or Victoria moving into those states, but they haven’t been a massive recipient of immigration, so people moving from overseas. They all tend to land in New South Wales and Victoria. So that’s why I have an interest in some of these broader, macro-economic factors and conditions. And they usually will be a precursor, I find, to do that. The other big one that I look at quite often is supply/demand, particularly around new builds. Potential development applications, housing applications-
Mike Mortlock: Housing stats, yep.
Rob Southwell: Yeah, yeah. And I think that’s a big thing. I think a lot of people read what they need to read out of it, depending on what article they’re writing that day, so.
Mike Mortlock: Yeah, yeah. And I guess it’s fair to say that we’ve reached the peak of the market in most sort of markets around Australia, most capital cities. I know there are some obvious examples, like Hobart. What’s your prediction for the property market in the next little while, and what’s happening with business conditions as well? I know obviously wages growth is pretty slow. We’ve been hearing a little bit about that in the news. How does that sort of tie into the market as well?
Rob Southwell: I think they’re actually … I guess I’ll start with the business conditions, because I think they’re actually going to impact positively on pricing. I guess I can only really comment on New South Wales, because that’s the area I’m closest to. I think the business conditions in New South Wales have probably been the strongest since I’ve been working, so I think they’re probably the strongest you’ve seen in, definitely post-GFC, but probably in the last 20 years, I think. In the sense that you’ve got … I guess, New South Wales is a very property/infrastructure driven economy, and then probably from a business perspective, financial services focused, and I think all of those areas are booming at the moment.
We just did a, we publish a deal makers report annually, which talks about M&A activity in the mid-tier space, which represents about 77% of the whole market, and it’s really come up in the last 12 months. And the expectation is, it’s going to continue to grow. So, that gives you an indication of business confidence. It’s quite high. I read a report recently that said New South Wales government’s spending $1 billion a month on infrastructure at the moment, and the pipeline for that is pretty long when you think about things like the metro tunnel. Building the tunnel under the harbour is going to take another seven or eight years to do. So all of those things create job growth. They have a big injection in the private sector because they’re all working on these jobs, and then you’re getting a lot of activity. Places like Japan are very active, and that’s before you look internationally. So you go internationally, and the Japanese government have encouraged industry to … They’re not getting growth in Japan, so they’re encouraging people to invest off shore. A lot of that’s coming to Australia. They’re looking for assets, and businesses, and things to invest in.
So I actually think … And then you look at the basic factors. We’ve got low inflation, relatively low unemployment. We’ve got record low interest rates and we’re starting to get, the growth is starting to improve. So we’ve had low twos on average over the last few years of growth. That’s still pretty good. And that’s picking up. And considering long term averages, they like to predict three, three and a half.
So I actually am quite optimistic about the next couple of years, particularly in New South Wales. The wage growth is usually the last thing to go. So what you’re seeing is the businesses are growing. I think last month they said that new employment jobs growth has been really high, so my experience tells me that if people are looking for new people, and they’re not getting them, you’re starting to get, you’ll get the wage growth. I think it’s probably slower to occur than people think. But we had the RBA governor in our officer before Christmas and he said that will come, and I tend to agree with him. So I actually am pretty bullish about the economy in general.
Mike Mortlock: That’s an interesting-
Rob Southwell: It is interesting as well. I was speaking to our guys in Perth office and they say that they’re whole liquidations and whole last couple of years, which has been dire, businesses going under, a lot of that’s starting to dry up now. So you’re starting to see green shoots of growth and a bit of a shift in economies like Perth, which they’re probably hurting the most at the moment. So even those places are starting to see little signs of new growth coming through.
Mike Mortlock: Yeah, interesting. And are you thinking that that’s likely to keep pushing the market higher or do you think the values have maybe sort of gone a little bit in advance of where they will and we’ll have a little period of stagnation, or do you just think those underlying fundamentals will keep pushing forward?
Rob Southwell: I don’t think we’re going to get double digit growth like we had for the last few years. But you look at the last two 10 year periods, so you go from mid ’90s to the mid-2000s, I think Sydney did more than double in that time. In the last 10 years, it’s slightly less than double. So when you average it out, that’s 7% a year, give or take. But when you look at both of those periods, probably 70% of that growth happened in five years, in both of those periods. So it’s starting to show periods of really accelerated growth and then it sort of flattens out. So I think that, I definitely don’t see Sydney metro area real estate dying. There are centres, sorry, for want of a better word, is going to drop out of the market, are going to be renting for a long time. But I don’t think long term averages for the next year or two are out of the question. Particularly-
Mike Mortlock: I guess … Sorry, I’ll let you finish.
Rob Southwell: So particularly if you bought in the right areas. I mean, you look at Sydney, there’s some areas that are just getting over populated with new developments that are getting bought, so they’re not going to go anywhere or go backwards. But if you’ve bought in, like I said, 30 year hot spots, there’s just no supply. So I don’t think, I definitely don’t think we’re going to get double digit growth, but I think that 5 to 7% is not unrealistic.
Mike Mortlock: I guess people are just going to need to be a little bit more creative. APRA’s cause some headaches with investors looking at interest only with higher leverage and with some of the capital cities being what we think might be the peak in the near term, are you sort of seeing with any of your clients, that they’re moving away from property for any of those reason or looking to say regionals over capital cities?
Rob Southwell: No, I think they’re probably slowing down a bit. So the confidence there to do purchases are … And I think this is what’s happening in the market in general. There’s not that sense of urgency, which is probably the difference between 5 to 7% a year growth versus 12 to 15. You’re getting people who are buying stuff, but … Yeah, so there’s definitely a little bit of a lot more consideration that’s happening before they’re buying property. But I think the longer term, more experienced investors, if they see a good asset, they’re buying it.
I think what we’re seeing though is that the banks particularly, it’s just taking longer to get the money out of them. They’re still lending. They banks aren’t closed as some people have made out, but they’re just dotting the I’s and crossing the T’s closer than ever now, so.
Mike Mortlock: Yeah, and the shareholders are still going to be wanting their returns, so they’re going to have to be lending somewhere, somehow.
Rob Southwell: Yeah, exactly. I mean, you saw that in the interest rates. September last year, they pushed the rates up by 50, 60 basis points and straight after Christmas, they all come down by the same amount because they just didn’t need new loans. They’re getting squeezed by APRA not to lend so much, which has really curved the investing lending, but they still need to grow, so.
Mike Mortlock: Exactly. Getting back to your sort of high net worth individuals, I’m just interested in asking, is there something that typically that they’re doing better than the average person in investing, or is it something about their risk appetite or their planning? Is there anything that you sort of see in common with people that … Obviously they have great advisors, but you can lead a horse to water of course. Is there something they do well that they have in common?
Rob Southwell: I think there’s a couple of aspects there. Usually they’re quite discerning, so they’ll usually say no to more things than they say yes to. Particularly, so the assets, I think, generally the numbers have to work. If the numbers don’t work, they don’t look at it. If the numbers work and they’re comfortable with the demographics of the area or if it’s got some peculiar aspect to it, they’re comfortable with that … so I think, having done more of it, they’re probably more discerning or they have a model that works for them, so they tend to stick to that.
I think second thing is that they have probably a much longer term view, and I’m talking 10, 15, 20 year view. I think quite often people who invest in property … they say with shares, you should be at least two years out. I think with property, you need to be at minimum five year plus kind of horizon. And so they tend to be investing for a longer term.
I think from a risk perspective, they understand how to manage the risk. So they’ll tend to have probably a better buffer. So even though they might be borrowing their maximum LVR, they have funds or equity available at their disposal so that if something, they have a bump in the road, they can ride it out without having to sell the asset under distress.
Mike Mortlock: Yeah, so they never box themselves into a position where they have to let go of an asset, which might be costing them in the short term, but over the long term it’s actually a really good thing to hold on to.
Rob Southwell: Yeah, exactly. And then for me, that’s one of my biggest things, is having a buffer and knowing, or predicting, and kind of road testing your own portfolio to say, “What happens if this happened?” Or “What happens? How’re you going to deal with it?” Yeah, I guess that’s what it … It’s the real boring stuff. It’s being a little bit risk averse. It’s being really discerning. You know, the old Kenny Rogers song, you got to know when to hold ’em and when to fold ’em.
Mike Mortlock: Yeah, good advice.
Rob Southwell: Sometimes the hands you fold are just as important as the hands you win. So it’s saying no to things when you know that … Using your head rather than your heart. And being smart about managing the risks, and being very patient.
Mike Mortlock: I guess, there’s two things that have come up that I didn’t expect in this interview so far. One of them is Kenny Rogers, of course. The other being the RBA governor come into your office. I mean, the most famous person we get in our office is probably the postman. But it just showcases why I love to interview people such as yourself, Rob. You’ve just got that access to those upper echelon decision makers, which leads into my next question. And that’s, what do you think the next federal election will have as an influence on the property market?
Rob Southwell: Yeah, I think it’s a really important, it’s a pretty important election. I think if we remain with incumbent government, I don’t think … You might see some tweaks. I think the biggest risk is tax policy.
Mike Mortlock: Superannuation is tweaked every 10 minutes in Canberra, at least in modelling.
Rob Southwell: Yeah, and it’s … We advise a lot of clients that have self-managed super, and they get slammed a lot, you know? From changes all the time and it’s a system designed to make people self-reliant in retirement. So I think some stability around that is important. I think from a property, negative gearing is continually brought up by the opposition. I think if they were to get in and actually been able to enact some of their changes, I think you’d have a short term negative impact on property and some associated property businesses. I don’t think it’s a great thing. My analysis and commentary on these, when looking at one of the big factors that affect property growth, yeah, negative gearing is probably a small contributor, but we’ve had negative growth for 30 years. Sorry, negative gearing for 30 years. And people borrow money to buy all sorts of assets as well, so I think using negative gearing to change housing affordability is probably a bit fraught with danger.
So the housing affordability issue is probably the biggest issue, if you break it down. And probably the biggest impact on that is release of land, and how they go about releasing land or changing zoning to allow further properties to be built, be it medium or high density, or allowing development further out. But Sydney is a funny location particularly, because we’ve got national parks to the north and the south, we’ve got mountains to the west and an ocean to the east, so there’s only so much land to build houses.
Mike Mortlock: It’s sort of a property investor’s dream from a supply point of view, isn’t it?
Rob Southwell: Yeah, yeah. And we’ve got nearly 400,000 people coming here every year, into Australia. And they have to go somewhere. It’s a really hard one, but I don’t think in terms of longer term real reform that you’re going to make a dent in housing affordability by removing a tax policy. Because most people I speak to who have property investment, would continue to invest in property even if the tax benefits weren’t there.
Mike Mortlock: Yeah, exactly. So that sort of ruins some of the arguments around negative gearing and what that’s going to do to housing affordability. I guess, I’m interested in how important property is to the overall Australian economy. I mean, there’s a lot of people who are talking about housing affordability as their sort of main focal point, but a lot of people have exposure to property. They might not own directly, but through super funds and that sort of thing. What role does property play in the economy in Australia?
Rob Southwell: Well, you know, looking at say the last Victorian and New South Wales budget announcements, over 50% of the government’s revenue is coming from property. And in New South Wales, books have been better than they’ve ever been, and they’re using that to build this infrastructure, which is really driving some of the growth in the state as well. So when you look at it in that regard, it’s really important and it’s pretty vital to the economy. And I think Australia generally are a property led country, putting aside some of the major industries. Obviously I think, in bound tourism, obviously resourcing, professional services, all those types of things. Particularly on the east coast, we are very focused on people driven business, so IT businesses, tech businesses, professional services. They all require, they’re all built on having a large pool of people and all those people need to live somewhere. So we are very reliant on those people-centric businesses.
And we are getting a lot of interest from foreign people for property, both commercial and residential. So I think it is pretty important. But at the end of the day, that doesn’t drive the economy. It’s not our biggest sector of the economy, but it does have a big impact, particularly at a government level and their ability to build schools and rail projects and hospitals and all that stuff.
Mike Mortlock: Exactly, all the stuff that we need to live our lives. A bit of a cliched question, Rob, but I have to ask it. What are you thinking in terms of areas for capital growth opportunities in the next couple of years? Obviously you mentioned we’re probably looking at single digit growth in Sydney, but there are other areas that you have your eye on though, that you think the fundamentals are good from an infrastructure, and housing stats, and supply point of view?
Rob Southwell: Yeah, sure. Probably given that I’m taken my foot off the gas personally from an investment perspective, I think still think some of the prime areas around New South Wales are still worthy. The trouble with those is, a lot of that stuff now … If you’re looking at eastern beaches, inner city areas like Rushcutters Bay, there’s a lot of change happening around the Potts Point, King’s cross area. And actually trying to find areas still going through periods of change, and there still are plenty of those areas to pin point. I think there are still some areas in the inner west that are still, have ways to go in terms of future growth. I refer back to my first place in Erskineville and remember telling my parent I bought a house in Erskineville, and it was like, “Why are you buying there?” Their expectation of, their memory of that area, when they were growing up around there. So I still think that there are some good opportunities. You’ve just got to do your research or employ the services of an expert to help you find those. I think the tricky part is, particularly for new plans off the plan, I think they’re overpricing them at the moment. So I’m probably 50% old stock, 50% off the plan, and I’ve said no to a lot in the last 12 months because the pricing is just too bullish, and they’re stealing your first couple years of growth.
Out of New South Wales, I’m not really an expert. I look at some of the inner city, sort of the inside that 10K circle down in Melbourne, probably more focused on houses, so your semis and free standing houses. Your Hawthorne’s, your Carlton areas, I think are still very attractive for longer term. I think Melbourne might be suffering from a saturation of medium density, high density apartments. So I think that’s a good opportunity.
And then you’re looking at areas like Hobart. So a colleague of mine got his timing spot on and started buying properties in Hobart and around Tasmania two, three years ago. I still come back to long term fundamentals though. I think when the market cools down a bit, you have to have a real shift in fundamentals, so you’d need people to … So I think that’s driving, there’s a little bit of Victorian life style assets purchased there. I think there’s people moving down there for sea change, but you need the industry to support it longer term. I don’t think I’d be jumping on Hobart right now. That’s probably had … You know, if you look at the last 10 years, it’s gone up 45% and 27% of that, half of that happened in the last 18 months, two years. So, that often worries me. When you look at the longer term rates, it’s been quite anaemic.
I always advise people to steer clear of coastal areas. I’ve spoken to many clients with sand between their toes and told them not to buy that holiday house. I think you’ve got to bring it back to fundamentals. What’s the area historically done? What’s the asset, the median? What’s the asset’s done best around the median house price? One of the fundamentals, even though it sounds expensive, compared to other assets, it’s probably still going to do better over longer term.
Mike Mortlock: Yeah, and a lot of those lifestyle destinations, there’s a lot of people that are moving there as a sea change or as retirees, and not necessarily driving that economy. So that’s something to be aware of as well.
Rob Southwell: Exactly. Yeah, and you need to be in areas that have multi industry sectors that are driving the economy. I think you’ve seen that with the smaller towns that run the periphery of all the resources boom. As soon as the resources boom stop, some people have been absolutely smashed from a real estate perspective doing that, so you got to be really, really careful. Like I said, you got to pick the areas that have done well for the last 30 years. As I said to someone, at whatever time did you buy property did you go, “Oh, my God. That was so cheap.” In hindsight, it’s always cheap, but at the time you buy it. So you’ve got to stick to fundamentals, I think.
Mike Mortlock: You just wait long enough and it’ll definitely be cheap. Now Rob, if people are interested in getting in touch with you, is there an easy way to do that?
Rob Southwell: Yeah, of course. Probably the easiest way is to email me and it’s email@example.com and I’d be happy to talk to people.
Mike Mortlock: Awesome. And I very much appreciate your time, Rob. I guess I wanted to ask just in closing, if there’s one piece of advice you could impart, I know you’ve given us a lot of gems already, but if you can think of one more, what would that be?
Rob Southwell: It was the first partner mentor I ever had, he said to me, “If you thought it was a good asset, and it is a good asset, whatever you do, don’t sell it.”
Mike Mortlock: Right.
Rob Southwell: And find other ways to use the equity in it, but by all means, do not sell it if you absolutely do not have to.
Mike Mortlock: Awesome advice. Or at least wait until you’re in … your super fund’s in pension mode or whatever you need to do to minimise that tax.
Rob Southwell: Exactly.
Mike Mortlock: Well, Rob, it’s been an absolute pleasure. Thank you very much for your time and really enjoyed the interview and appreciate you coming on.
Rob Southwell: Thanks very much, Mike.
Mike Mortlock: Cheers.