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How I'd invest $1 million

Scott Keck, founder of strategic property consultancy firm Charter Keck Cramer, was one of the few in the property sector that predicted the demise of some property trusts. Now he tells SmartCompany his outlook for property, his business strategy, why Melbourne is the nation's hotspot and what property he would buy if a fairy godmother handed him $1 million tomorrow.

Amanda: Scott, last year in the doom and gloom you were very positive. You had revenue of around $26 million. How's the year gone for you?

Well, we've had revenues this year of $30 million, so we've had a better financial year this year than we did last year, and we truly expect to have even a marginally better year next year. So although we're not recession-proof, we're reasonably recession resilient. The reason for this is that our firm's operations involve quite a bit of public sector work and our views about property are very much in demand in these turbulent times.

Now you went through the 1990s, what's different this time around? Back then there was quite a lot of controversy around property valuations and pressure on consultants to value things certain ways. What's it like this time around?

Well, in fact it's very, very similar. The same stresses, the same anxieties, the same pressures are there. They're all debt related. The difficulty was that in the 1990s they were debt related because interest rates were too high. Now, they're still debt related not because interest rates are too high but because there's no debt availability.

So what does that mean in terms of pressure?

Well, very viable projects of which there is a true market demand and for which there is a viable strategy, are not being able to be implemented because the debt that the private sector normally relies upon to carry these projects is not available. Previously, it was not available because the cost was too high in the 90s. Now it's not available because the banks have a liquidity problem.

So are we going to see more companies go broke in that sector?

Things are not as bad as the anecdotal commentary would make out. There's a lot of positive, viable, development occurring, particularly in the residential sector. There's also a lot of private investor support for commercial property that is well leased and although there is a lot of talk about prices having softened or values having softened, the only values that have softened have been for properties that have weak credentials.

Properties that are well leased and are good properties, the price decline has been very little.

There's still very good demand at very strong prices for good property. The property that has suffered most in this current cycle is non-residential property, that is to say retail or commercial property which is secondary by location, secondary by building quality and most importantly secondary by weak lease structure. If there's no secure income stream, if there isn't reliability of leasee commitment, those are the properties that have been suffering.

So where are the hotspots then, where are we looking?

If you make a priority list of hotspot real estate opportunities at the moment, Melbourne is the hotspot. And I'm not just saying that because I'm in Melbourne. That's the truth of the matter.

Why are you saying that?

Well, we don't have the paper thin economy of Queensland, we don't have the higher value, now de-escalation values, that Sydney's going through. We've got a far broader based economy than Adelaide, Perth or Tasmania, and we also have (and this is probably the real reason) the fastest growing population and the greatest demand for new housing.

And where is that concentrated, inner city?

It's always been the case but there's a very strong housing demand in Melbourne, increasingly more of it is medium density and apartment orientated and it's probably 55% in the outer suburbs and 45% in the inner suburbs. So of all the new housing demand, and it's very strong, 45% of it is basically towards the apartment or townhouse market and 55% of it is towards the traditional subdivided block and traditional house market - the house and land package.

And how's that changed from five years ago?

Five years ago the 55% outer suburban fringe (house and land package) and 45% inner urban mix would have been 60% outer fringe and 40% inner urban. And so it's come off 5% for the outer urban and gone up 5% for the inner urban.

Looking forward what's it going to be in five year's time?

Over the next 10 years there will be big number changes and move to 50/50. That doesn't sound like a big change but it is. So the 55% outer suburban demand, 45% inner urban demand, over the next 10 years will probably change to 50/50, that is to say less outer urban demand and more inner urban demand.

So if someone gave you $1 million Scott, what would you buy and where?

I'd buy two townhouses for $500,000 each in the inner suburbs and the reason for that is if you can't afford a house, and most people can't now and you have to opt of some other form of housing, would you rather have a townhouse or flat? And I ask you Amanda Gome what would you rather have, you'd rather have a townhouse. Okay, so the next best alternative to a house is a townhouse.

So houses having got too expensive, the demand will now shift to townhouses. And for the next four or five years in Melbourne, particularly in the inner suburbs both east and west, the lowest risk, most assured investment you could have would be to buy a townhouse, a residential townhouse.

And what does the townhouse look like?

It's two stories, it is two bedrooms with a study. It's about 125 to 130 square metres. It's been built in the last eight to 10 years and is probably one of up to 10 in the particular development.

So we'll expect to see more of those being built?

That's where the really savvy developers are focussing their attention. There's a lot of very good quality, smaller number, boutique scale developments coming on and they'll meet with very strong demand. People don't live in houses anymore, they can't afford them. They're living in townhouses, they're not fully embracing apartments yet. A lot of tenants are but owner/occupiers are saying okay I can't afford a house but I'm not going to buy a bloody flat, I'll buy a townhouse.

And what's happening to houses then?

Well houses are supported by a market of people who are in the upper socio-economic profile these days, whether it's due to income or capital. A good house in the inner suburbs these days costs you $800,000 to $900,000, if not $1 million. But in the same suburbs where houses cost you $1 million, you can buy townhouses for probably 50-60% of that value.

On housing prices?

The house values do tend to correlate to the economies broadly speaking and I would think that there are still some economic issues in South East Queensland around Brisbane and I think Perth will actually get through it because there is a rebound in the mineral markets over there.

I would say it's still potentially soft in the highly concentrated areas of South East Queensland. I would say that Adelaide and Tasmania are neutral and balanced, I would say that Perth looks like it might be underpinned. Melbourne is starting to rebound and that's in the statistics and I would say Sydney would be lucky just to hold its own in the next 12 months.

Will the Government make changes to negative gearing?

If you look at the media and if you look at the reports, there has been discussion on a number of occasions about negative gearing and where it's all going. And I would say there is enough public debate about negative gearing to raise the question of whether or not its status is going to be adjusted that you would have to ask the question, are there some short-term changes about to brought in?

Well, they've already started with holiday homes...

Well if they're going to do it, they're going to cut deeper than that.

What's happening with coastal property? A lot of our readers have coastal homes.

That's a bit soft: I mean you wouldn't be selling a coastal home at the moment unless you had to.

Shares or property?

A lot of people are saying to themselves at the moment they're torn between the equities market and the housing market or the real estate market.

Let me say this, over a long period of time, usually over any 10 to 15 year period, the equities market performs very similarly to the real estate market. In other words your total returns, whether it's income or capital growth are basically the same from both. So if that's the case, the question can be asked what difference does it make as to which one you would invest in?

The answer to that is that over the longer term, they might perform similarly but along the way, they perform very differently. And if you look at the current market, equities have been slashed, they've gone down by 50% on the share market but real estate hasn't. Now why is that? And the reason is this: there was much more debt in the equity market than there was in the real estate market.

But you buy shares in some company, you don't know how much debt the board has taken on board but you buy a little flat somewhere, the debt is under your control. So without getting into the complications, it is a fact that although these two investment classes perform similarly over a long period of time, they behave very differently along the way.

So from that, you might then say you're safer in property?

No, you're safe to understand the reason for balancing your investments in a variety of places but you should never be without real estate.

It's a very good point. What about your industrial, retail?

Well, the commercial markets are being knocked around more in this economic downturn more than the residential markets. Of all real estate, the residential markets have been much more resilient. Now when you move away from residential and you look at the three broad categories of the non-residential markets which are commercial, retail and industrial, probably the market that has suffered the most is industrial vacant land. And at the other end of the scale the non-residential property that's performed the best is anything in those three categories that has a really long lease.

And what about moving forward? What would you do there if you had $10 million?

Well for $10 million, I'd be looking to buy anything that's got a 15 year lease to a Triple A tenant because it's a blue chip guarantee, so it's like buying a bond.
So it's either a supermarket or Bunnings or a petrol station. Anything that's got a long-term lease.

Now Scotty, you were probably the first I know of who really warned people about the property trust. What should you be looking at investment wise now?

Well, my caution about the property trust was always for the reason that I think that if you're going to be in property, you should do it directly rather than leave it to a manager.

The managers take too much of the profit and are often too avant-garde with their gearing strategies. And that's what's brought all of these trusts undone. So don't get involved in property unless you can do it directly. That's my big push. This would upset the trusts but I don't mind being called controversial.

So you're at $30 million revenue now, what's your plan going forward?

Just to stick to our knitting. We've built a great business, my employees and my partners are all very happy with the business. So far as I'm aware our clients are very happy with the services that we're providing and we're just very thankful and satisfied that our business is professional and broad based.