On the road again...with Dr Matt - Airlie Beach

On the road again...with Dr Matt - Airlie Beach

Back when I first started investing, the common mantra was go out and look at 100 properties, make offers on 10, and hopefully get your offer accepted on a few, and then choose the best 1 to settle on. These days, with the advent of more and more sophisticated research tools online, I certainly would not be recommending you follow that advice. 

However, whilst in my opinion a good 85%-95% of your research can be done online (and some may argue you never need to actually get out of your chair), I personally still think there is massive value in actually getting on the ground and doing some offline research as well.

So to quote Mr. Willie Nelson himself when it comes to due-diligence, “I just can’t wait to get on the road again…”

As I have mentioned previously doing actual on the ground research allows you to truly look at the local market, gauge local feedback about the area, and look for imbalances between the actual market conditions and the actual consumer sentiment. Sometimes, locals have first hand information you would not otherwise know unless you speak directly with them. However, at other times locals can’t even see what is happening all around them, or to use the saying “they often can’t see the forest for the trees”. 

And so it was that my business partner and I found ourselves in Airlie Beach recently, after a whirlwind visit through the Gold Coast and Cairns.We were not in Airlie Beach by accident, but rather to prove, or disprove, what our online research was indicating. We spent 3 days speaking to local real estate agents, builders, business owners asking them about where the market is and where they saw it heading.  We even filmed some interviews, and if you email us at  info@thepropertymentors.com.au requesting access to this we can arrange to share them with you.

So why exactly were we In Airlie Beach?

As I have mentioned in previous articles we tend to take a long term macroeconomic view of property investing, and then add our own value added component for immediate uplift.

This will most often be in the form of either a development or sub-division strategy, and given that the time frames for these strategies are often 12-36 months we need to be able to confidently predict market movements often years in advance of their current reality.

In contrast, the Ripehouse team, for example, will use the latest trend analysis to identify the data that supports imminent price growth, which is great for strategies with existing markets and/or near term settlements. However, this strategy is one that we see as being perhaps of a more short-term or technical nature than some of our strategies. By the way neither strategy is right or wrong, or better or worse for that matter, than the other, we are just highlighting that in property their is more than one way to skin the cat. 

In fact, one of my pet hates (no pun intended) is companies that promote only one way of doing property. Somehow, they have decided that theirs is the only way, and that every one that comes into their system has to do it that same way. What is that saying about round holes and square pegs?

Anyhow, let me jump back off the soapbox for a moment to return to the points I wanted to make about the ideas behind macroeconomic overlays.

If we take a good look at the global economy right now, and Australia’s place in that, we can deduce a few things from all the data right now.

We are in a low growth environment! Obviously most of the advanced economies e.g. Japan, Eurozone, US etc have been limping along since the GFC and even the emerging economies that have been driving most of the world's growth  eg. China, India, etc. are also slowing.

We are in a low interest rate environment and likely to stay here for many years to come! The central bankers around the world have dropped interest rates to zero (ZIRP’s), and in some cases below zero (NIRP’s). The goal was to stimulate inflation, through both business and consumer spending. But….

We have low inflation rates, or even deflation, or recessionary forces dominating most economies! The RBA for example has a mandate to keep inflation between the 2-3%p.a band, but we are currently sitting well below that at 1.5%p.a. 

Most of the economies around the world are all simultaneously wanting to see their currency trade lower! I have found it useful to think of it like this! With the lower global growth, there is less money flowing around the world. Governments and businesses therefore would like to see their currencies devalued to make their export markets more globally competitive. In the case of Australia, our dollar has been heavily pegged to the Terms Of Trade, and by extension, to the economic performance of China. At it’s peak in 2010 China had GDP of over 12% p.a (now a bit over 6%p.a) and iron ore at it’s peak in 2011 was trading at over $190 per tonne (now at a bit over $52 per tonne). As I write this article the AUD:USD exchange rate is sitting at just below 75c. That is the Aussie dollar will only buy US 75c. Compare that to the all time high of $1.10 hit in 2011 that means that right now the AUD is about 32% more competitive than it was in 2011. Some economists are saying that given the world conditions that the AUD could fall to as low as 60c, 50c or even 40c. Whilst the AUD sits uncomfortably high at US75c, and with low inflation figures, and a somewhat cooling property market thanks to the APRA intervention last year, we believe the RBA will cut interest rates even further over the next 12 months. 

So depending on your views of the  state of the global economy, where China is headed, relative interest rates, the Terms Of Trade position, and the global currency wars afoot, how you allocate your money from a asset allocation perspective can make a big difference to your outcome.

We believe that there is a very strong macroeconomic argument to be made that those industries hit the hardest in recent years, such as the tourism industry, will now find macroeconomic support by the conditions at play now and probably over the next decade or two. As such, and before that really happens, there is a window of opportunity to buy into depressed markets, that are supported by strong tourism growth. 

So that brings us back to Airlie Beach. 

One of the arguments is that investing in small markets (Airlie Beach proper only has around 200 houses in it), with an economy reliant only on one economic driver is fraught with danger.

In general, we agree with that, and without some very enticing macroeconomic overlays we would not be investing in this market.

But lets do a quick summary of the drivers behind the Whitsundays market, that attracted us up to the area:

TOURISM: Whilst tourism, is undoubtedly the major economic play for us here, and we expect China to slow, and the AUD to fall, there are actually 2 other countercyclical industries that will cover the position. Namely, agriculture and mining. So if the AUD stays high, it will largely be because China, and/or the terms of trade are growing beyond expectations. In that case the property prices in the Whitsundays will be boosted by renewed activity and jobs in the mining sector. The Whitsundays are perfectly placed alongside the Bowen Basin and the developing Galilee Basin, both world renowned mining provinces providing industry and opportunity. The Whitsundays also boasts the developing port of Abbot Point which has potential to soon become the largest coal loading facility in the world and home to the 6,000 ha State Development Area. 

GENTRIFICATION: This is one of the major things that doing on the ground research can help uncover.  There are currently $37 billion worth of developments earmarked for the Whitsundays LGA. Since my last visit to the Whitsundays, I was actually super impressed with the level of urban renewal and gentrification going on in Airlie Beach and the surrounding suburbs of Cannonvale and Jubillee Pocket. A number of 5 star resorts have either started, or are being built, or in planning. The council has spent millions upgrading the main street for example, and new restaurants, café’s and businesses have opened up and are expanding. The Port of Airlie development and Abell Point Marina development are attracting world class vessels including $50+M superyachts into the area. One of the things I learnt from my on the ground research for example is that the local Jet Ski Hire business has expanded from 5 Jetskis to 46 Jet Skis in the last 2 years alone, and that occupancy rates are now approaching all time highs.

DEPRESSED PRICES & SUPPLY CHAIN: Since the peak of the market in 2011 (driven largely off the back the mining boom) prices have been smashed by as much as 50%. Stock on market is low, and is not selling on large volumes. In fact, most of the locals are of the belief that prices have been pretty much flat for years. As a result of that there has been limited new supply coming online meaning that the whole area is becoming dated and screaming out for new development. 

FINALLY DON'T LEAVE ANYTHING TO CHANCE: Obviously, whilst we see that the market is supportive of good medium to long term growth, we don’t want to leave anything to chance and we want to create at least an upfront profit for our hard earned investment dollars. So whilst we were there, we finalised the acquisition of a development site which will enable us and our members to generate at least $140,000 (and we believe it will be closer to $250,000) in immediate uplift and a dual income stream via the acquisition and subsequent development of 9 x Duplex properties. Given that this is a members only opportunity I cannot say anymore than that in this forum but again if you are interested in learning more about how we work shoot us an email to info@thepropertymentors.com.au.

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