Given Australia’s love affair with residential property, what role should holistic financial advisers be playing? ifa’s Rachael Micallef reports
YOU ONLY need to step inside an auction room, open a newspaper or look at the real estate billboards lining any major motorway to gauge the extent of Australia’s love affair with property.
Owning a slice of Australia is so entwined with the national culture that it is of little wonder that so many people turn to bricks and mortar when it comes to kicking their investment into gear.
According to data from the Australian Bureau of Statistics (ABS), the total value of investment housing commitments rose by 3 per cent or $308 million in December 2013 to reach $10,675 million, following more than two years of consecutive monthly increases in investor activity.
SQM Research managing director Louis Christopher says he expects the general momentum of the residential investment market to continue over the year, albeit at a slower pace than in 2013.
“It depends on which capital city we’re talking about, but our forecast is for a 7 to 11 per cent rise in residential property values across the capital cities for this current year,” Mr Christopher says. “That comes off a 9.3 per cent rise from last year, according to the ABS.”
But Margaret Lomas, property adviser and director of Destiny Financial Solutions and a host of Your Money, Your Call on Sky News Business, says the enduring popularity of direct residential property investment hinges on more than just its current market valuation.
“The thing about property is that people feel it’s safer – even though that is probably a false sense of security,” Ms Lomas says. “People buy residential investment property because they have a real familiarity with it and they understand how it works, as opposed to potentially investing in the share market, or managed funds, where the average person can often feel a little bit at sea.”
It’s a sentiment well understood by the property experts who proliferate the direct residential property sector, yet it is still one area which financial planners seem to be hesitant about taking part in.
Ms Lomas and other property advisers have become extremely successful in what is an emerging profession and led by Property Investment Professionals of Australia (PIPA).
Given the emergence of this new semi-professional class, together with advice regulation putting a client’s ‘best interests’ front and centre, many financial advisers are now considering how best to get a piece of the pie.
With this in mind, ifa takes a look at the debate surrounding the provision of advice on Australia’s favourite asset class and considers the role of financial planning within it.
A double standard
You could be forgiven for thinking that property, as a stalwart of the Australian investment landscape, would be subject to some of the most stringent regulations of all investment vehicles. However, direct residential property investment has almost no regulation whatsoever.
“That’s the whole problem – there aren’t any [rules],” Ms Lomas says.
“If you speak to the government, they’ll try and tell you there is, but in reality what they’re referring to is the new Credit Act.”
The National Consumer Credit Protection Act 2009 outlines the conditions for holding an Australian credit licence and how much money is lent to people to buy residential property but, as Ms Lomas says, it “provides absolutely no safeguards around how you buy property and what you buy”.
The problem is that advice on financial products can only be provided by those who are appropriately licensed – typically with an Australian Financial Services Licence (AFSL) or a credit licence.
However, under the Corporations Act 2001, residential property investment isn’t defined as an investment product.
The Act specifies in note 2 to section 763B that “examples of actions that do not constitute making a financial investment under this subsection are: (a) a person purchasing real property or bullion (while the property or bullion may generate a return for the person, it is not a return generated by the use of the purchase money by another person).”
The rules for property only differ with property funds, which are included in the Corporations Act as an investment product – meaning anyone giving advice on these investment assets must be RG146-compliant. It’s a double standard that PIPA chair Ben Kingsley calls “a major concern”.
“[Residential] property is often the highest value transaction investors enter in to, and yet no formal training or education is required in terms of the provision of advice regarding property selection and strategy,” Mr Kingsley says.
“This stands in stark contrast to advice surrounding equities, taxation, financial planning and housing finance, all of which are closely regulated. This is hard to comprehend.”
However, Real Property Advice’s strategic relations manager, Wayne Slager, says while he believes regulation is unnecessary, he thinks it is inevitable.
“From a philosophical point of view, I find it interesting if not inconsistent for advisers to rail long and hard for property to be regulated when their own experience in their regulated space is often criticised for being heavy handed, costly, cumbersome and ultimately [delivering] very little, if any, benefits to the consumer,” Mr Slager says. “So why would applying the same regime to a different asset class produce anything better?”
Can you go direct?
While the area may be largely unregulated, if advisers want to grab a piece of the residential property pie, they can’t just jump in and start advising.
The rules around the provision of residential property advice where it meets financial planning are not clear cut and require some consideration, according to Mr Kingsley.
“From a financial planning point of view, you would want to be very careful about giving advice on property,” he says.
The primary concern is industry conjecture over whether or not residential property advice falls under real estate or buyer’s agent licences. The FPA says financial planners can’t give advice on specific properties without holding a real estate accreditation.
“They can definitely talk about asset classes – including property – in respect to the appropriateness of the asset allocation for a client but they can’t make specific recommendations on direct property,” FPA general manager for policy and standards Dante De Gori says.
Even if they received appropriate real estate accreditation, he added, “the reality is, even with their hat on as a financial planner, they are unable under the law to be able to provide direct property recommendations or advice on direct property”.
However, some in the legal community hold a different view. As to whether or not a financial planner can give advice on specific properties, Baker & McKenzie partner Astrid Raetze believes “there is nothing in their AFSL that prevents this”.
“There is no need for a real estate licence unless services relating to the sale, purchase and leasing of properties are also provided by the financial planner,” Ms Raetze says.
Rockwell Olivier managing principal Peter Bobbin holds a similar view – that “financial planners can give advice on property and on specific property” the way anyone can due to its unregulated nature.
“I believe there will be a line where they can make a recommendation but be in a position where they don’t need to have an agent’s licence,” Mr Bobbin says.
“As long as they’re not holding themselves out as a buyer’s agent… or as long as they’re not holding themselves out as a real estate agent… talking about the financial metrics of a property is not, by and large, dealing in real estate.”
The Fold Legal’s managing director, Claire Wivell Plater, says whether or not an adviser needs a buyer’s agent’s licence depends on whether what they are doing “falls within the definition of the activities for which a buyer’s agent licence is required” – and this varies from state to state.
There is, however, no reason why a financial adviser cannot hold a buyer’s agent licence, she says.
“There is no reason you couldn’t provide both those services… there is no prohibition on doing it. It’s just a question of do you have the skills and the ability,” Ms Wivell Plater says.
Regardless, it is important that any adviser looking to undertake to provide these services gets appropriate legal advice first, to ensure they remain compliant.
What all the experts to whom ifa spoke agreed upon were the difficulties around professional indemnity (PI) insurance and dealer group conditions for advisers who wish to give direct residential property advice.
“Within most financial planner dealership groups it’s prohibited, and a lot of PI insurances that cover these financial planners have that giving advice on non-financial products such as direct property could potentially be a breach of their PI cover,” Mr Kingsley says. “This is the frustrating part in terms of someone putting on a suit but acting as a marketer, trying to sell a development: they can give property development advice outside of an SMSF every day of the week.”
As Mr Bobbin explains, the issue extends from developments over the years which have seen fewer PI insurers in the market, as well as both increasing premium costs and reduced scope of cover from the insurers that have remained.
He says that while direct residential property advice doesn’t constitute “financial product advice” as stipulated in the Corporations Act, it can give rise to financial product advice through “a negative approach”.
“You have got financial advice occurring if a financial planner is recommending to a client direct real estate in circumstances where the planner is fully, reasonably expecting that the client will be pulling money out of a different product,” Mr Bobbin says. “So while it doesn’t represent financial advice as such, it certainly can represent advice … and as a consequence of that, the dealer group and the planner’s licence is open and exposed.”
For this reason, many dealer groups forbid their licensees from giving this kind of advice within their licence agreements.
“I expect that to the extent of any recommendation involving real estate, financial advisers would be well advised to identify whether or not they are covered by their insurance,” Mr Bobbin says.
However, the direct, specific advice route isn’t the only option for financial advisers wishing to advise on residential property.
With most advisers avoiding the sector due to the hurdles in providing direct residential advice, Omniwealth chief executive Aaron Greaves says his business saw an opportunity to “treat property as just another investment solution”.
Omniwealth provides a comprehensive, in-house residential property advice service, involving financial planners, mortgage brokers and property professionals.
However, to ensure their business remains compliant, the property branch of Omniwealth is kept distinct from financial planning within the business, essentially outsourcing to another branch in the company.
“So what technically happens is a financial planning client of Omniwealth is referred to Omniwealth Property and Omniwealth Property is a licensed real estate agent,” Mr Greaves says.
“It operates under instruction to fulfil a purchase of property based upon the strategy provided by the financial planner. The fact that because we provide holistic advice… I can cover all of the financial aspects of their life… and really open up the world of investing for the client,” Mr Greaves addS.
James McFall’s business, Property Planning Australia, is a financial services business licensed through AMP that includes mortgage and finance services.
While, historically, buyer’s advocacy was part of the business’ in-house offering, they now outsource the service externally.
“We’re not getting involved in the investment attributes of it as much and we’re not telling people to buy one asset or not buy another… we now outsource that to consultants, some of whom have previously worked with us,” Mr McFall says.
“The asset decision itself is not something that is really the domain of the planner; it’s more helping people understand where it fits into their overall financial plan.
“In terms of where our financial planning advice sits within all that… it’s taking into consideration [a client’s] broader financial plan and helping them better understand how property fits in it.”
Mr Bobbin says this is the most common way planners get involved in direct residential property.
“The way that the area is mostly done is under a … sophisticated referral relationship,” he says.
“So there will be someone who is a licensed real estate agent – either buyer or seller — and the financial adviser will talk in ‘overview terms’.
“When the client has almost made a purchase of the property – not an [actual] purchase of the property – they’ll then pass the client onto someone who is formally licensed.”
While Ms Lomas says the general skill-base property advisers need is similar to that of financial advisers, both she and Mr Kingsley recommend advisers who wish to advise on residential property in any way look to cement their knowledge base through additional accreditation.
Courses are available through many higher education institutes, as well as through industry bodies, including the Property Investment Association of Australia (PIAA).
PIPA also has its own course which gives graduates the association designation of Qualified Property Investment Adviser (QPIA) on completion.
“[The course] does have a very clear framework in which advisers can work through, firstly, the understanding of the individual and their investment goals and, secondly, making the most appropriate property selection to meet their criteria,” Mr Kingsley says.
“[It finishes] in how you would then structure a property investment plan or a property investment report that would be a part of the recommendation you would then deliver to your client.
“It’s really about replicating a statement of advice but from a direct property point of view.”
Ms Lomas adds that the QPIA designation was designed to be compliant with RG146.
“We spent years and years developing it to make it appropriate for property advisers and also to make it fit in with the existing financial services regulation so if what we hope will happen [happens] – which is property advisers are eventually taken under that particular framework,” Ms Lomas says.
Not your cup of tea?
Given the potential barriers to providing direct residential property advice, there are other ways in which to give clients exposure to property without circling house listings in a newspaper. Funds are a less emotional way to hold property and can deliver additional benefits to clients, depending on the type of fund and structure chosen.
“The benefits of property funds are [that] they give the investor the opportunity to choose,” AMP Capital’s core property fund manager, Damian Fitzpatrick, says. “You can have one property or a percentage of a number of properties, or you can either be sector-specific or diversified.”
Australian Unity Investments’ head of portfolio management, Ryan Banting, says property has repositioned itself to become “a very attractive asset class at the moment”.
“Over the past 12 to 18 months, we’ve noticed that investor interest and appetite, particularly from advice clients, has been very strong,” Mr Banting says.
“I think we’re starting to see investors that are looking for the stability that property provides in portfolios. It doesn’t have the volatility that an Australian and international equity exposure has but it is also able to provide a strong yield.
“As people start to roll off some of the longer duration term deposits they entered into two or three years ago, and as the chase for yield goes on… they need to look beyond just cash and term deposit products to achieve that enhanced yield.”
Property funds each have their different attributes and benefits and Mr Fitzpatrick says choosing one involves looking at a client’s individual circumstances and “being aware of what you’re invested in”.
“How do you pick between direct and listed? They’re both popular for different reasons,” Mr Fitzpatrick says. “Direct really is because you have this perceived level of control.
“Mums and dads [like direct] because of the negative gearing component where they can… use that as a tax deduction.”
Property syndicates have also become more popular with mum and dad investors in the recent market, he adds.
APN Property Group director, corporate development, Tim Slattery says the popularity of property syndicates stems from their ability to give investors access to commercial property.
“Unlike listed [Australian] real estate investment trusts [A-REITs] and general equities which trade on the ASX, property syndicate pricing reflects the true value of the underlying assets, based on regular (generally half-yearly) independent valuations which determine the net tangible asset [NTA] value,” Mr Slattery says.
“NTA pricing naturally leads to smoother investment returns and protects investors from the often irrational price fluctuations that plague listed markets. Commercial property by nature is a defensive, high yielding, lower growth asset class that naturally enhances portfolio diversification.”
Mr Fitzpatrick continues that while A-REITS are often popular due to the high yields they can deliver, it is important that investors understand they behave like shares so they need to be prepared to weather the storm in poor share markets.
“When there is poor sentiment in the market or when there is a global shock… the share market tends to drop and react and REITS, being part of shares, will do the same,” he says.
“So if you’re a longer term investor, you learn to try and eliminate the noise and just sit there and have that expectation.”
Mr Banting says one of the benefits of unlisted property is that it avoids this equity market volatility.
“You’re getting direct property exposure… [but] you get that lack of volatility flowing through, you get the benefit of an increasingly large and diversified asset and tenant base and in a lot of cases it is a defensive means of protecting your portfolio against inflation,” he says. “In addition to that, what we see as a benefit of the unlisted market is the liquidity that we provide on a regular basis.”
APN’s Mr Slattery adds that the A-REIT market is well positioned to provide 9 to 11 percent returns in the 2014 financial year thanks to several market factors, including the low Australian dollar and a supportive global economic backdrop.
However, there will be a flight to quality in the office, retail and industrial property sectors.
“There is a clear divergence between quality prime-grade assets and secondary lower-grade assets,” Mr Slattery says.
“Better quality assets continue to attract strong rental demand and benefit from both a valuation and income perspective, as their ability to attract new tenants is generally greater. As owners of quality prime-grade assets, the A-REIT sector is showing every sign that it is set to deliver sustainable returns over the next few years, further supported by steady economic fundamentals and a low interest rate environment.”
Mr Slattery adds that for savvy investors, niche sectors “continue to offer attractive investment opportunities and well located assets, with the ability to generate reliable income, will continue to deliver attractive returns for discerning investors”.
The best sector over the next three to four years, according to Mr Fitzpatrick, will be industrials and logistics, contributed to by online shopping which is heralding the arrival of “dark stores” or warehouses from where stock is distributed.
In retail property, he says, the best value can be found either in non-discretionary shopping centres in regional areas or in online retailers who are ahead of the game and use their physical shops as display areas.
“Really in the next couple of years it’s relatively flat so it’s all about good management,” Mr Fitzpatrick says.
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