Back to News & Views

“Bottom of market does not guarantee profits” | By Cal Doggett – Published in The West Australian

Categories: Commercial

Featured in The West Australian on May 21st, 2018:

Cal Doggett, Managing Director Properties & Pathways

We continue to hear speculation the Perth property market could be at the bottom of the cycle. Even so, it’s incredibly important to consider each segment of the market distinctly. So, let’s take a sneak peek at two prominent sectors – the residential housing market and the Perth office market.

Residentially, I think the Perth property market has reached the bottom. I would not be surprised if some Eastern states money starts to trickle into our housing market as investors identify huge disparity in prices. Investors in the housing market are typically searching for capital growth rather than yield, so it becomes almost irresistible for a true investor to invest money into the WA housing market where the growth expectations and growth potential are high. Add this to the fact you could probably buy three properties of equivalent proximity to the CBD in Perth for the same price as one in Sydney.

And what about the Perth office market? There are some pieces of evidence to support this sector of the market “hitting the bottom” and becoming more buoyant.

But, as with anything, you either have to dissect the market with absolute precision or be bound by general movement of the masses. And as such we have to put aside any tiny pocket of blue sky and consider the masses.

So, if we’re looking at macro movements of the Perth office market then don’t be fooled by optimism, positivity, and saucy headlines. What I’m saying is, while there could be evidence to support the bottom of the market, there are three major things to consider:

  1. The bottom doesn’t mean it will go up… at least not immediately. We could sit here at the bottom of the market for years and years, with huge potential lying dormant, waiting for an external catalyst to kick-start hopeful growth.
  2. Because of this, we don’t have the luxury of just buying anything and waiting for the property cycle to do the work for us. For example, seven years ago you could have bought a single car park in Sydney and without lifting a finger probably have sold it yesterday for 400 per cent profit. This is not the case in Perth. Yes, you could acquire an asset at a good price, but you will have to intentionally go about adding value and/or repositioning the assets relevance in order to extract the value. You cannot afford to sit on your hands.
  3. Reference does not imbue relevance. Be very careful of basing your assessment of value on what an asset sold for five years ago, as this reference point is useless and it’s distorting the perception of value in today’s market. While it’s great buying an asset for $8 million which five years ago sold for $23 million, it does not mean you’ve made $15 million – and it certainly doesn’t infer the price will bounce back to $23 million overnight. I’m suggesting the height of the boom might be somewhat unrealistic for Perth to achieve over the next decade, so be very careful using an old price as a frame of reference for the profit or value you might be hoping to achieve.

So, I absolutely agree with some property fundamentalists who argue counter-cyclical acquisitions are ripe for the picking in Perth. However, the important thing to note is the organic rate of growth in Perth might (and, in my opinion, will) take more than five years to truly gain traction.

However, this doesn’t preclude a considered and very intentional acquisition of an under-loved or under-utilised asset with the aim of repositioning it. And right now, there are already some clever investors doing just that.