Savvy investors look past market noise

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New investor lending activity in Australia is about 70% above pre-pandemic levels. Are you missing out?

FAR FROM running for the hills, investors are sticking it out in the current property market and some indicators show that certain pockets are flourishing like its 2022. Indeed, the proportion of new housing loan commitments by investors compared to the overall market is exceeding 2022 levels.

Pepper Money is one of Australia and New Zealand’s leading non-bank lenders. Established in 2000, Pepper Money first launched as a specialist residential home loan lender in Australia with a focus on providing innovative home loan solutions to customers that were being underserved by traditional lenders. Today, Pepper Money has a broad product offering of residential home loans, personal loans, asset finance, novated leases, and commercial real estate loans across Australia and New Zealand.

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Barry Saoud, Pepper Money

To be sure, this is partly due to the marked drop in owner-occupier housing loans on the back of higher interest rates. Not surprisingly, the total amount of investor lending in the first six months of 2023 was tracking between 15% and 30% below the heady, record-breaking levels of 12 months prior. But take a step further back from the cheap credit-fuelled spike of the pandemic years, and it’s clear that investors are a powerful force in the market, perhaps even ascendant. Levels of new investor activity in the housing market this year are around 70% higher than in the first six months of 2019. Once pandemic anomalies are dismissed, history may end up labelling 2023 as an investors’ bull market in Australia. “Generally speaking, savvy investors can be less rate sensitive than owner-occupiers and more equipped to handle interest rate fluctuations and adapt their strategies accordingly,” says Pepper Money’s general manager for mortgages and commercial lending, Barry Saoud. Investors are also much closer to the market than the average borrower and are known to take shrill headlines predicting their imminent retreat with a grain of salt or even as a buy signal.

Barry Saoud, Pepper Money

One area in which increasing rents are prompting firms to buy property, either for their own use or for investment purposes, is the industrial commercial real estate sector. According to Frank Knight research, intense competition for limited space prompted rental growth in the March quarter of 8.6% in Brisbane, 8.2% in Sydney, 1.5% in Melbourne and 2.5% in Adelaide and Perth. Year-on-year commercial rental growth in Sydney, the tightest market, is at a whopping 40%. High material

“This is why the market conditions we are seeing in major capital cities such as Sydney, Brisbane and Melbourne may be enticing for the cohort of investors that have the capital, equity and appetite for risk.” It isn’t a difficult calculation to make for a seasoned veteran. “Savvy investors are certainly capitalising on this sort of opportunity, benefiting from rising yields throughout the correction phase,” Saoud says. “They are also being lured into new opportunities by higher yields as rents increase by up to 15 to 17% in certain pockets of the market.”

There are plenty of brokers leaning in and supporting the commercial investor property market right now. “In many ways, the investor cohort is a world of opportunity for brokers who are looking to diversify their business, especially if they are experiencing a dip in owner-occupier new business,” Saoud says. It’s also a reliable market for a number of reasons, including its depth and sophistication. He says another bonus for brokers is that clients in this area often have unique insights and stay ahead of the curve in terms of the factors that affect their investments. “Property investors are more likely to have a deeper understanding of the real estate market, financial trends and economic conditions. That makes for interesting conversations and an engaged cohort when we are in these sorts of conditions.” Investors are also more than capable of riding out rougher economic conditions, some being old hands at navigating the intricacies of weaker markets and a diversified portfolio. “Property investor clients often have a diversified investment portfolio, which means their financial wellbeing is not solely dependent on the performance of a single property,” Saoud says. “This diversification helps reduce their sensitivity to interest rate fluctuations compared to owner-occupiers, who may be more reliant on the performance of their primary residence.” In some regards, this may require brokers to up their game in order to provide value-added service to an investor client. One important area for this cohort is tax. Investor clients are going to be highly engaged around understanding their options when it comes to tax deductions and benefits. “It’s important to ask your investor clients if they are maximising all the expenses from their taxable income, and if their accountant is providing them with tax advantages that can mitigate the impact of higher interest rates,” Saoud says. Offering access to strong accounting referral partners might be one way to impress an investor client. While building relationships with accountants may take some time, these kinds of introductions are the sort of activity that can influence clients to keep their broker in their pocket for life.

“In some cases, a 2 or 3% rate increase on the mortgage may be offset by a 10% or more increase in rental return”

“Property investors are more likely to have a deeper understanding of the real estate market, financial trends and economic conditions. That makes for interesting conversations”

New investor lending activity in Australia is about 70% above pre-pandemic levels. Are you missing out?

costs and supply chain pressures are slowing down the completion of new space to rent, and the fact that nearly half of the industrial space in the pipeline is pre-committed means that the undersupply situation is unlikely to ease any time soon. Across the wider property market, auction clearance rates were already between 10 and 25 percentage points higher in mid-August 2023 than they were in the same period 12 months prior, according to CoreLogic’s capital city auction statistics. This suggests that higher interest rates are not dissuading investor interest in property despite the clear effect they are having on owner-occupiers. Saoud says this factor coupled with strong rental yields is enticing some investors to make a comeback. “In markets with very strong rental yields, mortgage repayment increases may be offset by higher rental yields. So, in some cases a 2 or 3% rate increase on the mortgage may be offset by a 10% or more increase in rental return,” Saoud says.

Because mainstream lenders are tightening lending conditions across the board, some investors who might in the past have used a more traditional finance channel are now turning to the flexible options available at non-banks. Alternative lenders are generally more flexible and favourable for investors than some other institutions, and Saoud says investors are a strong cohort for Pepper Money. Pepper Money has positioned itself to make hay while the sun shines in this market through its Red Hot Rates promotion launched in August. This offers significant reductions across home and commercial loans and is particularly appealing to investor clients. Pepper Money has greater flexibility on the serviceability front than many lenders, but there are a host of other reasons why its loan options are growing in popularity for investors. “We currently have a 2% buffer across our home loan options, but in the case of investor clients we have additional flexibility when it comes to clients with lower LVRs and higher credit ratings,” Saoud says. Other policy levers that can be hugely useful to investors include no DTI ratio, no notional rent requirement, no lenders mortgage insurance requirement and no cash-out restrictions, as well as unlimited debt consolidation options for business and Australian Taxation Office debts and more. There are some very common similarities between residential and commercial investor loans at Pepper Money, including their LVRs, loan terms, loan features, documentation types such as Full Doc or Alt Doc assessment, and securities. When you look at a typical investor home loan deal, the purpose is either purchase, refinance or cash-out on a residential security. The same purposes are offered in commercial property; the only difference is the actual security type. “On top of all this we offer rapid deal assessment,” Saoud says. A deal submitted by 11:00 am can mean that the assessment is back in the broker’s hands on the same day. “We have market-leading SLAs, and that pace of response can make all the difference for your investor clients that need to move at pace,” he says. The rewards for a broker can become self-reinforcing. “Helping clients to get ahead through property investment can be hugely satisfying.” So the next time you see a headline predicting that investors are pulling in their horns, just make sure not to stand near any red flags.

“Property investors are more likely to have a deeper understanding of the real estate market, financial trends and economic conditions. That makes for interesting conversations”

BARRY SAOUD, PEPPER MONEY

“Property investors are more likely to have a deeper understanding of the real estate market, financial trends and economic conditions. That makes for interesting conversations”

BARRY SAOUD, PEPPER MONEY

Rental yields make property investment a no-brainer

How brokers can capitalise

Non-banks at the forefront

How brokers can capitalise

Non-banks at the forefront

How brokers can capitalise

Non-banks at the forefront

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Published 18 Sep 2023

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Investors taking bigger share of housing loans

28.6%

Source: ABS Lending Indicators

Strong investor activity in housing market

New housing loan commitments by investors (seasonally adjusted)

Source: ABS Lending Indicators

Investor housing loan commitments as proportion of total housing loans

34.0%

35.2%

June 2019

June 2022

June 2023

$bn

4.93

Jan

Feb

Mar

Apr

May

Jun

11.45*

2019

2022

2023

7.75

4.89

11.43

7.73

4.78

11.32

8.02

4.75

11.10

7.99

4.71

10.73

8.46

4.73

10.22

8.67

*Record high

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