Construction budgeting – is underestimating the best idea?

Nothing makes a better headline that ‘new project comes in under budget’ or ‘new project finishes months ahead of schedule’. Across the ditch in Auckland, two major projects were the targets of speculation about overestimations in budgets. The Victoria Park Tunnel was completed two months early, even when faced with the difficult task of shifting and replacing the Bird Cage hotel, a heritage-listed building. The Newmarket Viaduct, while still ongoing, is ahead of schedule and possibly under budget as well. Many have wondered if the expected construction times were exaggerated to create good press upon completion.
Most of this is, of course, idle speculation. After all, both projects went to tender and the competing companies would’ve wanted to offer the best price to New Zealand Transport Authority. Every construction management company must walk this fine line with time and cost budgets when submitting tenders. You want to give the client a realistic idea of how long a project will take and how much it will cost, but you also want to be competitive in the tender process. While financial modelling can answer some of these questions, nothing is more valuable than experience – unless some finds a way to bottle luck!

Author: Mr M Grochowski

SMSF loans becoming the new norm

Self Managed Super Funds are becoming a popular basis for securing a loan. Mr M Grochowski in his latest commentary on trends in the property investment industry quotes new research which shows a majority of brokers have now written a Self Managed Super Fund loan.

According to the latest The Adviser straw poll, 50.2 per cent of brokers have written an SMSF loan, with 10.9 per cent admitting they write these types of loans on a “regular” basis.

Of the 247 respondents, 21.5 per cent said they rarely write these types of loans, while 17.8 per cent admitted to “occasionally” writing these products.

Commenting on the survey, Michael Grochowski says there are significant opportunities for brokers who write SMSF products – something the industry is slowly starting to learn.


SMSFs are becoming increasingly popular as more and more Australians seek to take greater control of the performance of their superannuation funds. Australians are increasingly investing directly in residential property using SMSF loans in order to obtain maximum gearing benefits, says Grochowski.

According to Grochowski, this trend is going to grow in response to the current market volatility in which property, particularly residential property, is seen as a relatively safe investment. In the past SMSF loans were not viewed favourably by many brokers because they were considered too complex to write, says Grochowski, but that view is now changing.

Speaking to investors in his monthly forum, Michael Grochowski says, “The process of obtaining an SMSF loan has become more and more straightforward as lenders have developed the technical and support infrastructure to assist brokers.  For example, the more switched-on lenders have designed loans that remove many of the complexities that are involved in establishing an SMSF borrowing structure, and in doing so, they now provide both the customer and the broker with a streamlined experience,” Grochowski said.

Grochowski concluded by saying, ‘Brokers don’t really need to worry if they do not have much knowledge of this type of loan. In many ways if you can write a regular home or commercial loan you can write an SMSF loan, as the lender should be able to provide the necessary support, such as experienced sales and underwriting teams with expertise in this area. The real risk for brokers who have not written an SMSF loan is that they are missing out on a substantial opportunity to add value to their clients.


“We expect to see much more of this highly attractive loan vehicle in the future”, says Grochowski.

Big Changes in the SMSF industry

Small businesses have been warned to stay on top of their self-managed super funds, and check with their managers that everything is up to scratch ahead of a raft of legal changes coming this year.

Michael Grochowski, in his weekly commentary to private investors, says that SMSF owners need to be on top of the new changes, which will affect everyone who has opted to use this superannuation investing method to better control their retirement funds.

The industry association, the SPAA, is reporting that new auditing requirements, regulations on transfers made out of the country and new penalties are just a few of the changes businesses need to be aware of.

Grochowski notes that these licensing changes will affect everyone involved in SMSF’s in 2013. This means specialist advisors – including those who maintain and operate SMSFs – will need to be registered as of July 1. Registration for this begins after January 30.

If administrators decide they want to keep managing SMSFs, they need to have their applications in by April. There are some requirements for this, such as auditing at least 20 funds and meeting some educational requirements.

In addition, accountants who provide advice for SMSFs also need new approval, in the form of a limited licence which takes effect from July 1. This will provides an avenue for accountants who want to work on SMSFs without having to get a full licence.

Grochowski warns, “Financial planners who also provide tax advice will need to be licensed under the new structure. As part of this change, financial planners who provide tax advice will need to meet education and experience requirements; satisfy a fitness and propriety test; and follow an approved code of conduct.”

Further changes include a requirement for SMSF owners to now consider insurance as part of the investment strategy, says Grochowski. This will involve some careful analysis of the insurance requirements for each individual SMSF owner, who will need to decide if insurance is appropriate for them and their circumstances.

Grochowski also notes that there are more changes coming, such as mandatory trustee education and the introduction of new administrative penalties.

Grochowski says the industry association is recommending that SMSF operators need not worry about the details of these changes, but says they should be speaking with their auditors and accountants to find out what their plans are. If an accountant isn’t considering getting registered, then it may be time to find someone who is, he says. “They just need to check their auditor is registered under the new system.”

Ten year survey highlights residential property investment as best investment

The latest Long Term Investing report from fund manager Russell Investments shows that Investing in property over the last two decades has delivered strong compared with shares and other asset classes, according to property commentator Michael Grochowski.

Analysing the report Grochowski notes that taxation policies have been a key factor in the sector’s long-running attractiveness. Over the past 10 years to December 2011 residential investment property has outperformed all other asset classes at the lowest and highest tax rate at 7.2% p.a. and 5.8% p.a. respectively.

Viewed over a 20-year period, Australian shares returned 9% p.a. and 7% p.a. at both the lowest and highest marginal tax rates respectively, with residential investment property achieving the second highest return of 8.1% p.a. and 6.6% p.a. at the lowest and highest marginal tax rates respectively.

Grochowski says that cash had the lowest returns under both tax regimes of all asset classes over 20 years.

Calculations by Russell Investments, and quoted by Grochowski in a commentary to property investors last week, showed that over the 20-year period the effective tax rate for top marginal tax payers is most favourable for Australian shares at 20%, with residential investment property at 26% and Australian REITs and 23%.

In comparison, says Grochowski, the effective tax rate for overseas shares is 28%, it rises to 36% for global REITS and is at 49% for cash and bonds.

Grochowski notes that the impact of personal taxation on residential investment property has also been less significant as a result of the tax deductibility of expenses relating to residential investment property.

“All three asset classes (Australian shares, residential investment property and Australian REITS) also provide tax deferral benefits and qualify individual and superannuation investors for a capital gains tax discount on liquidation, which contributes to their after-tax attractiveness relative to bonds and cash,” Grochowski notes, quoting the report.

Michael Grochowski makes the point that for investors residential property is no longer a risk free asset class or a sure bet for future growth. The main risks for residential property relate to relatively high valuations and the prospect of further deleveraging by Australian households, says Grochowski.

In concluding his remarks of the report, Michael Grochowski referred to last year’s Prime Minister’s Economic Forum in Brisbane, where Westpac boss Gail Kelly said compound growth in house prices were over for good and Australia would not see another housing boom.

Strong Return to Property Investment

Traditional investment mainstays, bricks and mortar are back in the race for investors’ cash, beating out the volatile sharemarket and the accompanying doom about the global economies, says property market commentator, Michael Grochowski.

Although slow to recover after the gloom and doom of the post GFC years, Grochowski says the flow of cash to property is rising, thanks to lower interest rates and a thaw in lending deals from the banks.

The latest Westpac/Melbourne Institute monthly index of consumer confidence shows that property has made a comeback. In the latest survey concerning the wisest places to put new savings, 25 per cent of respondents said ”real estate”, up sharply from a little more than 18 per cent in the preceding quarter’s survey, according to Grochowski.

Quoting chief economist at CommSec, Craig James, Grochowski said the real value in the Westpac/Melbourne Institute monthly index of consumer confidence was the question about the wisest place to put new savings. ”No doubt the fact that interest rates are coming down, immigration is rising and new building remains weak were all aspects causing respondents to nominate property as one of the wisest places for new funds.

”In other words, demand is expected to rise but the supply of homes is not expected to keep pace, so prices are expected to rise. According to Grochowski, the logic is entirely reasonable.

”The positive views on property purchases represent good news for the beleaguered housing market. Hopefully consumers will follow through on expectations.”

Mr James said that while the Reserve Bank would be worried about consumer gloom on the outlook for their finances, rate cuts must stay on the table. Commenting on commercial property sales, Grochowski said that as a result some superannuation funds and individuals were paying cash and financing after the close of a sale.

Investment A-grade credit with long-term leases can still get up to 70 per cent loan-to-values and have a positive spread between the low interest rates and the yield on the real estate; and some are using lines of credit with plans to refinance later, said Grochowski.

Wealthy individuals are following suit but are showing a preference to the strong leasing market in the less-traditional sector of fast food and convenience-based assets. Grochowski concluded that this trend is setting the pattern for property investment in the year ahead.