State of the property market,Risks & Opportunities for Investors.

What can you do

about it? 27of July 2015

What’s causing the credit squeeze?

DFP PresentationPresenter: Matthew Royal, Director DFP

Falling Iron Ore Prices

International market volitilty

Property Bubbles in Sydney and Melbourne

Continuing Soveriegn Debt Uncertainity

What is causing the credit squeeze?

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Cheap freely available credit/liquidity fueling asset and equity bubbles

Chinese Stock Market Bubble Bursting and GDP Downgrades

Shanghai Stock Exchange (SSE) Composite nosedived by 30% in July

On July 8, 51% of A class-shares listed on the Chinese Stock Exchange were suspended by the Chinese Government for trading in an attempt to stave off further losses.

What is going on in China?China’s stock market sell off:

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Resulting effect Iron Ore Prices?In the weeks that followed iron ore logged its worst trading week on record.The steel price in China is now cheaper per tonne than cabbage.

Iron ore prices plummeted to a new six-year low in July, falling to $A59.83 ($US44.59) a tonne, their lowest level since 2009.

Economists are warning that Commonwealth government tax receipts could shrink by another $6.5 billion over the next two years - with implications for federal budget deficit - if the iron ore price remains near its record low.

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Sudden aggressive regulatory change created by APRA’s inaction and a lack of self regulation by the Banks

The credit squeeze itself

Increased Bank cost of capital and pressure to maintain ROE and Share Prices

What is causing the credit squeeze continued?

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Two Key Basel 3 & APRA Ratio’s1. Current Leverage Ratio

Calculated as….

Equity Capital ---------------------- Credit Exposures

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2. Common Equity Tier 1 capital ratio “Capital Adequacy”

• Calculated as…

Tier 1 capital + Tier 2 capital

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Risk weighted assets

Figure 1. Common Equity Tier 1 capital ratio (left)

Source APRA as at June 2015

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Increase in variable home lending rate

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Effect of increasing variable home lending rates and decreasing cash rate

Tightening macro prudential lending standardsAPRA get’s tough but too late:

Dec 14 - APRA announces a tightening in home lending standards particularly for property investors.

May 15 - APRA announces further tightening to more conservatively test serviceability and reduce Loan to Value ratios.

APRA has set a speed limit to the growth in lending secured by residential investments to 10% pa.

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Precesators

Benchmark stress test on servicing rises from circa 6.25% to 6.5% pa to 7%-8% pa

No longer counting:• 100 % of rental income• negative gearing benefits• dividends• bonus pay • other “uncertain” earnings

Measuring borrowers' actual spending V’s the poverty-line benchmark

Bank’s follow suit:

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What does it all mean?• Increasing the cost of debt + increasing

equity requirements = increased holding costs and decreased investors return on equity leading to correct in asset values

• Reduced & owner occupier investor confidence

• Reduced buyers in the market• Sellers market turns to buyers market• Asset values correcting themselves• Better buying opportunities • Lower liquidity • Slowing supply of new and existing

properties• Improving yields overtime

Banks pressured to reduce LVR’s from 95% to 80% - the new normal

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Depressed Commodity Prices

Bank Credit Appetite &Market Confidence

The Perfect Storm

Greece & EurozoneCrises

Federal Government Budget Repair Worsening

Growing Media and Political Speculation Over Property Bubble

Local Credit Rationing

Chinese Stock market Crash

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The Banks are already preparing.

How prepared are you for the current downside risk?

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What are you doing ?

The New Lending Environment

What are your

options

Dilute your concentration with Banks16

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What can you to do to ensure you have best in market?

Put firewalls between your liquid assets, sources of your cash flow and your investment strategy.

Assess your current position and exposure

Raise undrawn LOC’s against surplus security

Hold multiple banking relationships.

1 2

3 4

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What can you to do to reduce your risk and maximise your position

Utilise full doc, low doc loans.

Keep some mystery

Consider lending partners who will consider stand alone facilities with high LVR’s.

Be in control of your finances

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The impact of investment property and interest only lending charges

With the housing boom and the current instability of the world economy, increased pressure has been put on all of the major lending banks to tighten their lending policies for those looking to borrow money for investing in property.

The rise in interest rates by major banks is one of biggest changes which are happening. They appear to be cutting back on the offering of massive discounts which they have traditionally offered to new property investors.

This means that those who are intending on taking out a home loan will need to re-calculate the amount of money that they can borrow – based on what they can afford to pay back, before committing to a loan and its repayments.

0.27% raise in Rates

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Changes to Interest Only vs

Principal and Interest

Tough Measures being applied across all majors

I II

III

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Is there any Good News for Property Investors or Home Buyers?

Whilst these tough measures seem to be being applied across all of Australia’s major home loan lending banks, you can still find some good deals and better rates.

Just like every other country, Australia needs to protect its financial institutions from the threat of problems from the world economy. There are options

Higher LVR’s are available outside of the Major banks

Mortgage review – when should I do this?

Do you have the best in market for your finances?

Your Mortgage should be review

annually, however now is a good time given the

recent changes to the financial landscape

Are you thinking of acquiring

another asset

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Check List

36 check points based on Credit History Liquidity Security Client Data Timeline Serviceability Partners

Full Listhere

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Property Investment Analysis (1/4)

• Cannon Hill QLD• Boutique block of only 5 townhouses in the core suburb of Cannon Hill just 8 km from Brisbane

CBD• The property is 100m from major bus depot and a 5 min walk to train.• Major shopping centre only 100m from property that includes Aldi, Coles, Kmart and other majors.• Modern and contemporary 3br townhouse over 3 stories that also has rumpus room on the ground

floor which is a big plus giving a second living area. Open plan living on the 1st floor with balcony and a back yard terrace as well.

• Indicative rental of $565 per week (5.29% gross pa) however this property offers low risk with greater option for capital upside.

Description&Summary

Assumptions Projected results over 10 yrsProperty value $555,000 Property value $861,662Initial investment $166,500 Equity $448,454Gross rental yield 5.13% After-tax return /yr 9.66%Net rental yield 3.49% Net present value $161,036Cap. growth rate 4.50% IF SOLDInflation rate 3.00% Selling costs & CGT $43,267Interest rate 5.65% Equity $405,187Taxable income $0 After-tax return /yr 8.55%

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Computer Projections

Disclaimer: Note that the computer projections listed above simply illustrate the outcome calculated from the input values and the assumptions contained in the model. Hence the figures can be varied as required and are in no way intended to be a guarantee of future performance. Although the information is provided in good faith, it is also given on the basis that no person using the information, in whole or in part, shall have any claim against Investor Advocate - Sydney, its servants, employees or consultants..

Property Investment Analysis (2/4)

Investment Analysis Projections over 10 yearsEnd of year 2015 1yr 2yr 3yr 5yr 10yrProperty value $555,000 588,300 620,657 654,793 708,224 861,662Purchase costs $19,500Investments $166,500Loan amount $413,208 413,208 413,208 413,208 413,208 413,208Equity $141,792 175,092 207,448 241,584 295,015 448,454Capital growth rate 4.50% 6.00% 5.50% 5.50% 4.00% 4.00%Inflation rate (CPI) 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Gross rent /week $565 28,499 29,354 30,234 32,075 37,184Cash deductionsInterest (I/O) 5.65% 23,346 23,346 23,346 23,346 23,346Rental expenses 31.01% 9,112 9,385 9,667 10,255 11,889Pre-tax cash flow $-166,500 -3,959 -3,378 -2,779 -1,526 1,949Non-cash deductionsDeprec.of building 2.50% 7,500 7,313 7,130 6,778 5,972Deprec.of fittings $38,650 6,055 7,615 5,374 2,893 927Loan costs $5,208 1,042 1,042 1,042 1,042Total deductions 47,055 48,701 46,558 44,314 42,134Tax credit (super) $0 0 0 0 0 0After-tax cash flow $-166,500 -3,959 -3,378 -2,779 -1,526 1,949Rate of return (IRR) 9.66% Your cost / (income) per weekPre-tax equivalent 11.36% 76 65 53 29 (37)

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Tabulated Breakdown of Spreadsheet Items (1/2)

Property Investment Analysis (3/4)

PROPERTY VALUE (average growth of 4.50% per year)Property price: 555,000Total book value: 555,000Property market value: $555,000

PURCHASE COSTSConveyancing costs: 1,500Govt. Stamp duty: 18,000Total Purchase costs: $19,500

LOAN COSTSEstablishment fees (0.50% of loan): 2,066Mortgage insurance (0.32% of loan): 1,322Mortgagee's solicitor's fees: 1,000Valuation fees: 300Registration of mortgage: 230Registration of title: 115Search fees: 175Total loan costs: $5,208

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Property Investment Analysis (4/4)

CONTRIBUTION TOWARD TOTAL COSTSInvestments Loan Total Cost

Property costs: 166,500 388,500 555,000Renovation costs: 0 0 0Purchase costs: 0 19,500 19,500Furniture costs: 0 0 0Loan costs 0 5,208 5,208Totals: $166,500 $413,208 $579,708

LOAN DETAILSLoan type: I/O Yrs 1-40Interest rate (yr 1) (%) 5.65Loan: $413,208Loan costs (written off over 5 yrs): $5,208Monthly payment: $1,946Annual payment: $23,346

RENTRent per week: 565Potential annual rent: 29,380Vacancy rate (%): 3.00Annual rent: $28,499

Tabulated Breakdown of Spreadsheet Items (2/2)

Partnering with First In FinanceBenefits of working with an experienced,

trusted finance partner

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Personalised support

We get to know you and your clients and provide a personalised service.

We undertake our fact find to clearly understand the clients needs, requirements and desired outcomes.

For us to achieve our goals, we need to make sure that you are getting quality service, products, price and results.

How do we do this?

Like any business, we need to have market leading offers that have the following aspects:

• Flexible Options • Choice of products • A range of repayment options• Can accommodate different security types • Lend to different title types • A variety of credit underwriting policies • Arrange finance for different asset classes

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We only do finance – we won’t work with your clients across other

services or introduce anyone who will

We deal with clients with the upmost

professionalism and confidentiality

All directors at First In Finance have worked with

either one or multiple banks, so we know their

policies, criteria and credit guidelines.

Respect for your Client Base

How can Mortgage Brokers and Partners work closer together?

Referral Partners and Mortgage brokers are ideally placed to assist clients to achieve their clients’ needs and requirements through a discovery process.

Within this there is the opportunity for both Mortgage broker and Referral partner with the consent of the client to work in concert to provide optimal solutions to achieve a set of requested outcomes for the client, and this is where both advisers can add value to the client.

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Personalised level of support for your referred clients;

Your referred clients remain your clients, whilst they are being professionally managed by First in Finance for their finance needs and requirements;

Access to First in Finance executives, to discuss products and scenarios for your clients;

First in Finance to undertake a full review of clients’ needs and requirements.

First in Finance Executive Partners ProgramBenefits – What does a First in Finance Partner get?

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First in Finance Executive Partners ProgramBenefits – What does a First in Finance Partner get?Additional revenue stream

Fees and benefits increased with more referrals

Introduction fees agreed

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WHAT’S IN IT FOR YOU?

Personalised referral Program Potential for additional revenue stream for referred clients, once on boarded

as a referral partner. Personalised one on one meeting with FIF Executive to discuss best method

to structure partnership Participation as an executive level referral partner Every client referred in becomes a valued referral program Silver member Referral Fee / spotters fee available After 5 referrals they are eligible to participate in additional revenue

streams Every referred client gets a guest invitation to join as at our luncheon series.

Referral program

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Executive Level – Approved Referral partners

Partnering Levels

Platinum

Referral Partner – Up to 5 Referrals in a calendar yearGold

One off referrals – Introducer Fee / Guest at Luncheon SeriesSilver

Presentation by:

Matthew Royal Director DFPmroyal@dfpartners.com.au

Bronko Kozel Director FIFbronko.kozel@firstinfinance.com.au