Best thing since mining boom: Phenomenal Chinese demand for Australian property set to continue; Billionaire Lang Walker says Sydney and Melbourne house markets are too hot
Tweet Topic Started: 15 Aug 2014, 03:01 PM (1,798 Views)
House hunters may complain, but the “phenomenal” influx of Chinese money into the local residential property market may be the best thing that happened to the local economy as it struggles to make its difficult transition from an unprecedented mining boom.
The demand from foreign investors for Aussie bricks and mortar is set to intensify for at least three years, driving a boom in apartment construction activity and boosting the bottom lines of listed companies such as Lend Lease, Mirvac and Goodman Group, according to exhaustive new research by broking group CLSA.
And while there have been plenty of warnings about foreign investors pushing property prices beyond the reach of a generation of local prospective homeowners, Chinese investment may be the catalyst for growth in a non-mining corner of the economy – building and construction – that traditionally is a strong generator of employment.
Around 10 million of the wealthiest Chinese families, or around one in seven, are interested in migrating to Australia, according to a survey conducted by the broker. And home ownership in a desirable destination country is “a key reason” for the flood of money coming into the Sydney and Melbourne property markets, conclude the broker’s analysts.
Not all of those 10 million households will have the financial wherewithal to ultimately act on their desire to relocate Down Under, but it is representative of a powerful trend.
China is already the number one source of source of foreign money in the local real estate market, and anecdotal evidence suggests that that position has only strengthened this year. Sydney and Melbourne have overwhelmingly been the destinations of choice.
The rationale for this growing appetite for Aussie bricks and mortar is more than just financial.
Chinese investors are lured by the prospect of one day moving to a country with clean air, a good education system and a strong legal system. Indeed, the only country Australia ranks behind as a desirable destination for Chinese immigrants is Canada, where new restrictions have been put on foreign investment and immigration.
Existing regulation, administered via the Foreign Investment Review Board, restricts non-residents to new properties. There is anecdotal evidence that these rules are circumvented to illegally allow foreign capital into established properties, but the extent of that is hard to estimate, says CLSA senior analyst Andrew Johnston.
But Johnston concedes that “there will be some Australian residents that are homebuyers that get displaced from buying a new apartment due to price, such that second-hand apartments become relatively more attractive”.
While the news is mixed for some home buyers, it’s great news for the bottom lines of the country’s biggest listed property developers – and potentially their shareholders.
In putting together their report on the impact of Chinese investment on the local housing market, CLSA analysts spent the past six months meeting more than 50 property industry contacts, both here and in China, in order to fill in the gaps in a high-profile story which has often relied more on anecdotal evidence than hard data.
The conclusion they reach is no less striking: the “phenomenal” Chinese investment in Aussie housing will continue “for at least three years”.
That will drive construction activity as developers rush to fill the gap between supply and demand.
The researchers believe that its unlikely there will be significant changes in local foreign investment rules, despite a current Parliamentary enquiry. Nor do they believe Chinese authorities will place new restrictions on capital moving out of the country. They are similarly sanguine about the prospect of a property price crash in the top Chinese cities, and note that the non-financial motivations for investing in overseas mean “the price of property in their home market may have limited influence on their intentions and ability to invest in Australia”.
In other words, the trend is here to stay. And behind the doom-laden warnings of inflating property prices, an influx of investment that sparks a jobs-heavy housing construction boom may prove to be the tonic for an economy struggling to transition from its mining boom.
Billionaire Lang Walker, one of the country's largest property developers, says home prices in Sydney and Melbourne have climbed too much, and he is turning his focus to investments in Malaysia instead.
"Sydney is a little too hot at the moment," Mr Walker said in an interview in Singapore this week. "Melbourne has gone through a period of intense growth and that's plateaued off." However, the residential market in Brisbane still has some potential, he reckons.
Home prices in Sydney jumped 14.8 per cent in July from a year earlier, the fastest growth among all state and territory capitals, according to RP Data-Rismark. Melbourne prices rose 11 per cent, the second-fastest increase, and prices in Brisbane increased 6.9 per cent.
Mr Walker, whose company is behind developments such as Sydney's King Street Wharf and Main Drive Kew in Melbourne and has $12 billion of property projects in the pipeline, is looking to increase investments in southern Malaysia, where he has already put in about $2 billion into a project in the Johor region. Mr Walker said he is in talks for further investments in the city of Johor Bahru as he bets that demand from neighbouring Singapore will increase.
Residents of Singapore, which is southeast Asia's richest city, are increasingly crossing over into Malaysia, as they seek property, labor and amenities, often at half the cost or less. Economic growth and soaring immigration have strained Singapore's resources, making it one of the most expensive places to live in the world.
With cheaper land plentiful in southern Malaysia, money is pouring across the border. Singapore has invested at least 11 billion ringgit ($3.72 billion) in Iskandar Malaysia, a special economic zone in southern Johor established in 2006 that's three times the size of the city.
As long as the money they are pouring in continues to give acceptable gains. The Chinese are, by in large exceptionally savvy investors. I think our government needs to understand that it is not an alternative to mining, if our property does not perform to their investors expectations the flight in capital would be spectacular.
You would then see a collapse that would rival none. Mark my words , the second China's investors shy away from or pull out of Oz the proceeding collapse in prices will be enormous. In saying that though if immigration keeps rental vacancy rates down in the areas they are buying then this might go on for quite sometime.
Foreign investment is one of Australia’s biggest media issues in residential real estate at the moment. As a professional property buyer, I hear people saying:
“Every time I go to an auction, I get beaten by a foreigner.” “These people can’t have that much money, there must be something illegal happening” “Why are they winning every single auction?”
The ‘elephant in the room’- what we are not comfortable saying - is that when we say foreign, we are talking about the Chinese property buyer. I don’t think people would feel as aggrieved if that buyer was from Italian descent, Lebanese descent…or, even more recently, of Indian descent. It is Chinese buyers people seem to have a problem with. But is there even a problem in the first place?
I would like to explore the issue by going straight to the Foreign Investment Review Board (FIRB) website and seeing how they address this from a policy position. The FIRB says:
“It is the government's policy that foreign investment in residential real estate should increase Australia's housing stock. That is, the policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (such as new developments of house and land, home units and townhouses) and brings benefits to the local building industry and its suppliers.”
That’s it. That’s our policy – bottom line. The rules are designed to allow overseas buyers to support the building of residential property in Australia. They aren’t designed to allow overseas purchasers to buy into existing and established Australian property. After all, we already know that Australia has a housing shortage of between 200,000 and 270,000 homes at any given time.
The Foreign Investment ‘No Overview At All’ (Operating in the Dark) Board
A second question is whether the FIRB is able to police its own rules. In a recent article in the Sydney Morning Herald, journalist Gareth Hutchens writes:
“Senior Bureau of Statistics officials have admitted they read trade magazines and newspapers to keep on top of changes in the amount of foreign investment in Australia's residential property, because their collection of such data is too patchy.”
At the same hearing - Paul Mahoney, an ABS assistant statistician, said they actively researched newspapers for information on foreign purchases of residential property, even though they knew the practice was ''a bit hit and miss''. But, in his words; “it had to be done... because the ABS gathered very little data itself”. Really?
Wouldn’t that be like me trying to be a talent scout for the Australian cricket team reading the back page of the local paper to find my next big talent? Efficient? Surely not.
This admission came during this public hearing , where the hearings are being held in response to industry concerns that foreign investors, particularly Chinese, have been sidestepping our laws to buy established property over locals and inflating prices to a stage beyond affordability.
At this same enquiry, Brian Wilson (from the FIRB) said:
“Much of the public controversy about Chinese investors buying up residential real estate was “not necessarily malevolent” but not based on facts”
But how Mr Wilson say this? Clearly he doesn’t have the facts, as the FIRB’s own reporting indicates.
Legitimately Illigitimate?
Personally, I am not against foreigners, or specifically, Chinese buyers, buying established property in Australia. Chinese buyers are buying property in Australia via their local citizens, who may just happen to be relatives, friends and even business colleagues. As a matter of fact I have purchased and assisted in the purchase of many, many legal Australian citizens - some of whom may have raised the funds for their purchase via families and friends overseas. I can’t validate where the money is coming from, but I can say that:
As much as this is explained to me, it would be considered rude in Chinese custom to expect to sign an agreement between parties (let say it is a family and friends ‘collectively’ pooling money) that would validate any formal agreement. Trust is an important virtue.
The internal belief within China is that the government is currently addressing corruption and modes of money mobility. Whether rumour or fact – the population that has access to disposable money for investment believe that the opportunity to move money out of China will be more difficult in the future. As such, they are taking advantage of this now – and any ‘premium’ they are seen to be paying for a property can be considered the cost of ‘doing business’. A ‘tax’ even.
Having come from an Anglo-Saxon background myself, the fact that Chinese people have an established such trust and understanding with their families back home should be considered a source of strength. Culturally, if I could be provocative, I think that is something we could all learn from. The fact that they decide to build their wealth outside their mother country should be considered a compliment to the value of property in Australia.
In a global economy, where we are prepared to compete on almost every other economic level, including labour, we should not deprive those people (who can afford) it of our land. They are one of our closest neighbours and, in my opinion, it’s inevitable anyway. The problem that I have is that to be told by our powers that be that they are looking into the problem and can’t see a problem. It seems like a great case of them putting their head in the sand. I am not so much concerned about the non-problem, but I am concerned about the lack information obtained by the FIRB.
As to the question of local buyers feeling as if they have missed out.
If you follow the way a property purchasing ladder works, you’d see that for all the noise created by the emergence of the Chinese buyer – the reality is that the successful Chinese buyer only wins the property by one dollar or $5000 in the case of a property auction. Only a fool would pay more. It could even be true that the next one, two or even three under bidders might have been Chinese bidders too…but, in my experience, this rarely adds more than a few thousand dollars at best and perhaps one or two percent of the property price (at worst). Remember, when someone wins an auction, they only win by a margin ‘just’ higher than the next highest bidder.
It’s called the ‘purchasing pyramid’, with a fundamental base always supporting the underlying value with fewer and fewer buyers bidding prices up, until you have a winner. Take the top dog away, you’ve still got a good price. Believing that Chinese buyers fill the whole pyramid, or at least even the top part of that pyramid, is not only foolish, it’s incorrect.
The claim that it is adding 5,10 or 15% to our established property prices just isn’t true and therefore so are claims that it is changing the face (and fundamental price) of our market.
The Chinese Dragon is Here to Stay
It’s true that the Chinese purchaser is aggressive and has a mindset of ‘needing’ to buy into Australian property, but I think this is borne out of their doubts they have in the Chinese regulatory and economic system. For what it’s worth, I don’t think this problem is going backwards. Although, it doesn’t yet add a valid percentage to our property prices, I’d be naive to think that that over time it wouldn’t. As the amount of buyers forming our ‘buying pyramid’ become more significant, the growth this can afford property might be distortive to normal market rules.
I don’t think this foreign investment currently is the problem other people think it is. I am delighted foreign investors are acknowledging the value of our property.
But we should at least have an FIRB awake to the conversation about how it is happening. Firstly, what is the point of the FIRB otherwise? Secondly, what about when it does become a problem.
The method of purchase by the Chinese market is via consortiums. They are the oldest, most unsophisticated and perhaps the most basic consortium that you could ever find - the family. These family ties aren’t the type of ties that can be broken with rules from an institution like the FIRB.
My advice to Australia is to get used to it. The Chinese buyer is here to stay. My belief is that they are buying established property and there isn’t a law in the land that can stop it. My opinion is that I wouldn’t want a law that could!
I can’t help feeling very pessimistic. Whilst the Fairfax article doubles as a property spruik as well as an “assurance” of sorts that property and construction will save the day in case of any economic downturn, the needs of those priced out of real estate will become more and more irrelevant. It will lead to the outer suburbs becoming slums as the new McMansions start to show signs of wear and tear. Anyone who doesn’t already have a property or three will be relegated to the slums or have to pay a large percentage of their incomes on rent nearer the cities.
Manufacturing has just about been killed off in this country. Jobs are being lost in many other sectors. Uni graduates will emerge with debt but no job. But as long as the all-important housing bubble is kept inflated by foreign money, that’s all that matters.
And the gap between the haves and have-nots will widen. Why would politicians want to rock the boat? They are the “haves” and their salaries will continue to rise each year. Their properties will increase in value. So until a politician or political party shows that they are willing to prick the bubble and risk the whole economy falling flat on its face, things will just continue as normal. That is, if you can call the Chinese take-over “normal.”
The once-in-a-century mining investment boom is set to decline sharply over the next few years as large mining projects, such as the three liquified natural gas projects in Gladstone (valued at over $60 billion), are completed.
According to Reserve Bank of Australia (RBA) estimates, the mining sector accounts for nearly 10% of Australian employment, with most of these jobs in areas directly related to mining capital investment, such as construction workers, engineers, and other mining services. As mining projects are completed, much of the labour utilised during the construction phase will no longer be required, leading to a material increase in unemployment unless other areas of the economy can expand sufficiently to fill the void.
Arguably, a perfect storm is developing for the labour market, with the planned closure of the Australian automotive assembly industry by 2017, which is expected to lead to the loss of up to 30,000 jobs, coinciding with the collapse of mining capex and the loss of scores-of-thousands of mining-related jobs. The current “boom” in housing construction should help offset these losses in the short-term, but it too is likely to fade next year as home prices peak and the construction cycle turns.
A simple way to imagine this picture is that Australia’s standard of living has been dramatically inflated by a huge ten year pay rise that was never earned. We spent that salary and inflated the costs in the economy as a result. As the pay rise recedes, our cost base is now uncompetitive and everything in the economy – labour, assets, capital – is going to have either deflate or become more efficient to make up the gap between our incomes and the lifestyles we’ve become used to.
The once-in-a-century mining investment boom is set to decline sharply over the next few years as large mining projects, such as the three liquified natural gas projects in Gladstone (valued at over $60 billion), are completed.
According to Reserve Bank of Australia (RBA) estimates, the mining sector accounts for nearly 10% of Australian employment, with most of these jobs in areas directly related to mining capital investment, such as construction workers, engineers, and other mining services. As mining projects are completed, much of the labour utilised during the construction phase will no longer be required, leading to a material increase in unemployment unless other areas of the economy can expand sufficiently to fill the void.
Arguably, a perfect storm is developing for the labour market, with the planned closure of the Australian automotive assembly industry by 2017, which is expected to lead to the loss of up to 30,000 jobs, coinciding with the collapse of mining capex and the loss of scores-of-thousands of mining-related jobs. The current “boom” in housing construction should help offset these losses in the short-term, but it too is likely to fade next year as home prices peak and the construction cycle turns.
A simple way to imagine this picture is that Australia’s standard of living has been dramatically inflated by a huge ten year pay rise that was never earned. We spent that salary and inflated the costs in the economy as a result. As the pay rise recedes, our cost base is now uncompetitive and everything in the economy – labour, assets, capital – is going to have either deflate or become more efficient to make up the gap between our incomes and the lifestyles we’ve become used to.
It’s a lost decade in the making.
The automotive industry should've been closed a decade ago. How could the industry ever be considered legitimately earning it's keep when it was so heavily subsidised and protected for so long?
Apparently US$1.4 trillion has left China since 2002, and its now increasing and running at US $10b a month!
All of this new money will eventually find its way into increasing land values. History shows that there is always something that comes up to kick start new cycles and it will probably show that the recent Chinese domestic stimulus and currency expatriation signaled the start of this current new upward cycle.
As long as the money they are pouring in continues to give acceptable gains. The Chinese are, by in large exceptionally savvy investors. I think our government needs to understand that it is not an alternative to mining, if our property does not perform to their investors expectations the flight in capital would be spectacular.
You would then see a collapse that would rival none. Mark my words , the second China's investors shy away from or pull out of Oz the proceeding collapse in prices will be enormous. In saying that though if immigration keeps rental vacancy rates down in the areas they are buying then this might go on for quite sometime.
I think a lot of the Chinese investment is not based on a return sic has rent. It is based on owning a property in a political stable, democratic nation, clean environment so there family may live in the future. This is priceless to the Chinese hence why they pay so much for it and will continue to do so in increasing numbers.
This is only the tip of the ice berg, as more Chinese gain in wealth they will want to buy property overseas. The same thing happened in America, but they had the destinations for families to buy holiday homes in nice locations. Chinea lacks this somewhat. With 3 billion Asians to our north demand for Australian land and properties will increase.
Do you honestly think the Government is going to deny visa applications from wealthy migrants who bring vaste financial resources with them, plus educated working age children. No chance, they will be welcomed with open arms. This trend will continue if not grow a lot. Keep in mind a lot of these rich people have the aim of becoming Australian citizens in time or at least there children do. It is win win for this nation.
Our cities will follow the growth patterned most other large cities with most inner suburbs for the well off as they can afford it. For the rest you can rent an apartment. Try buying anything decent in New York in the CBD, rent is far more common.
I would hardly call Mcmansioms slums, like everything in time they will also be redeveloped as younger generations buy, demolish and rebuild.
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