Lure of property investment Down Under
By Tan Kok Keong
/ REMS Advisors, The Edge Property |
Singaporeans have been fervent purchasers of residential properties in Australia over the past few years as they seek alternative investment channels. Over the last half year, the rapid increase in residential property prices in Australian cities has heightened the market risk, but market players appear divided on the sustainability of the uptrend.
On a macro level, there have been headline-hogging concerns over the country’s underperforming economy and the prolonged weakness of its currency. On June 1, Treasury Secretary John Fraser was quoted as saying that Sydney was in the midst of a property bubble, with Australians overcommitting on housing loans as a result of overly low interest rates. There have also been suggestions of over-supply of high-rise residential apartments and condominiums in some key city centres, such as Melbourne, and unsustainable price increase in Sydney, which has made homes unaffordable for locals.
Despite these factors, investors have generally remained positive on the Australian property market. Moreover, foreign buyers’ appetite remains strong despite recent attempts by the Australian government to rein in foreign purchase. This article provides an analysis of the drivers of positive investor sentiment towards Australian properties and highlight our preferred investment destinations for residential properties.
Resilience of the Australian economy
On a long-term basis, Australia’s economy is one of the most resilient among developed countries, with no annual recessions recorded in the past 23 years. By end-2015, Australia is expected to be the 13th-largest economy in the world. According to the International Monetary Fund, the country’s economy is expected to grow by an average of 3.09% per annum over the next three years, which is above the expected growth rate of 2.32% among the advanced economies.
The common question we get asked is how this is possible, with the resources/mining sector performing poorly. According to data from Austrade, the real gross value-add of the mining sector was only 8.8%. A deeper look at the composition of Australia’s economy suggests that its resilience could be due to its diversity. Its economy is largely service-driven, with 82% of the value-add related to the services sector (see Chart 1).
Chart 1
Other than mining, Australia’s investment fund management is ranked the third largest in the world by the Investment Company Institute’s report, Worldwide Mutual Fund Assets and Flows. Australia is also ranked fourth in the number of foreign students in tertiary education by Unesco; the top 15 in the world for agricultural exports by the World Trade Organization (as at 2013); and has the eighth-largest international tourism expenditure (2013), according to the United Nations World Tourism Organization. In essence, the Australian economy, while no doubt affected by the downturn in resource-based industries, has other drivers that have helped and are likely to continue to help it weather adverse external economic conditions.
Sydney residential prices increased 40%
Residential property prices have generally been increasing across all major cities since 2012 (see Chart 2). In Sydney, residential property prices registered a stellar rise of almost 40% compared with end-2011. In comparison, property prices in Melbourne increased by a relatively modest 17.8% from the last trough and those in Brisbane by 12.8%. In Perth, after increasing by 15% from September 2011 to end-2014, the residential property price index registered a decline of 0.3% in 1Q2015, based on the latest available official statistics. However, there are signs that this could be reversed in the coming quarter, as investment appetite for the Perth market has improved. Based on market feedback and launch prices of recent projects, it appears that the price increase could be sustained, though at a more moderate pace.
Chart 2
Source: Australian Bureau of Statistics
Foreign investors a key driver of growth
By and large, the price growth of residential properties in major cities can be attributed to the increased investment appetite from foreign purchasers and continued rural-urban migration. No statistics are available on total purchase of residential properties by foreigners. However, we can get an idea of the scale of foreign investment interest by looking at investments in commercial property. A recent report by KPMG entitled Demystifying Chinese Investment in Australia suggests that Chinese investors alone have bought US$4.4 billion ($6.1 billion) worth of commercial real estate in 2014 (or 46% of the total investments in Australia by the Chinese). For purchasers of residential properties, other than the prospect of making financial returns, the purpose of buying a property can vary widely. Some buy with a view of it being a retirement home, as a form of saving for their children’s education, as a refuge from pollution, as a sanctuary from natural disasters in their home countries and to secure permanent visas. So, the question remains whether such investment appetite will be sustainable and which cities could be less susceptible to sharp corrections in the event of a downturn.
Go where the people are and will be
For sustainable investment returns, we suggest that investors look at cities where there could be sustainable population growth. The first gauge could be the relative attractiveness of the city as a place to live in. Australia is blessed with a number of cities that are considered among the most liveable in the world. Based on the Economic Intelligence Unit’s Liveability Ranking in 2015, four cities emerged on the top 10 list: Melbourne, Adelaide, Sydney and Perth, in that order (see Table 1). Melbourne has topped this list for five years running. There are numerous other indicators that point to very much the same results, some with Brisbane included in the ranking.
Table 1
Source: Global liveability survey by the economic intelligence unit
Over the last three years, among the big cities, population growth in Perth, Brisbane and Melbourne has been above country average, while Sydney fares just marginally lower, based on net migration data from the Australian Bureau of Statistics (see Table 2). Over the next three years, the ABS forecasts that population growth could be strongest in Perth, followed by Brisbane and Melbourne, while population growth in Sydney and Adelaide is expected to fall below that of the national average. In the proximity of some of these cities, there are also rapidly growing suburbs that are ripe for consideration. Some of these suburbs grew because locals shifted out of the city centre to more affordable locations, while others grew because of deliberate efforts by the state government to decentralise.
Table 2
Source: Australian Bureau of Statistics
Low-risk, medium-return investment
At the end of the day, property investment is a long-term game and other than trying to catch the price cycles, we advise investors to relook the fundamental driving factors of price growth. In addition, they should bear in mind local preferences and “local affordability”, as they are only allowed to resell properties to Australians. In addition, note that tax laws could differ between different states. Obviously, there are some localities where the risk of oversupply increases the risk of investing. For the residential sector, we prefer exposure to projects in the city centres of Perth and Brisbane and the suburbs of Melbourne and Sydney that have good amenities. In our opinion, on the whole, Australian residential property could be considered a relatively low-risk, medium-return investment that can form a part of your portfolio for medium- to long-term hold.
Tan Kok Keong is CEO of real-estate consultancy REMS Advisors and co-founder of Fundplaces,a real-estate-dedicated crowdfunding platform. He can be reached at kk.tan@rems.asia.
This article appeared in The Edge Property Pullout of Issue 692 (August 31) of The Edge Singapore.
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