By: Rosemary Johnston – Thursday, September 03, 2015
The Australian residential property marketing had risen from an estimated A$5.2Tr in March 2014 to an estimated value of A$6Tr in July 2015 according to CoreLogic RP Data. If we thought the capital growth rates disguised in that rise were spectacular we may be surprised by what is coming. Let us look at the capital growth trends for the recent past, the present and the future.
Capital growth in Australia has been driven by world leading population growth rates over the last decade. During and immediately after the GFC Australia was the shining light amongst the western economies. It offered a stable political environment, great educational institutions, good employment opportunities and a growing economy based on the mining boom. Skilled workers wanted to come here on 457 visas and stay.
More recently Australia’s population growth is slowing as other economies recover. Our average wage growth has been below inflation and the availability of cheap money is being mopped up in the APRA driven regulation of lenders.
If availability of money in our own economy is restricted what will drive the next wave of capital growth? The answer is very likely Chinese investment. In May this year the Chinese Government changed its policies to allow their citizens to invest directly in overseas property markets.
Juwai.com, the leading Chinese internet platform for real estate sales, estimates that this will trigger US$667B of foreign property investment representing ten per cent of the assets of the wealthy Chinese population. They also estimate that as much US$75B may be heading to Australia. That translates into A$100B at today’s exchange rate.
The 10th Demystifying Chinese Investment report by KPMG and The University of Sydney reported that 72% of Chinese property investment was in Sydney and 50% of that was in the commercial sector. My colleagues in Melbourne are speechless at the changes occurring in that market and yet it pales compared to Chinese investment in Sydney.
To put this into perspective the report found that the volume of property investment in Melbourne and Sydney together outstripped investment in London, and New York in 2014. Australia was ranked second after the US for investment in property from Chinese nationals from 2007 to 2014.
According to the Australian Bureau of Statistics, China now ranks as Australia’s fifth largest property investor with 4% of investment stock, behind the United States at 24%, the United Kingdom at 13%, Japan at 10%, the Netherlands at 6% and equal to Singapore at 4% and ahead of Canada at 3%.
So is that A$100B likely to come to Australia? Juwai.com reported that Chinese investment in Australian real estate is trending up 35% month on month on their platform. Also the day after the announcement of the devaluation of the Chinese currency, search numbers on Australian properties were unchanged.
What would A$100B invested in Australian real estate mean? Let’s assume 50% was invested into commercial property. We have seen the announcement of the $1B resort and apartment complex at the Gold Coast and we now recognise it as a proportion of a much larger amount. Investment in tourism and leisure sites is increasing, as well as landmark commercial buildings in Melbourne and Sydney CBDs.
What would be the impact of an investment of A$50B in the residential market? And what would its impact be if it were leveraged to an 80% LVR giving $250B for investment? Under the current FIRB rules this would need to be invested into new property for foreign nationals.
The ABS report that for the twelve months to June 2015 8,788 non-houses (including units and townhouses) were approved. Not all approvals are subsequently built. Let’s be conservative and assume 60% were built or about 5,300 properties. The median unit price for Australia was $526,000 as reported by CoreLogic for July 2015.
Our estimate of the value of new residential non-housing construction is 5,300 dwellings times $526,000 and that equals $2.79B for the financial year. Chinese developers are currently developing apartment towers for sale to Chinese nationals at a great rate. They will need to step up the pace to absorb this level of capital over the next decade.
Remember we have only been talking about capital from private individuals. On top of this is the capital from Chinese development companies, the insurance companies that receive over US$50B in premiums per annum and other commercial interests. A share of the wealth of China is about to be invested into premium assets around the world.