Australia’s property markets have recovered from the financial and economic problems of the past two years much faster than expected and the outlook continues to be positive, according to Mr Martin Hession, head of property at Australian Unity Investments (AUI).
“We have experienced a very different downturn to the one in the late ‘80s/early ‘90s, when there was a huge oversupply of property – particularly commercial – that weighed on the market for years. The reasons for the recent turmoil in the property market were quite different and caused by disruption in the banking industry, not an imbalance in supply and demand of property.
“In fact, because banks have not been financing property development for almost two years, supply is set to become tight very quickly. Combined with an economic recovery in Australia and solid growth in white-collar employment, you get the ideal conditions for substantial growth in the property market.”
Mr Hession says that, as a result, opportunities for investors are exceptional at the moment because many property values are still priced at levels that were set when the market view was that Australia was going into a recession.
He uses industrial property as a good example of a sector with strong prospects.
“Because industrial property became overpriced in about 2007, prime yields fell to between 6.5% and 7.5% which was very low. When the global financial crisis occurred, the market took the view there would be a recession and that a lot of warehouse space would not be needed because retail sales would plummet and other companies would go out of business. As a result, values dropped and the yields suddenly went to 9% and even as high as 10.5%, which was too far the other way.
“Of course, we escaped a recession and retail sales have not been that bad. As a result, we see yields on industrial property coming back pretty dramatically to about 8.5%, which is still a long way above the levels of 2007. Even on a five-year view, we expect they will reduce to around 7.5% to 8%, so we are going to see quite a rise in values.”
Mr Hession said that the optimistic outlook for the property market is also supported by a number of one-off factors that are unique to the current cycle.
“Listed property trusts have recently raised billions of dollars to strengthen their balance sheets and they’re ready to invest again. They were badly burned by their investments in the US and Europe, where the global economic recession hit hardest. As a result, they are saying they will focus on Australian property, where losses average about 15% compared to 40% and even higher for many of their assets overseas.
“We are also seeing overseas-based property funds saying they want to increase their exposure to Australia because of its stand-out economic performance.
“In the last two years Australia hasn’t built any property to speak about. The result is going to be lots of money chasing too few properties because overseas and local property funds now only want to buy in Australia. It’s going to create a lot of competition for existing property in Australia.
“The other positive factor on the horizon is the likely end of the government guarantee on bank deposits.
“The wholesale deposit guarantee ends on 31 March and the retail deposit guarantee will be reviewed at the end of next year. That’s still a way off, but at some stage investors will start switching back from bank deposits as they realise these will be one of the worst investments over the next three to five years.
“That trend will help revive interest in the property investment market and can only add to what we believe will be an exceptional story for investors over the next few years.”
Mr Hession cautions that there are still lingering effects of the credit crunch which property investors should take into account.
“The banking industry and financial markets are returning to more normal operations, but the availability of cash is still constrained. Banks are still cautious about lending outside of their blue chip customers.
“Finance is hard to get for developers and the cost of borrowing is high. Property funds and developers generally did not get any of the benefit of the sharp decline in cash rates last year as it was offset by an increase in the risk margins that banks add on top of the basic cost of money.
“With official rates back on the way up, the cost of debt is becoming a major issue for some funds, and those with significant amounts of debt are still going to struggle.
“As a guide, a conservatively managed property fund would cap its borrowings at about 50% of the value of its properties. That’s actually a very conservative level of gearing because the debt is being measured against property values that have already come down by an average of 15%. Property investors should make sure they fully understand the debt arrangements of any fund or development they are considering investing in,” Mr Hession says.
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Further information:
Martin Hession
Ph: 03 8682 4408
Mobile: 0419 988 730
Email: mhession@australianunity.com.au
