Nov 14 2018Add to Favorites
National house prices have fallen about 5 percent from their peak, due to the sentiment around banking regulator tightening investor and owner-occupier lending rules.
November analysis released by both UBS and Macquarie Bank highlight that potential buyers have become very cautious and expect prices to fall further.
Both reports highlight that whilst borrowing capacity has declined, most borrowers don’t borrow at their maximum. The RBA recently showed that relatively few households would have been constrained by the tightening in lending standards over recent years.
According to the November UBS analysis, current lending standards suggest that the maximum loan size offered to the median borrower would be $530,000 to $630,000, well above the typical actual loan taken. APRA data also shows that only around 18% of new housing debt in Q2 2018 was close to the largest loan size allowed (90 percent or more of the maximum) – which is not an indication of severe credit curtailment, hence the cooling of the residential market is largely sentiment driven.
Institutional groups like Mirvac, Grocon and others are vying to get into the build-to-rent space driven by the Australian supply-demand fundamentals. High net worth family office investors and private equity groups are also getting in on the opportunity, capitalising on falling prices of brand-new residual developer-held apartment stock for bulk acquisition.
A private investor has reportedly acquired 25 apartments at a discount of 20 percent at Consolidated Properties' high-rise Spire development in the Brisbane CBD after the original buyers defaulted on settlement. Most of the original off-the-plan buyers were Chinese investors.
Other opportunistic high net worth investors such as Former Macquarie banker Andrew Hooper-Nguyen and his business partner, the co-founder of ASX-listed Excel Coal, Chris Ellis have been reported to be active in the space, specifically in Brisbane’s Fortitude Valley. Len Ainsworth, who’s wealth is estimated by the AFR to be c. $4b has reportedly acquired brand new bulk residual stock in Brisbane at a significant discount to market.
In keeping with the theme of retaining valuable holdings, apartment developer Meriton has changed plans for its Sussex Street mixed-use project in the Sydney CBD for a second time, this time from hotels to serviced apartments, again in keeping with the theme of holding the real estate.
Meriton first lodged plans to build an apartment and hotel tower at 230-234 Sussex Street, adjacent to the heritage-listed Foley Brothers warehouse at 230 Sussex Street, in early 2017 and received approval in May that year.
After relodging plans with City of Sydney council to convert the tower into a pure hotel development eliminating all apartments, Meriton received approval in September.
Cap on new supply,
Australia’s population reached 25 million in August this year, significantly quicker than forecast by the ABS. NSW and QLD state government’s commitment to infrastructure spend of c. $85billion and c. $45billion respectively, and Victoria c. $14b, with the federal budget committing an additional $25b, all indications would suggest population growth will continue.
The NSW state government recently kyboshed the new planning regime for the western Sydney Corridor, which had slated 35,000 new homes as a result of political and local community pressure.
With 10m residential dwellings to house a population of 25 million in Australia (Core Logic June 2018) and caps on new supply driven by difficult planning as well as the softening market, logic would point to supply-demand fundamentals creating continuing issues around affordability.
The recent November reports from both UBS and Macquarie Bank provide support to the theme that dwelling completions are below average relative to population growth.
Population Growth/ Migration;
A think tank report by the Grattan Institute estimates a 30,000 annual cut to migration over a decade would lower national house prices by about 3 percent.
Housing Prices and Migration Flows, a NSW Treasury document, shows Sydney and national house prices would be lower than the forecast trajectory due to fewer migrants. The Morrison government has flagged plans to cut the annual permanent net overseas migration cap to 160,000, from 190,000. NSW Premier Gladys Berejiklian has called for the state's annual 90,000 migration intake to be slashed in half to 45,000.
The number of permanent visas granted in the last financial year fell by 21,000 to 162,400, about the level the Morrison government is aiming to lower the cap to.
The number of temporary work visas granted rose by 12,000 in the last financial year and the number of student visas granted jumped by 35,000, according to Capital Economics.
Capital Economics senior economist Marcel Thieliant suggests that net migration will only weaken slightly to around 200,000 over the next couple of years.
A new report by Citigroup economist Paul Brennan notes that there are economic risks from a significant pullback in the population growth rate.
Federal Election – negative gearing debate
The Coalition government and property industry have warned against Labor's proposed property tax changes, with the government arguing they will "smash" house prices and now is the wrong time in the property market cycle to reduce tax incentives.
A future Labor government would end negative gearing for future investments, except newly-built homes. The 50 percent capital gains tax break is proposed to be halved to a 25 percent tax discount, with existing investments retaining their current tax benefits.
MP Funds Management is positive on residual discounted residential apartment stock acquisitions as a result of the supply-demand fundaments compounding affordability as an ongoing issue. MP Funds Management is a real estate investment manager that has funded $1.1b in real estate transactions across 21 investments, producing an average investment return of 21%.
In 2016 we provided mezzanine finance for two separate town house developments of c. 24 townhouses each, so around 50 townhouses in total in Brisbane. MP Funds Management came into the deal for a short period of six months. We had the opportunity to buy out a portion of the existing capital providers position at a 19% (investment return (which was compounding monthly).
I am fascinated by the intergenerational transfer of wealth and how the financial and investment sector will evolve as a result. According to a study by Wealth X, over the next decade or so, one of the largest ever intergenerational wealth transfers will take place. Including all individuals with a net worth of $5million or more, its expected $15.4trillion of wealth to be transferred by 2030 globally. This sum is equivalent to the entire Chinese economy or 17 times the market capitalization of Amazon, one of the world’s most valuable companies.
Our first property financing deal was a c 150 apartment project, called VIDA, located at the riverfront in Brisbane’s Westend by Pointcorp, with a gross completed value of $100m approx. Bank West provided the first ranking senior debt, and we sat pari-pasu with Maxcap as a mezzanine loan, ranking in priority behind the bank with a second mortgage security and with Thakral Capital Australia subordinated to us as equity. After we had run a lengthy and detailed due diligence process, our capital was called in about the third quarter of 2013 and repaid in full by the end of November 2016, with a 21% IRR (-annual internal rate of return).
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