Apr 12 2019Add to Favorites
Whilst overall consumer sentiment is cautious in the lead up to the Australian federal election, together with the media attention surrounding the decline in the housing market (compounding negative sentiment in the short term), we believe Australia’s domestic economy is heavily reliant on inflows of tax-paying skilled migrants to bolster the diminishing, younger tax payer-base. This is as a result of our top-heavy aging population.
In crude terms, this is a key lever and a medium to long term driver of our domestic economy and housing market.
Geopolitical head and tail winds surrounding the effect of Brexit and the trade wars between the USA and China create further caution. Recent February 2019 research by the Economist China suggests that the trade wars will in fact be a moot point given China and the USA’s interdependence on each other.
Coming back to consumer sentiment in Australia, which we believe is largely driven by the housing market, MPFM’s market view for the medium to long term is based on the thematic that continued population growth will drive our domestic economy. Australia’s aggregate residential housing market was worth $7.6 trillion as of June 2018, this figure has come back by c. 5% across the board as a result of the APRA and Royal commission activities, which commenced at about the same time the S&P ratings agency put a warning on Australia’s rating in 2016. Whilst the warning was placed on Australia as a result of a perceived overinflated housing market, major hedge funds and investment banks were shorting Australian bank stocks in anticipation of another Global Financial Crisis (GFC), generating a global PR issue for the Australian banks, forcing the hand of the Australian regulator to cool the market.
Australia responded with the APRA mortgage lending restrictions and the Royal Commission, which together with ongoing negative media on the housing market has dampened sentiment significantly and cooled the fiery growth of the local housing market.
As at June 2018 the aggregate mortgage debt on the $7.6 trillion Australian housing market, was about $1.76 trillion, an LVR of about 23%, which doesn’t appear to be reflective of a bubble or GFC- like or overleveraged situation.
Over 52% of Australian house hold wealth is held in the housing market and as a result we view the sentiment around Australia’s housing a key driver and heavily correlated with consumer sentiment and spending.
As a result of the APRA and Royal commission initiatives, which have cooled Australia’s housing market, the S&P ratings agency has as recently as four months ago removed the warning from Australia’s global rating.Leading up to the Australian Federal election both parties are aware of our diminishing tax payer base and continued requirement for in-flows of skilled, tax-paying migrants to bolster tax-payer revenues in order to support the aging population.
Both state and federal government’s commitment to infrastructure spend over the short to medium term is evidence of this.
The NSW government has pledged an $85 billion spend for the next four years to infrastructure to support growth from 7.7million people to c.11 million by 2036. QLD has committed $45 billion and the Victorian state government has committed $13.7 billion to infrastructure in the 12 months following April 2018. The May 2018 Federal Budget accommodated for a seemingly small c. $24 billion by comparison.
Australia has 10 million residential dwellings to house a population of nearly 25 million, growing at a rate of almost 400,000 people a year. We have a cap on new housing supply as a result of not only a very difficult planning system, in NSW and Victoria specifically, but now more so than ever with the recent depressed market, construction and approval rates according to the Housing Industry Association of Australia are at all-time record lows.
As a result of crude supply- demand fundamentals, the current dynamic is creating a climate which will again create continued upward pressure on residential house and apartment prices as a result of supply-demand, as a result, we believe that consumer sentiment will begin to rebound after the Australian Federal Election.
• The preliminary estimated resident population (ERP) of Australia at 30 June 2018 was 24,992,400 people. This is an increase of 390,500 people since 30 June 2017, and 92,200 people since 31 March 2018.
• The preliminary estimate of natural increase for the year ended 30 June 2018 (153,800 people) was 4.2%, or 6,200 people higher than the natural increase recorded for the year ended 30 June 2017 (147,600 people).
• The preliminary estimate of net overseas migration (NOM) for the year ended 30 June 2018 (236,700 people) was 10.1%, or 26,600 people lower than the net overseas migration recorded for the year ended 30 June 2017 (263,400 people).
Mandi Prager is the principal of MP Funds Management. MP Funds Management has provided investment funding for over $1.1bn of real estate based investments across 22 transactions and produced an average annualised investment return of 21-22% (IRR).
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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