May 26 2019Add to Favorites
In a twist of fate, market sentiment is in full bloom after the results announcement of the Australian Federal Election.
The Aussie dollar is falling which isn’t great if you are looking for opportunity because will create an environment of greater in-flows of offshore capital and result in localised competition.
However, if you own assets, the lower Aussie dollar will create a larger market for disposal and more than likely have a sharpening effect on capitalisation rates, creating upward pressure on values across the board.
No announcement has been made in respect of the NSW FIRB duties implemented in 2016 as this has created a severe dampener in the residential space specifically. Victoria has suggested that the duty may increase from 7%-8%. Nonetheless the localised supply-demand fundamentals continue to drive demand for residential accommodation, and restrictions on supply will continue to create upward pressure on pricing. Read more here.
Announcements have been made by the banking sector that consumer mortgage credit will be easier to obtain moving forward with the 7% interest servicing rule of thumb having been reduced, which will increase borrowing capacity. Additionally, the RBA has suggested another rate cut, which as put a further spring in the nations' stride. The weekends' auction clearance results were announced by CoreLogic at 69.9% for Sydney and 62.9% for Melbourne - the highest for the year and reflecting a rebound in sentiment.
Although there may be some greater and systemic debt issues which will play out over the coming 18-24 months, the availability of consumer mortgage credit makes buying a house more accessible. These recent announcements will create greater transactional volumes and again some upward pressure on pricing, which will make everyone who owns a home feel wealthier, stimulating overall economic sentiment.
Non-bank lenders in the Aussie consumer mortgage space have also become more aggressive on the back of the coalitions' win. Groups like Firstmac and Liberty have made announcements that pooled mortgage funds have been upsized from $500m to $1.4b. Primarily backed by offshore capital, both funds have had to turn further expressions of interest to participate in the funds of up to $200m away, indicating significant offshore interest in Australian Residential Mortgage Backed Security product.
The Coalition has proposed to lower the cap on the permanent migration to 160,000 from 190,000 and require some skilled immigrants to move to regional areas, which has been on the horizon for some time and in an attempt to reduce congestion. However, this cap is unlikely to have a material effect (in dampening the systemic and pent up demand for housing) given the 2017-18 intake of about 160,000. Overall Australian population growth was still close to the 400,000 mark according to ABS data.
Interestingly the in-flows of overseas students to Australia isn’t spoken about heavily, which also has an effect on requirements for accommodation and our overall economy. This year in-flows of students from Brazil to Australia totaled 17,000; from China totaled 140,000 (a 6 percent increase on 2018 and a 35% increase on 2017). Inflows of students from Colombia to Australia are this year above 12,000 representing a 20% rise from 2018 and 56% since 2017.
The rolling yearly total of new housing approvals fell into sub 200,000 territory for the first time since May 2014, creating perfect conditions for a rebound in residential house prices. Read more here on MP Funds Management’s view on the supply-demand fundamentals.
New apartment sales and project launches are at record lows as a result of the APRA and Royal Commission-implemented credit restrictions on funding to both buy and construct new projects. The current net effect of this is approx 5000 (and growing) brand new apartments sitting as unsold brand new apartment product. If these can be acquired at the appropriate discount and in bulk, this sector represents a pocket of value for a period as the sector begins its rebound. Read more here.
In the listed space the 360 Capital Total Return Fund (ASX: TOT) is an interesting way to get exposure to the residential debt space. Paying a 10% dividend and the underlying asset base is in keeping with the theme of the rebounding residential market, with a mandate for brand new residual residential stock loans. Being listed, it means that there is a low entry dollar size for exposure to this sector of the market (circa $400 via a banking platform like the @westpac app), whereas most unlisted syndicates require minimums of $100,000 - $500,000. Any investment exposure will be subject to the natural volatility of the stock market, but there is also the benefit that the investment has better liquidity than an unlisted exposure.
We are focused on high-quality assets along the eastern seaboard of Australia, last week I was in Melbourne looking at opportunities and meeting with investors. Next week is Queensland to look at sites and opportunities that we have in due diligence, stay tuned for more on this front as we start to talk more about the specifics of these deals.
MP Funds Management is working on a range of high-quality deals for co-investment and institutional debt arrangement in the hotel sector, retail shopping centre sector, commercial office sector, development sector and acquisition of bulk residual brand new residential apartment product (at a discount). Our key focus is the eastern seaboard of Australia.
MP Funds Management fee structure is largely performance-based and aligned with investors receiving their principal investment and base return in the first instance, with our fees being largely performance driven.
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).
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MP Funds Management update 1st Oct 2019 and investment pipeline: MP Funds Management has completed its co-investment into the acquisition of a 52,000sqm office asset in Brisbane CBD, right opposite the railway and with 98% of rental income underpinned by government tenants.
MP Funds Management has provided investment funding for approximately $1.3b in unlisted real estate since 2013 and has provided an investment return of approximately 21% annually. Whilst MP Funds Management focuses on unlisted real estate, I am always fascinated by innovation and I personally will sometimes invest in other areas. Recently I caught up with the founder of a very clever new Australian – based app called Stake https://stake.com.auwhich is a Business-to-Consumer based platform that enables Aussies to get direct exposure to the USA equities market.
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In November 2014 we co-invested with another Manager into the acquisition of a 13-level North Sydney CBD office tower for a purchase price of $36.75m or $4,665 per sqm. A total of $19.5m equity was invested with a gearing ratio of 65%, debt was locked in at a rate of c.4% for the intended five-year investment period.
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