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).
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.
United States of America
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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