Aug 08 2018Add to Favorites
Fear & Loathing in the Aussie Real Estate & Credit Markets
The Australian dream could well be characterised as owning your own home, having a surplus disposable income and having a big lump of superannuation to retire comfortably on; or to put it another way, it’s simply having a high quality of life underpinned by some form of government support as we age.
When the market gets difficult (as it is currently), largely due to reduced availability of real estate credit, consistent negative commentary and sentiment, it is a perfect time step back and re-assess your investment strategy to ensure it meets your goals and objectives.
Fundamentally it’s your “why” that governs your “how”.
That is why it is also important to understand that when making investment decisions it is imperative to find a balance between the objective commercial assessment and the more emotional and psychological motivators.
It is the objective commercial assessment – understanding the fundamentals – that helps to manage the strength of these emotional and psychological drivers when they are telling you to hold, fold, walk away or run.
As stated in Part 1, having a clear investment strategy, patience and discipline provide the best chance of optimising long-term investment objectives.
Grit, Wherewithal and a bit of Chutzpah
Some of the most amazing and inspirational lessons I have learned about determination and fortitude have come from reading the autobiographies of some well-recognised titans of business – specifically Sir Frank Lowy the co-founder of Westfield, and Ted Turner the owner of US news channel CNN.
One of my favourite passages in Sir Frank Lowy’s autobiography epitomises his determination and foresight when as a 13-year-old boy, he dressed up as a messenger boy to get to the front of the line so that he and his mother could avoid the long queue to get on a boat to flee from the Nazis to safety. Several years later he immigrated to Australia on his own, still in his teens and lived and worked on a construction site as a cleaner. Today Frank Lowy’s net worth is estimated to be AU$8 billion.
Media Mogul Ted Turner’s autobiography talks of the time when he took over the media business. Things were so tight that he told his executives they had to take stamps off incoming mail and recycle them for the outgoing mail. Senior executives were not allowed to cash their paychecks. Today Ted Turner’s net worth is estimated to be US $2.3 billion and CNN as a company was valued at about US$10 billion in 2016 according to a report by JP Morgan. With approximately two million acres of personal and ranch land, Ted Turner is the second largest individual landholder in North America via Turner Land.
And while the official stories of people such as these provide inspiration, sometimes the unofficial stories of successful people can be just as enlightening.
One of my favourite unofficial anecdotes relates to highly successful property entrepreneur and developer, and provides a slightly unconventional account of his vision, ambition and clear determination: this particular developer had learned that an international airline was looking to lease additional warehouse space. The developer knew of a warehouse that was suitable and was currently for lease. With some quick thinking, he contacted the airline to inspect it. He hired a Rolls Royce for the inspection, put a “sold” sticker over the “For Lease” sign out the front, cut the locks on the gate to gain access and proceeded to carry out the inspection as if he owned it. Suffice to say the airline was satisfied with the accommodation and duly entered into an agreement to lease the warehouse. On the strength of this agreement, the developer approached a bank and was able to get the funds from the bank to put in an offer to the actual owner, and was successful in buying the warehouse. Today this developer is estimated by Forbes to be worth in excess of AU$2.0 billion.
What I love about these lessons is the insight they provide into the minds of illustrious people who intuitively saw an opportunity and had the wherewithal to act, but also backed it up with the grit and chutzpah necessary to stay true to their vision despite any short-term challenges they met. Their response to market cycles and they have lived through many given their respective ages, has enabled them to extract and build sustained value when those pockets of opportunity arose. Their “why” prompted their “how” and the rest is history.
Royal commission investigation into Super.
With the Hayne Royal Commission currently turning its inquiry into Australia’s pooled managed superannuation funds, particularly in relation to seemingly arbitrary and opaque fees, payments to unions and conflicts of interest, which have the net effect of eroding a c $2.5 trillion pool of superannuation capital. Whilst the Commission’s findings have been troubling, it has provided some validation in support of my decision to establish my SMSF, so that I can maintain direct control of my financial destiny.
I admit that superannuation and investing can be uninspiring, especially when you are young, busy, paying bills and juggling kids, family, and more immediate life commitments, but the sense of empowerment that comes from taking control of your investment future can have a hugely positive effect on the now.
Ultimately building a portfolio of sustainable wealth, both in and out of superannuation takes a bit of grit and determination, especially when there are fluctuations in the market and the prevailing sentiment is negative.
MP Funds Management has experience across a variety of real estate sectors and has successfully invested at all levels of the capital stack: senior debt, mezzanine debt, and equity. We are always seeking opportunities that offer the most value from the market with the least risk possible.
Over the last few years, MP Funds Management has invested $287 million across about 21 deals and produced an average internal rate of return of 21%. Our fees are transparent, performance-based and aligned with the successful realisation of investment returns.
Immediate real estate credit constraints vs longer-term economic growth requirements.
Despite current real estate credit restrictions and negative sentiment, MP Funds Management still adhere to the overriding thematic that Australia’s aging population (and diminishing tax base) will need to be addressed through consistent levels of immigration in order to minimise any fiscal deficit as the demand for health and other services increases. This population growth will also stimulate further growth to the $0.800 trillion commercial property sector and will continue to underpin demand for residential housing over the long term.
Infrastructure investment is also directly correlated with population growth. To facilitate this, the Queensland Government announced $45 billion in infrastructure spending for Brisbane in May this year, and similarly, the NSW government has committed $87.2 billion to new infrastructure over the next four years. (read more here).
Direct excerpts from the 2018- 2038 NSW State Infrastructure Strategy are as follows:
“NSW has the largest infrastructure program and the strongest economy in Australia. A key factor in
the State’s recent success has been its focus on infrastructure investment, job creation and accelerated housing supply.
NSW’s population is forecast to increase from 7.7 million people today to over 12 million by 2056 – an additional four million people needing two million more homes. NSW will face a tightening fiscal position as its share of Commonwealth Government revenue declines and its ageing population increases the demand for health and other services.
To meet these challenges, this 20-year State Infrastructure Strategy makes recommendations for each of NSW’s key infrastructure sectors – transport, energy, water, health, education, justice, social housing, culture, sport and tourism. If accepted, Infrastructure NSW’s recommendations would have a substantial, highly positive impact on the State’s future: growing the NSW economy by increasing productivity and participation and generating significant additional employment.
If current trends continue, the Government will face a major gap between what it receives in tax and other revenues and what it spends on public services and infrastructure. This fiscal gap will be driven in part by NSW’s ageing population that will result in lower tax revenues over time as people retire and higher expenses, particularly in the health sector." (read the NSW summary here).
Vision to the Future.
Investing in real estate via an SMSF in the traditional sense of buying a whole property asset is increasingly prohibitive. A number of banks have announced restrictions on lending to SMSF’s to buy property. The current property exposure for the c. $700b worth of Australian SMSF capital is estimated to be around 19%. This ratio is likely to decline over time.
In broad terms, residential real estate represents approximately $7 trillion dollars of asset value to the Australian economy (by comparison the equities sector of our economy accounts for about $1.8 billion (Core Logic Housing Market Update June 2018). As previously noted, our population is 25 million and currently growing at about half a million people a year. Our top-heavy aging population means that immigration stimulus and working- tax paying population growth is required to support the cost of what we consider to be the great Aussie way of life.
As outlined by NSW Government Infrastructure, Sydney is forecast to grow from 7.7 million today to 9.9 million in 2036 to 12.1 million in 2056. Accordingly, the State Government is committed to providing improved levels of infrastructure to service the growing community.
Real estate credit markets are constricted at the moment making borrowing for residential property harder. It is expected that the lead up to the 2019 federal election will see political pressure on both immigration levels and potentially some planning outcomes and the new supply of housing (read more here).
We see the slowdown in residential markets as short-term and believe the fundamentals are solid to support future growth.
I am investing my SMSF in real estate because, despite short-term headwinds, I am confident in the overall stability of the market and the long-term outlook for growth. The way that unlisted real estate behaves is relatively predictable and I primarily invest in the syndicated investments that MP Funds Management manages because it enables diversified exposure to a range of high quality, institutional grade real estate assets across residential, land and commercial.
Like the UPS worker, my “why” is to build a portfolio of wealth that is sustainable and lasting, that can facilitate a great life, help the people I love and leave a legacy for the next generation.
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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