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Value Hunting and Bench Marking week 12 June 2019

Value Hunting / Markets


Jun 11 2019

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Despite the fact that sentiment has improved in the residential media and commentary space, it looks like we may have a way to go before actual material improvement is seen overall. 

MP Funds Management invests in all property sectors (commercial – retail- mixed-use), not just the residential debt (and or equity) space. The reason I am so fascinated with the residential sector is that I think the sentiment surrounding the residential space is ultimately what governs sentiment for the larger segment of the population who own our c. 10million residential dwellings, which is a fairly accurate indicator of the overall economy and investor sentiment. 

That being said, there are c. 5000 apartments in Sydney, sitting as residual stock either waiting to settle or yet to be sold. 

At this juncture, most developers are holding onto overpriced apartment stock, some have the ability to ride the market out, others don’t. Private equity, family office, and investment groups wait patiently to snap up this residual apartment product at the right discount to market and take advantage of the arbitrage in the inevitable bounce back in values over the next 3-5-year period. 

Research house Urbis found just 7% of new apartment stock it monitored in Melbourne sold over the first quarter of 2019, while new apartment launches crashed by about 80%. Falls of up to 20% on contracted prices were recorded for apartments that settled in 2018 with prices expected to come under further pressure this year.

Read more on the supply-demand fundaments here.

Meriton has acquired its first ever site in Melbourne for c. $29m, which is slated for a Meriton apartment hotel. The project will be Meriton's first development outside of NSW and Queensland, where it has completed about 70,000 apartments.

In the wake of the announcement of his $480 million in off-the-plan luxury high end sales just a few weeks ago at St Moritz, and in one of the toughest residential markets we have seen in 10 years, Tim Gurner's residential development business GURNER has launched yet another project, the $280million Victoria & Vine, with 5 bedroom penthouses priced at $7.5m.

These prominent announcements say two defining things about the market: 

  1. We have a systemic undersupply of housing for a rapidly growing population, which is why those who can afford to build and hold, do.
  2. The high-quality upper-end sector of the market is still very strong. 

Both of these points are further exemplified by the sales results in Sydney’s’ CBD suburb of Potts Point, where home and apartment prices above the $3m mark are transacting in volumes and holding value or increasing in price, rather than experiencing any sort of decline. Additionally, groups like Mirvac and Grocon are investing significant amounts to get into the build-to-rent sector, which is still a difficult market to enter based on Australian tax and structural finance issues.

The competition in the industrial and commercial space is intense with mass exodus being made from retail and fully priced residential space (aside from those higher-end apartments).

These two points also point to the increasing gap between those that have and those that don’t becoming more pronounced.

Q1 wages growth caped out a 2.3% up from a record low of 1.9%, however, there is significant pressure on a large sector of business owners with steady wage overheads and a softer economy.   

Looking to Australia’s overall economy, a recent Crestone update notes that growth is expected to slow below 2018’s 2.8% pace. USB forecast below-trend growth of  1.9% for 2019, CBA had adjusted its outlook downwards from 2.4% - 2.2%. At its May update, the RBA materially cut its outlook from 2.75% - 2%. RBA has cut rates again this month in June and UBS and CBA expect further cuts in August. Whilst sentiment has bounced as a result of the unexpected election results and announcements by APRA to ease the housing criteria, Q1 inflation fell from 1.8% to 1.3% and core inflation slowed from 1.7% to 1.4%, sitting at or below the RBA’s 2-3% target and supporting the potential of a further rate cut as a follow up to this months. 

In the residential space, we are seeing transactions happening in the discounted bulk brand new residual stock space, as well as options to finance presales, we see value in both these sectors, if the pricing is right, based on supply-demand fundamentals. Read more here.

A slew of continuing transactions in the commercial mixed-use hotel and industrial space is putting pressure on yields to sharpen with the retail still very much unfavored. 

MP Funds Management is currently looking at opportunity and has a strong pipeline in each of these sectors. 

From a macro and geopolitical standpoint, investment manager Crestone talk about renewed market volatility as a result of not only the recent developments of USA/ China trade tariff discussions but also a range of other geopolitical risks. As a result of this volatility, there is a weighting towards alternative assets, (inclusive of unlisted real estate equity, debt and infrastructure assets) with allocations to alternates rising by more than 50%. This is as a result of alternatives as an asset class having a return profile which is uncorrelated or has a lower correlation to boarder market swings.

Global research house, Bank Credit suggest that as a worst-case scenario where trade talks break down completely, the combination of aggressive Chinese stimulus and still Dove-ish Fed will likely preclude a major global economic downturn.

UBS notes regarding the US economy, while the next stage if tariffs, 25% on $200bn will have large effects, the most susceptible firms have already failed, and others are diversifying supply chains”. Credit Suisse agrees that the economic impact (of higher tariffs) is less than last year.” 

MP Funds Management will originate its own deal flow and back other managers who we have established relationships with, and who may have gotten their foot on a competitively priced asset. At this point, given the competition in the market for quality assets, the entry price is key. 


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