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The 21st century may be the “Asian century”, but Australia has enjoyed links with the region for over 150 years. The Australian gold rush, which began in 1852 and petered out in the late 1880s, was built on a massive wave of migration from all parts of the world.
The largest foreign contingent on the goldfields was the 40,000 Chinese. In 1861, Chinese immigrants made up 3.3% of the Australian population, the greatest share it has ever been. The 2011 Australian census recorded Chinese-born people at 1.5% of the population.
Most of the Chinese in Australia working on the goldfields were under contract to Chinese and foreign businessmen. In exchange for their passage money, they worked on the goldfields until their debt was paid off, and most returned to China.  About 10% stayed, and their hard work continued, putting down roots to create the Chinatown precincts in central Melbourne and Sydney. These areas continue as the vibrant epicentres of Chinese history, culture and business in Australia.
While the recent high level of Asian investment into the Australian apartment market attracts much publicity, much less is known about the impact offshore developers are having on the Australian residential market.
Many are surprised to know offshore developers are now proposing or building 20,000 apartments across Australia, with Chinese developers second only to Singaporeans in the ranking of offshore sources. This provides offshore developers with close to a 50% market share in this Australian property development sector.
But there is a link between the number of offshore developers and the high level of foreign purchases. Many Asian developers are marketing off-the-plan sales directly back into their home countries and cities through well-known and tried marketing avenues.
This high visibility through marketing and the familiarity offshore purchasers have with the product appears to be a winning formula and has helped push off-the-plan sales to a level that is ultimately supporting such a high foreign developer involvement in Australia. This is certainly the case for Chinese developers.
As at December 2012, Chinese developers have about 4,500 apartments in the development pipeline in Australia. This is a tiny number by Chinese standards, where some of the larger developers will complete about 100,000 apartments in a single year, and there are a number of developers doing that when market conditions allow.
In Australia, Chinese developers have invested at least $A350 million in sites nationally and are proposing projects so far of at least $1.6 billion. This activity is providing an important stimulus to a local property and building industry, which is at a very low point in the economic and financial cycle.
But Chinese developers are still very much in the emerging phase in Australia, behind the Singaporeans, who have been the pioneers of offshore developers here and successful ones at that. Singapore-based Frasers Property stands out as the single largest offshore developer to date, with large and high-profile projects such as Central Park in Sydney and the Frasers Landing/Queens Riverside projects in Perth making a bold mark on the local scene.
Of the 4,500 apartments in the Chinese developer pipeline, 72% are still classified in the broad “planning” phase, which could mean sites have only recently been purchased with plans still being developed (and often final apartment numbers still unknown), with others still going through the development approval process. Singaporean developers have just 39% of proposed stock in the “planning” phase and 44% (2,600 apartments) under construction.
Of the Chinese pipeline, 700 apartments are presently under construction and around 550 recently approved.
The Chinese component of the offshore developer trend in Australia comprises 17 projects of the 58 presently monitored in total. Interestingly, of these Chinese-backed projects, 74% by apartment numbers are in Melbourne, with the percentage of foreign-developed apartments in Melbourne at a still-strong 48%.
Access to sites, a lower general site cost per square metre, a more accessible planning system and the strong cultural/education connections appear to have driven this higher-than-average representation of Chinese-developed apartments in Melbourne. Strong growth in visitor arrivals from China to Melbourne though increased direct flights appears as evidence of the strengthening links.
The Gu family’s AXF Group is the most active of the Chinese developers in Melbourne, with at least 2,300 apartments in the pipeline, including the 3.3-hectare former Kinnears Ropes site in Ballarat Road, Footscray, which could yield as many as 2,000 apartments.
 
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The other prominent location for Chinese developers is the Gold Coast, which represents 12% of the total Chinese-backed proposals. The massive three-tower Jewel project dominates this interest. The AU$1 billion project recently received state government approval and may kick off within the next 12 months. The project will include a six-star hotel and two residential towers.
Jewel's northern tower will have 215 luxury apartments over 41 levels; the central tower will be a six-star hotel with 300 suites and apartments over 45 levels; and the beachfront tower will have 108 premium residences over 35 levels. There will also be office and retail space and a host of resort facilities.
Jewel is being proposed by the Zhuhai Ridong Group and is likely to be completed by 2016, a time when the current oversupply of apartments on the Gold Coast is expected to be well and truly absorbed. Chinese developer Yan Jian is also active in the Gold Coast market.
Showing that Chinese developers are not just active in the larger Australian cities, the Datong Investment and Development Group is proposing two schemes in Adelaide, both in the CBD. The 123 Flinders Street scheme is particularly notable for its very bold design and is proposed to be the tallest building in the city at 39 storeys, a height only recently allowed under new planning controls. The same developers are also proposing the Aria on Gouger project on Gouger Street.
It’s perhaps surprising Chinese developers are not more active in Sydney, given the size of the city, its popularity with Asian visitors and the large number of Chinese apartment buyers in that market. Only 6% of Chinese-backed apartments are actually in Sydney, compared with 35% overall for offshore developers. There is further scope for Chinese developers to move into the Sydney market, but for now, the Singaporean-based groups have established the lead position among the offshore developers.
But why such a pronounced trend in Chinese and offshore developers, and why now? There are many drivers to this trend that have come together at this time, including:
<ol>
<li>The globalisation of property investment and development companies, looking to simultaneously grow business and spread risk by tapping into a number of different demand cycles and sized markets.</li>
<li>Coupled with point 1 is the significant growth of equity capital, particularly in China and the desire to invest part of this into “safe haven” destinations. Australia is considered a reliable investment location and place to do property business, with a secure land tenure system.</li>
<li>Like other property sectors, the price of residential development sites is generally low in Australia at present, coupled with reduced local appetite to acquire. Buying at this low point in the cycle will improve development feasibility and returns. Some previous site owners have been in a financially distressed state, particularly in suburban or country areas, with these sites being sold through receivers. Most site acquisitions by offshore groups have occurred since the global financial crisis, with this activity peaking in 2010-11.</li>
<li>Housing in most parts of Australia is undersupplied, particularly for reasonably priced products. This situation has been created by years of high interest rates and increasing developer charges being passed on to the end product.  The present low confidence caused by global economic uncertainty is further compounding generally low levels of buyer demand, particularly in greenfield housing markets.</li>
<li>The market popularity of inner-city apartment living close to transport, retail and education continues to be high, and this is where most apartments being developed by offshore groups are being proposed and built. This well-defined sector of the market is running counter to the general greenfield housing market at present.</li>
<li>Population growth in Australia remains high, and provided developers can meet the parts of the market where demand is highest there remains a good chance of achieving a successful project with high returns and low risk in a transparent, regulated industry.</li>
<li>Marketing of apartments directly into a developer’s home country has also opened sales to a purchaser group familiar with the developer’s product and has proved successful in reducing development risk by spreading the buyer catchment.</li>
<li>Various governments in Australia have and still provide incentives to purchase new dwellings (below a price point, which is typically in the middle market) and particularly for new apartments. These incentives can take various forms, such as a stamp duty concession or a first-home owners’ grant. These schemes appeared to have brought forward purchasing decisions and the termination of the schemes can lead to a spike in off-the-plan pre-sales and distortion in the cycle of transaction volume.</li>
</ol>
The risk around apartments developed by Chinese or offshore developers appears to be little different from the risk of those developed by local companies. Off-the-plan sales of individual apartments can remove part of the development risk, although risk is then transferred to settlement.
A number of the projects being developed by offshore groups have experienced a high proportion of sales to parties from the country of the developer or countries other than Australia. This does raise the prospect of the developer (or financier, if relevant) not being familiar with the buyers and reduces the ability to trace the ultimate source of funds for settlement.
Yet there appears to be no evidence through this cycle of this risk being realised to a point that has jeopardised the construction and completion of a residential project developed by an offshore company.
In some ways, offshore developers are in a fortunate position to be able to tap into large offshore buyers groups through existing contacts, opening up a source of equity capital not otherwise familiar to Australian developers.
The other obvious risk is oversupply in concentrated locations, leading to the potential for softening in achievable prices for off-the-plan sales. However, were this potential to be realised it should be revealed through difficulty or lack of pre-sales and a response by the developer to defer or alter a project.
Much has been written globally about Australian property prices being too high. Australian residential prices have grown over the longer term on the back of moderate but sustained levels of economic growth, coupled with population, employment and wages growth.
Add to this a general undersupply of dwellings nationwide and a conservative lending policy among domestic banks, and residential pricing appears to have been well supported to its current position. Unless all of these drivers unwind, it appears unlikely the median pricing levels of residential property will adjust downwards in the near term.
Provided offshore (and local) developers continue to carefully respond to the nature of demand for apartment product coming from the marketplace, in terms of product location, concentration, design, pricing, etc. then the supply-side risk appears to be manageable.
Although the connection of the Australian, Chinese and more generally, the Asian economies is a long and growing one, the relationship through the real estate sector still has a long way to develop.
 
Kevin Stanley is an independent real estate analyst with over 20 years' experience in property market research and urban planning.  He is located in Sydney, Australia, and can be <a href="mailto:kevinstanley3@bigpond.com">contacted via email</a>
For more on the allure of Australian property to Asian buyers, <a href="http://propertyobserver.com.au/ebooks/free-ebook-australias-allure-for-asian-residential-property-investment" target="_blank">download our free eBook. </a> The eBook is also available for<a href="http://propertyobserver.com.au/ebooks/australias-allure-for-asian-residential-property-investment-free-ebook" target="_blank"> free download in Chinese. </a>
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Eight reasons Chinese residential developers have emerged as a major force in the Australian market: Kevin Stanley

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The 2012-13 federal budget provides little joy for the property industry in the year ahead.
The focus of returning the budget to surplus is a responsible overall direction to take, at such an uncertain time for global sovereign finances.  It will put Australia into a strong position for future budgets, especially compared to other countries.  But the budget provides little short-term confidence and support for business or households, and that’s what is needed at the present time.
But the drivers of real estate demand are presently weak and this budget does little to strenghen them for the long term.  In that sense, this budget is a short term fix, not a reforming budget aimed at stimulating economic or property driver growth.
The retail and housing sectors 
The household sector in particular has little confidence neither to spend in discretionary areas nor to make major commitments, such as buying or building new housing.  Retail is a big employer and housing construction also has significant impacts across the wider economy.  These areas of the economy are under-performing largely due to a lack of confidence, and the budget does little to lift household confidence and drive these bigger commitments. 
The “cash splash” announced in the budget will not provide the sustainable lift in retail spending the sector needs.  Cutting the corporate tax rate would have had a more significant and sustainable impact on business investment, employment growth and hence retail spending than simply giving money away as a “one-off” solution.  While the budget may provide a short-term lift in retail spending in specific areas, such as education, it is not the structural shift the sector needs to get it moving and keep it growing at more reasonable rates. 
Employment generation 
Like households, business is reluctant to commit to employing further staff and these is resulting in weak employment growth, and in turn, demand for office space.  The budget does little in the year ahead to improve business confidence and profitability, meaning there is little chance of stronger employment growth in the short term.  Cutting the corporate tax rate as originally promised would have helped in this area. 
Infrastructure and city building 
The expenditure side of the budget announced last night is narrowly focussed and of little direct support to the property industry.  The area of “city building” in particular is a missed opportunity in this budget.  Australia needs to provide for future urban growth, but there’s little in the budget for this, while there’s a massive need in all Australian urban areas to support the development of more efficient and liveable cities.  Now would be the ideal time to both support the construction industry outside the resources states and provide for longer-term growth through greater commitment to urban infrastructure. 
Only three infrastructure-related projects were announced for funding in the budget, despite the massive needs in this area.  Federal funding for two of these, the duplication of the Pacific Highway and the improvement to rail networks through Adelaide will only proceed if the relevant state government matches the funding.  This is unfair.  These projects are of national significance and will help link the national transport network and should therefore be predominantly federal funded.  The matching of funding between the federal and state levels also risks distorting local infrastructure funding priorities in an environment of limited resources.  The third area of infrastructure funding commitment in the budget is to establish a government agency for the development of the Moorebank intermodal facility.  It is aimed at establishing another government agency and will not fund the construction of this much needed facility; it will not bring the construction of the facility much closer to operational reality. 
Property-related taxes 
One of the few bright spots in the property industry in recent years is the interest and activity from foreign investors.  Part of this interest has been stimulated by the potential to use an MIT structure which amploys a competitive witholding tax rate of 7.5%.  This rate will now be increased to 15% under the budget announced yesterday, removing one of the incentives to invest in Australia compared to other global destinations. 
This is a great pity because the low tax rate was only just getting established, being promoted offshore and used in setting up transactions and portfolio investments.  Last year foreign investors purchased about 30% of investment grade properties in Australia.  Without that, the local market would have looked very thin.
The one thing foreign investors always tell us is they like the stability in Government and law in Australia, especially compared to other parts of the world.  Unfortunately, Australia is not looking as stable and attractive as an investment destination anymore after the quick change to this attractive tax rate. 
Addressing the two-track economy 
The economies of the non-resources based states of New South Wales and Victoria are under-performing at present.  The budget provided an opportunity to specifically address this through re-directing geographically specific spending, such as on infrastructure.
This issue was not specifically addressed in the budget and the growth imbalances in the country will further divide property market performance in the short to medium term.
Kevin Stanley is executive director of global research and consulting for the Asia Pacific region at <a target="_blank" title="CBRE" href="https://www.cbre.com.au/EN/">CBRE</a>.
 
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Federal budget 2012: Little joy in budget for property industry

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Australia has gone from lagging to leading in relation to the rate of recovery in commercial capital values.
Prime office capital values have been rising in most parts of the world since 2009, however growth has varied widely and, perhaps surprisingly, values have increased the least in Australia.
But changes are afoot. Australia has emerged as the slow but steady performer on the world stage – which is one of the key reasons why this market has been such a magnet for offshore investors.
With the rate of capital value growth decelerating in Asia, the US only just limping into recovery and taking into account the changing outlook in Europe, Australia has started to emerge with a more stable, albeit modest, level of capital value growth than other parts of the world.
Indeed, in the third quarter this year, Australia and the US were the equal leaders in relation to quarterly capital value growth after prime office values increased by 1.5%. In the EMEA, which is the epicentre of the world’s economic concerns, capital values grew by just 0.7%, while in Asia values increased by just 1% as cracks began to appear in the region’s economic outlook.
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It is a significant shift given what has occurred at a global level since the start of the property market recovery in 2009. Since that time, global capital values have increased 16.7%, driven by strong growth in Asia, where values have jumped a staggering 28.5% on the back of falling cap rates and globe-leading office rental growth.
Even the EMEA and the US have so far managed to post reasonable growth of 15.3% and 13.6% respectively, despite the negative sentiment in relation to their economies.
By comparison, prime office capital values have increased by just 7.5% in Australia in the past two years, despite our enviable credit rating and the fact that foreign investors have been flocking here in record numbers.
And it is a far slower recovery than what has been experienced in past cycles. In the first two years of the recovery in the early 1990s, values increased 12.8% and in the mid-2000s, after the tech wreck, values increased by 11.9% in two years to restore all the value lost in the preceding downturn.
So what’s so different this time round and why has Australia been lagging The cost of debt is one key reason. The level of tenant demand is another.
Unlike most of the rest of the world, the cost of debt has remained relatively high in Australia and this has restricted the local investment market and left the door open to foreign purchasers, who are mostly using all equity when purchasing.
If investors do borrow to purchase, then the spread between the property yield and the cost of debt is too tight to provide much scope for yield of cap rate compression through the bidding process. 
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On the tenancy front demand outside the resources sector has been hesitant given the uncertain global economic environment and business confidence has remained low, which has slowed decision making.
As a result, Australian prime CBD office rents have grown just 4.0% since the fourth quarter of 2009, which has done little to boost capital values.
But the third-quarter growth numbers point to Australia being the slow but steady performer on the global stage – and this is likely to be a continued magnet for property investors – as is the fact that capital values here need to grow by another 18% to return to pre GFC levels.
The slow and steady pace of change in this cycle in Australia is likely to continue to attract investors comfortable with a more stable recent performance and outlook.
Kevin Stanley is executive director of global research and consulting for the Asia Pacific region at <a target="_blank" title="CBRE" href="https://www.cbre.com.au/EN/">CBRE</a>.
 
 
 
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Australian commercial property market has gone from laggard to leader

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Another volatile week on world financial markets leaves us to wonder what it all means for Australian commercial real estate.  It means many things, but most significanty, it further highlights the safe investment haven Australia has become for many asset classes, especially commercial property.
Foreign investors are increasing their prescence in the Australian commercial property sector, especially in the quality end of the market.  In the first six months of 2011, foreign investors accounted for 28% of transactions above $20 million.  This is twice the long term average.  Although only half done, so far in the 3rd quarter, foreign investors represent a staggering 61% of all sales, by volume.
As global volatility grows, so too does foreign investment into the Australian property market.  By far the largest source of funds is now Asia (20% of all purchases so far this year), as Pension Funds grow, Property Fund Managers become increasingly active and REIT’s also start to spread their wings.  But North America (accounting for 10% of all purchases) is also opening up as a source of funds (despite the high AU$), with new entrants from the USA and Canada now increasingly active.  Add to that the occasional foray by European-based funds and private investors, along with investors coming from South Africa and it seems the whole world is now chasing Australian real estate.
And why wouldn’t you?  We may think we have our problems with floods, cyclones, a looming carbon tax, rising cost of living and an economy too reliant on the mining sector, but compared to the rest of the world, we’re in very good shape and have a very bright outlook.
Despite a patchy recovery, forecasts still point to an improvement in economic growth over the next twelve months and this will underpin the recovery in the commercial property markets as well.  Add to this the famous transparency and ease of doing property business in Australia and the choice to look downunder is obvious.
But the most interesting part of this trend may be only just emerging.  Prices are starting to rise on the back of all this foreign investment.  Yields remain attractively high in Australia relative to other countries.  The traditional theory of the high cost of local debt limiting any scope for yield compression is going out the window as foreigners use mostly equity.  The increasing number of foreign players, coupled with the locals, is starting to put some much-needed tension back into the marketplace and this is resulting in prices being bid up for the most sought-after assets.  This must ultimately flow through to local valuations.
Yes, it may have been a stressful week in the stockmarket.  But by further re-inforcing foreign interest in the Australian commercial property markets, it may have also been an important turning point in restoring capital values.
Kevin Stanley is executive director of global research and consulting for the Asia Pacific region at <a target="_blank" title="CBRE" href="https://www.cbre.com.au/EN/">CBRE</a>.
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Kevin Stanley

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