Federal budget 2012: Little joy in budget for property industry

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 CBRE.