Opportunities for property investors in a two-speed market
Mining markets are the golden key to economic growth in Australia right now, whereas industries such as tourism are taking a hit from the high Australian dollar. Knowing where to look in Australia for prime investment property takes a bit of due diligence, however there are plenty of fabulous opportunities for the taking, provided an investor knows what he or she is looking for. For example, rising wages are a key factor to search for when seeking a great investment area. This is due to the fact that rising wages are strongly tied to rising property values.
Certainly we're going to invest where rents are going to grow, where populations are going to grow, where unemployment is low, and where certainly wages are going to grow. We're also going to buy where supply and demand is not keeping up, and so these opportunities are in Australia and not necessarily in the rest of the world.
The mining boom we're experiencing now is, essentially, the biggest in our nation's history and it's really set about because we're now intrinsically linked to the Asian marketplaces. We're more aligned with these marketplaces, putting us in a fantastic position as there's really limited times that China and India will stop building over the next 20 years.
The result of our connection with Asia through the mining markets will be higher wages in Australia. The next 20 years of property to me seem pretty good. Of course it's not necessarily all rosy, and I'll show you some other speeds to the economy so you can get a better understanding of where not to invest.
To show just how huge the impact the mining markets have had on the economy, consider a measure created by HSBC. Some 10 years ago or even 6 years ago, they were measuring 1 ton of iron ore and converting that into what we tend to buy. The example they chose was a flat screen TV.
One ton of iron ore, back six or seven years ago, when the Australian dollar was lower and commodity prices were lower, was essentially worth 2,200 flat screen TVs. As you will remember, back then a flat screen would set you back about $10,000. Today you can pick yourself up a flat screen TV for about $800 bucks. So today's measurement of 1 ton of iron ore is about 22,000 flat screen TVs. This is a result of a mixture of high commodity prices and the high Australian dollar.
Never before in the history of Australia has our arbitrage or what we own been worth so much compared to what we have to buy, and it's such a unique opportunity and a very prosperous opportunity that Australia needs to take advantage of.
The Australian dollar is higher at the moment, and that's obviously not necessarily great for people exporting, but essentially imports are cheaper. The Australian dollar has been higher than what it is right now, but it's never been this high since it's inaugural flight back in the ’80s.
I don't necessarily see that this will change very soon. It's not all a bed of roses, there's certainly some data coming out which does show a two speed economy.
If we were like New Zealand, that doesn't really have that much mining activity, and we relied on say dairy and meat, we would soon be very similar to those economic countries that don't fuel the engine for the great powers of India and China, and as you can see in the chart below, the line essentially dips and we would no doubt be in a far more recessive environment if it wasn't for the opportunity of the mining markets.
So the mining markets have made a bit of a resurgence, and they're always typically very small areas where the mines are located and so they create great little pockets of buying opportunities.
Of course some of the capital cities that link to these mining markets also create great pockets of opportunity. Places like Perth and places like Brisbane are fast becoming the global offices for the mining market sector.
So we're going to see the re-emergence of these marketplaces. Brisbane is certainly going to be the first cab off the rank. We've got some great economic data which has just come out to support the fact that Brisbane is really at the bottom of the market, but recovery is so close now, that buying in that particular marketplace is going to be a very strategic investment.
We saw during the GFC that the Victorian market and the New South Wales markets do very well, yet the mining markets suffered – Queensland and Western Australia – all those particular marketplaces suffered.
As interest rates were reduced, the masses bought real estate just after the GFC, in fact we're at a 5% variable interest rate and that'll add a lot of people, where there's millions of people in Sydney and Melbourne to jump into the markets and fuel great growth, but in the less populated states it didn't have that impact, but we're going to see that impact into the future.
The business sentiment is weaker, but the reserve bank has stepped in and they've restored a bit of parity back into the markets by reducing their interest rates and the banks have passed that on which is great.
Over the next 12 months, they're predicting more reductions around the interest rate sector, which could be great for creating a bit of urgency when it comes to buying.
Tourism
There are certainly some issues when it comes to buying in certain marketplaces, and these marketplaces I don't particularly want to buy real estate in at the moment, and they tend to be areas where the sole industry in Australia is tourism.
Because of the high Australian dollar, we are actually losing more tourists than what we're gaining, and this is a phenomenon that hasn't occurred since the early 80s. In fact we used to get 120,000 visitors to our shores every month - of course these visitors would bring money from their country and spend it on consumables in our country. Today, we're not getting that 120,000 and in fact because of the high Australian dollar, 120,000 more Australians are actually not holidaying at home, but going abroad to spend their money.
The problem though for areas that are reliant solely on tourists, is that there isn't any pressure on wages, and without pressure on wages there tends to be limited opportunities for properties to grow, and we're seeing that in some places, which solely rely upon tourism, that they defy the employment trend and have employment figures closer to 10%.
When there's higher unemployment, and an industry that typically has lower wages, which travel and tourism do, compared to say the mining sector, there isn't the ability for a market to push on.
Until there's going to be a turnaround in the amount of tourists that stay on shore and the amount of tourists that visit our country, those particular industries will remain very weak indeed, and that will be reflected in those particular housing prices.
We want to find the industries with the higher wages, and the mining companies are essentially paying the higher wages, and so it's going to be quite interesting when we look at the profits at the moment, compared to that of say 1995, which really is only 16 years ago.
The profits that the mining companies are making now, are twice that of what they were making 16 years ago, which is fantastic - it allows them to share that dividend with the people who work for them, and of course it opens the debate of should there be a mining tax or not, because the mining companies are doing very well.
Obviously then, without the mining companies, the economy wouldn't be doing so well.
Another thing about mining companies is they don't borrow money off banks – they are essentially cashed up to the hilt, so whenever they make a decision or make money, they're not making it from a point of leverage, they're actually making it from a pure cash position.
This fact always makes them very appetizing as say a blue-chip stock. If we can follow those blue chip stocks, and link the blue-chip companies who are building, or creating mines, then it makes a lot of sense to buy real estate in some of those areas.
Australia has historically low unemployment, one can understand the Reserve Bank worrying us about reducing rates, and 2011 has been a year which they've had to weigh up essentially a thriving economy – a two-speed economy, linkage to the Asian marketplaces and of course the USA and the European debt crisis.
So when there's low unemployment – around 5% unemployment – inflation increases…you can understand why the Reserve Bank really was on tenterhooks for some time. In fact we didn't really see any great fluctuations for something like 11 consecutive months, so eventually rates have been reduced, not because of our own country's inability to grow, but because we are safeguarding it from the forces of what is going to happen in Europe.
Europe is essentially a bit of a basket case at the moment, and we are able to stimulate our market forces because we keep our interest rates quite high compared to the rest of the world. So you've just got to ask yourself, when trouble comes along and we're at a 7% interest rate, the RBA says okay, let's drop that to 6% .
By dropping it to 6% and if the banks follow suit, there's a load of relief into the marketplace, and so we've got, I guess an economy right now that if it were 7 gears to it, and we are at a 7% interest rate, we could essentially drop the gear back 7 times, which is far more sound than say our North Atlantic counterparts who really can't adjust their interest rates very much – especially if they had to drop them much more, there wouldn't be an ability for the banks to get a return on their money.
Funding Issues
The toughest thing that is occurring in the property market, and in other industries, is bank funding problems. In general, it's a potential risk; however it's been fairly benign. We've all had a poor valuation happen, or a bank knock us back because our documents aren't right, and we've seen limited load-up lending, lower LVRs – we've seen all that.
Essentially we can deal with it – it takes a little bit more care, it takes a little bit more psychology to understand that there are bigger forces at play than essentially we may believe, and as we go through, and lending is tight, it's the only thing we have to deal with to buy real estate. I don't mind the fact that lending's tight, however, because I would prefer that to the lending habits that have seen European and American economies fall in such a poor state.
It's tough to lend or borrow money, but that's how it should be – people shouldn't just be given money without the ability to pay money back and unfortunately we've seen that overseas.
Interest rates are going down, and that is a good thing. 2012 will see interest rate cuts. As we've seen just earlier this month the RBA cut rates again by .25%, in order to help a fledging retail sector of the economy – provide a bit of a stimulus over the Christmas period, rather than wait till after Christmas.
As the next two years unfold, I don't see that there's going to be any changes. I believe that we're going to have challenges. Every time we buy a property there's going to be potentially a valuation challenge, all that has to happen is you need to resubmit and you need to find a bank that allows you to resubmit and do it again, and so forth. It's just the way it is, I can't help it, and the market is dictating that.
Sam Saggers is CEO of Positive Real Estate.