2008 was certainly an interesting year and one that will go down in financial history; 50% wiped off the share market, superannuation funds decimated and listed property trusts taken to the brink.
So where will all of this leave us in 2009 and beyond?
We are now in a Catch 22 market, which will make for an interesting year all round in property and development in Australia.
Property
There is an inordinate amount of property on the market nationally, from residential housing and apartment’s right through to large retail and commercial properties and any number of development opportunities across all sectors of the market.
The problem is credit and debt funding. Australian banks no longer have the cash funds and backing they previously had from the larger offshore investors which makes it much more difficult for them to lend causing them to adjust their lending criteria.
We are aware of a recent example where a blue chip client, with AAA rated companies and virtually no debt, was unable to secure debt finance from their banker of more than ten years to develop a commercial office building in which they would have taken more than 50% of the available space. In another development funding application of only $20m, it was suggested that the $20m be syndicated across four lenders at $5m each – unheard of in recent years.
The Australian property market is still in a state of adjustment (and shock) with valuers increasing yields almost on a daily basis leaving vendors with difficult questions to answer – should I sell, do I need to sell, will I be forced to sell and are there buyers at that price ?
In coming years it is entirely possible that we will see a few ‘super property groups’ who, in conjunction with the banks as partners/managers in legacy JV’s, are unable to sell or don’t want to manage property investments they’ve inherited. This scenario is certainly potentially bad news for tenants, but as banks will inherit distressed property that they cannot sell or entire property companies ,,it may be inevitable..
Markets, of course, always have two sides and there are a significant number of cashed up investors large and small, local and foreign , who are asking the same questions but in reverse; ie; ”How far will prices fall and yields go up?” As a good old Jewish client of mine said to me recently, I have my wallet out but I’ve not yet opened it!
Overseas investors still look at Australia as a prime investment target; we have legal certainty, a sophisticated property system and opportunity for growth before many other countries around the globe.
There have been a few recent examples of cashed up private investors plunging in for large retail assets in excess of $80m at yields of 8.5%, but there are also lots of willing buyers with cash who are still unable to secure debt finance from the banks.
Development
If you are sitting on development land, where are construction costs going this year? Simple, they are going down – maybe by as much as 10% in certain geographic and sector areas.
Facts; unemployment will rise and the availability of skilled and unskilled labour will go up, subcontractors’ margins will come down, builders’ small and large will have their order books slashed and this will, along with the current lower cost of fuel, decrease the cost of a raft of other items.
A weaker A$ will cause imported materials and machinery to stay up in price, however generally our prediction is that costs for new start projects will be lower than they have been for some time.
Council Planning departments, who have been overworked in recent times, should be able to process development applications in record time as the number of applications reduce, therefore reducing holding costs and making development generally more affordable.
So if you can finance your development (and maybe make a few sales) this will be the year to strike a deal to build.
A final note – Government and Superannuation
Every negative statement made by our politicians, journalists and industry pundits, causes many of these cashed up investors to sit back once more and wait for the self-perpetuation process to continue, fuelling the continued loss of confidence by making banal statements is now verging on the irresponsible.
In the early 1980’s and again in the early 1990’s the Federal government analysed and then increased the benefits of building and depreciation allowances – which in turn lead to increased levels of development and investment buying – which in turn stimulated the jobs market and brought much needed revenue into State and local governments through increased stamp duty revenue and the like. Food for thought rather than a Pokie windfall !
If we assume that over 10 million people are in employment in Australia with an average wage of around $50,000, a 9% super contribution equates to $45 billion dollars in contributions over the last year.
Fifty percent of these funds are probably sitting in cash as the superannuation funds have been shy of the equities market in the last six months and their exposure ratios to property, even with the downgrading of property values, has gone up in most cases well above their comfort/risk levels, so they will not invest in property whether it offers good growth potential or not.
It’s an interesting conundrum for the superannuation sector and indeed the Federal Government. The funds are shy of taking risks to protect their stakeholders retirement, however as they have lost a huge amount of their stakeholders funds anyway by being conservative, should they play a part in creating growth, future wealth and assist the country in staving off recession ?
By definition a significant portion of superannuation contributors will not receive their retirement benefit for 20-30 years. Surely such a long term return requirement enables the funds to take some longer term positions enabling to play a positive role in re-building the confidence required in the economy?
Fasten your seatbelts and hang on for the ride.
So where will all of this leave us in 2009 and beyond?
We are now in a Catch 22 market, which will make for an interesting year all round in property and development in Australia.
Property
There is an inordinate amount of property on the market nationally, from residential housing and apartment’s right through to large retail and commercial properties and any number of development opportunities across all sectors of the market.
The problem is credit and debt funding. Australian banks no longer have the cash funds and backing they previously had from the larger offshore investors which makes it much more difficult for them to lend causing them to adjust their lending criteria.
We are aware of a recent example where a blue chip client, with AAA rated companies and virtually no debt, was unable to secure debt finance from their banker of more than ten years to develop a commercial office building in which they would have taken more than 50% of the available space. In another development funding application of only $20m, it was suggested that the $20m be syndicated across four lenders at $5m each – unheard of in recent years.
The Australian property market is still in a state of adjustment (and shock) with valuers increasing yields almost on a daily basis leaving vendors with difficult questions to answer – should I sell, do I need to sell, will I be forced to sell and are there buyers at that price ?
In coming years it is entirely possible that we will see a few ‘super property groups’ who, in conjunction with the banks as partners/managers in legacy JV’s, are unable to sell or don’t want to manage property investments they’ve inherited. This scenario is certainly potentially bad news for tenants, but as banks will inherit distressed property that they cannot sell or entire property companies ,,it may be inevitable..
Markets, of course, always have two sides and there are a significant number of cashed up investors large and small, local and foreign , who are asking the same questions but in reverse; ie; ”How far will prices fall and yields go up?” As a good old Jewish client of mine said to me recently, I have my wallet out but I’ve not yet opened it!
Overseas investors still look at Australia as a prime investment target; we have legal certainty, a sophisticated property system and opportunity for growth before many other countries around the globe.
There have been a few recent examples of cashed up private investors plunging in for large retail assets in excess of $80m at yields of 8.5%, but there are also lots of willing buyers with cash who are still unable to secure debt finance from the banks.
Development
If you are sitting on development land, where are construction costs going this year? Simple, they are going down – maybe by as much as 10% in certain geographic and sector areas.
Facts; unemployment will rise and the availability of skilled and unskilled labour will go up, subcontractors’ margins will come down, builders’ small and large will have their order books slashed and this will, along with the current lower cost of fuel, decrease the cost of a raft of other items.
A weaker A$ will cause imported materials and machinery to stay up in price, however generally our prediction is that costs for new start projects will be lower than they have been for some time.
Council Planning departments, who have been overworked in recent times, should be able to process development applications in record time as the number of applications reduce, therefore reducing holding costs and making development generally more affordable.
So if you can finance your development (and maybe make a few sales) this will be the year to strike a deal to build.
A final note – Government and Superannuation
Every negative statement made by our politicians, journalists and industry pundits, causes many of these cashed up investors to sit back once more and wait for the self-perpetuation process to continue, fuelling the continued loss of confidence by making banal statements is now verging on the irresponsible.
In the early 1980’s and again in the early 1990’s the Federal government analysed and then increased the benefits of building and depreciation allowances – which in turn lead to increased levels of development and investment buying – which in turn stimulated the jobs market and brought much needed revenue into State and local governments through increased stamp duty revenue and the like. Food for thought rather than a Pokie windfall !
If we assume that over 10 million people are in employment in Australia with an average wage of around $50,000, a 9% super contribution equates to $45 billion dollars in contributions over the last year.
Fifty percent of these funds are probably sitting in cash as the superannuation funds have been shy of the equities market in the last six months and their exposure ratios to property, even with the downgrading of property values, has gone up in most cases well above their comfort/risk levels, so they will not invest in property whether it offers good growth potential or not.
It’s an interesting conundrum for the superannuation sector and indeed the Federal Government. The funds are shy of taking risks to protect their stakeholders retirement, however as they have lost a huge amount of their stakeholders funds anyway by being conservative, should they play a part in creating growth, future wealth and assist the country in staving off recession ?
By definition a significant portion of superannuation contributors will not receive their retirement benefit for 20-30 years. Surely such a long term return requirement enables the funds to take some longer term positions enabling to play a positive role in re-building the confidence required in the economy?
Fasten your seatbelts and hang on for the ride.