By Scott Keck

Executive Chairman Charter Keck Cramer

By many global rankings Australia scores highly in the important areas of democracy, social equality and equity, education, health, liveability, quality of infrastructure, standard of housing, multi-culturalism, sovereign risk, balanced and transparent government, economic performance, employment, natural resources, and commercial governance particularly in the banking sector.  These many strengths, coupled with Australia’s natural beauty, moderate climate, and absence of natural disasters such as earth quakes, floods, and tornados etc., make it one of the most desirable, safe, and prosperous countries in the world in which to live. The country also hosts very high standards of infrastructure, construction, housing and services and consequently, for all of these reasons, real estate in Australia is generally of a high standard, in strong demand, and consequently, by global standards, is relatively expensive in many of its residential sectors, yet in its commercial sectors, at par or competitive with other first world economies.  Forgive me if I make no mention of our spiders, snakes, sharks or bush flies.

Scott Keck 2Australia is a relatively young country, first colonised by the English in 1788, its economy and growth boosted by events such as the Gold Rush of the 1850s, and a prosperous wool and rural industry through to the turn of the 19th century. Industrialisation leading to a strong manufacturing base contributed to the rapid need for employment resources and from the end of the second World War Australia’s population grew by significant migration, culminating in the multi-cultural society enjoyed today and a current population of approximately 23.2m. Being a large island continent of 7.7m sq.km., compared with the United States at 9.8m sq.km., and near the size of Brazil at 8.5m sq.km., the relatively small population translates to an overall low density but much of the nation is arid with the bulk of population at 75% living along the attractive shorelines, mainly eastern seaboard, as summarised in the following table:

Centres of Population

Australian Population Analysis

State

2013 State Population

2013 State Capital
& Population

Capital % of
National Population
(ex suburbs
outer urban)

2013 Current Annual Population Growth

2051 Growth Projection for Capital City

New South Wales

809,444 square kilometres

7.41m

Sydney – 4.76m

20.5%

81,000

7.75m

Victoria

237,629 square kilometres

5.74m

Melbourne – 4.35m

18.8%

95,500

7.74m

Queensland

1,852,642 square kilometres

4.66m

Brisbane – 2.24m

9.7%

45,000

4.25m

Western Australia

2,529,875 square kilometres

2.52m

Perth – 1.97m

10.9%

67,500

4.71m

South Australia

1,043,514 square kilometres

1.67m

Adelaide – 1.29m

5.6%

13,000

1.81m

Northern Territory

1,420,970 square kilometres

0.24m

Darwin – 0.136m

.006%

3,900

207,000

Australian Capital Territory
(National Capital)

2,358 square kilometres

0.381m

Canberra – 0.38m

.016%

6,300

667,000

Tasmania

90,758 square kilometres

0.513m

Hobart – 0.217m

.009%

1,000

265,000

Total

23.14m

15.34m

65.53%

313,500

27.4m

ABS 3,218.0

In addition to the Capitals accounting for 66% of Australia’s population, there other major urban sectors including non capital cities such as Cairns and Townsville in Queensland, Newcastle in New South Wales, and Launceston in Tasmania. These, together with the metropolitan areas attaching to the main city capitals, account for a further population of approximately 20%, increasing therefore the total percentage of the Australian population which lives in significant urban areas to approximately 86%.

Whilst Canberra is the National Capital and Seat of Government, in general terms, Sydney as the largest and oldest city is recognised as Australia’s “International Capital” closely followed by Melbourne. Both cities are the major draw cards for inbound immigration and as noted in the chart above, have annual population growth projections of 1.5% p.a. and 1.8% p.a. respectively. It is expected, that over the next 20 years, Australia’s total population will rise from the present level of 23.13m, by 32%, up to 30.5m, the greatest proportion of that growth to be experienced in Sydney and Melbourne. Sydney’s current population is expected to increase by 31% up to 6.21m in the next 20 years, and Melbourne, as the country’s fastest growing city, is anticipated over that same 20 year period, to grow from its present population of 4.5m by 38%, up to 5.98m. Sydney and Melbourne, together with their metropolitan / suburban sprawl, have a combined total population of approximately 8.1m, equivalent to 35% of the total Australian population. The following, is a map showing the continent of Australia, highlighting the population density.

 

Supply and Risk

Across the nation, the supply of commercial accommodation, whether retail, offices, or industrial facilities, is about matched to need, but presents opportunities for additional accommodation in line with projected population growth, and due to the need for new generation or higher specified accommodation replacing the old. Particularly along Australia’s eastern coast therefore, focussed into Melbourne, Sydney and Brisbane, there are opportunities for speculative development and passive investment in these commercial sectors. In respect of residential accommodation, not only population growth, but changing preferences of younger households is driving demand for inner urban locations, creating excellent opportunities for residential accommodation in the form of apartments and townhouses. Nonetheless, conventional residential subdivision on the fringe of the main capital centres, remains strong there still being a good demand for the long held Australian tradition for the suburban “house and land”, family lifestyle. In the residential sectors therefore, there are also excellent opportunities for entrepreneurial activity in land subdivision, construction, high rise apartments and passive investment.

 

Engagement with Australian Markets.

Engagement with the Australian real estate market is not difficult, as the entry barriers are not problematic. Freehold land tenure in Australia, in the commercial sectors is able to be purchased directly by overseas interests, subject only to relatively minor financial and regulatory requirements which do not have difficult compliance requirements. Purchase into the rural and residential sectors for development are also relatively straight forward. The title and legal systems are both based on English models, and the availability and quality of a wide range of property professionals including valuers, planners, architects, engineers and contractors, is easily accessible. The country does have a strong Union establishment, yet this is manageable, and can be budgeted viably subject to standard negotiation and contractual arrangements.

Government in Australia is tiered from a Federal National Government, down to State level, and then within each State, at a Municipal level. Planning controls and implementation, and authority for approval, rests mainly at the lower Municipal level, with redress to State authorities on occasions where necessary, but does not involve Federal application. The legal system which provides for hearings and reviews of development schemes, can be a slow and expensive process, although not always, but generally it can be said, that the cost, length and process of planning in most States, carries an ultimate cost both directly and indirectly, which is still able to be incorporated viably into most developments at their end market values.

Unlike some other countries, the private sector in Australia is mainly responsible for all development, the Federal and State Governments only responsible for social and civic core accommodation and in no way involved in engineering and construction contracting which entirely the domain of the private sector. It can be said, that the built landscape of Metropolitan Australia is designed and financed by the private sector, with the public sector having the ultimate planning controls. Typically, facilities such as schools, hospitals, universities, police stations, jails and public buildings such as museums and libraries, are financed by Government, but all other accommodation amounting to more than 90% of the urban built form is driven by the private sector, including virtually all housing, office accommodation, retail, industrial logistics accommodation, entertainment, retirement accommodation, hotels, marinas etc. Government is the catalyst for infrastructure such as roadways, airports and public transport, yet these are constructed and sometimes financed under contract by the private sector, and invariably transfer from Government, by a process of privatisation, to the private sector for longer term investment.

Notwithstanding the large amounts of accumulated private and public sector superannuation in Australia, now estimated at $1.85 trillion, only 10% has found its way directly into real estate, most having been invested in equities, cash, and offshore opportunities. Financing therefore, is typically by developer equity, combined with bank or institutional led debt and perhaps by global terms, it may be said that the Australian Banking sector is cautious, entertaining only low risk, and consequently many worthwhile opportunities are starved or made difficult for the lack of finance. In this regard, there is in Australia, an opportunity for foreign capital investment.

 

Timing – When to Engage?

Professional representation of the Australian real estate market is through a range of well established and highly experienced agencies, including many which are internationally based including Jones Lang LaSalle, CBRE, Colliers, Knight Frank, Savills and others. It is important to understand that these agencies in general represent their vendor clients, and therefore have a professional sense of commitment to present properties in the very best light and with the most persuasive commentary, so as to attract committing purchasers at the best possible price for their clients. Whilst under Australian law, outright misrepresentation has legal consequences and can be challenged, there remains a grey area, where optimistic representation and commercial reality are often in contrast. Necessarily therefore, intending investors new to the Australian scene must understand the crucial need for independent due diligence, but to which they can be guided usually through their accounting and legal contacts, ultimately, to a non agency property consultancy which is an expert in due diligence, such as my firm, Charter Keck Cramer.

Having cautioned as to the need for independent due diligence, the other issue is of course timing. Experienced real estate entrepreneurs understand that successful returns from real estate whether development or passive investment, are rarely earned over night. In the Australian market, windfall gains, are very unusual as the market is relatively transparent, and most property opportunities, widely advertised, and openly contested. Satisfactory returns however are obtained through prudential due diligence, perseverance, patience and best practice. Total returns on annual basis, both income and growth, in the Australian markets are referred to as the Internal Rate of Return (IRR), being the analysis criteria most preferred by property analysts, and projected usually over a ten year investment horizon, allowing for returns to be the product of inflationary impacts upon rental growth, and capital gain. In this regard it is important to appreciate that real estate investment and its returns in Australia is very much a medium to long term growth strategy, underpinned by Australia’s enviable fundamentals of low sovereign risk, a well managed economy, and strong population growth, rather than a highly speculative environment manipulated by powerful private sector influences more typical of emerging economies.

Historically, Australian real estate activity, has either been from developers, broadly including speculators, subdividers, and building contractors, or on the other hand, passive investors, focussing on the acquisition of established property. More recently however, and as a reflection of both a more sophisticated market, greater superannuation, and a need to maximise returns, there is the emergence of developer / investors, who, look to create assets, rather than selling in the short term, having a strategy to hold longer term to maximise returns. In this environment, builders’ margins have fused with developers’ margins, which in the context of a long term hold strategy, can allow such parties to justify an initial acquisition premium above that which just a developer alone may not find viable.

Whilst in Australia, over time, all real estate sectors have had an upward growth trajectory, they do behave differently along the way, and out of step with each other. Currently there is a dislocation between the strength of capital markets (investment demand) relative to the physical space markets (i.e. occupier demand) wherein there is more capital looking to be invested than there are occupiers seeking to increase their floor space consumption. Currently, the residential markets of all types are generally strong, yet in the main capitals, whilst the retail outlook is stable, the office sector is characterised by rental offers being subsidised through incentives to effectively quite low levels, and a benign but improving industrial market. Investors however with solid balance sheets, and therefore able to choose the timing of their engagement or exit from the markets, should not find themselves marooned or hijacked through interim cyclical periods and could also use their strong cash position, to take advantage of softer markets at a time when there are always desperate vendors, and invariably, tighter finance. The decision to enter the Australian markets, whilst in part having regard to timing, should be more focussed on category or specialist sector, and location. These two important factors carefully selected, medium to longer term holding periods allow time to provide its inevitable inflationary support.

 

Preferred Locations.

Whilst there may be some marginal variance in opinion, I think that there would be amongst analysts, a general consensus, that the lowest risk areas for acceptable medium to longer term returns from property investment and development, will be at the locations of strongest economic activity and projected highest population growth, Melbourne, followed by Sydney. Whether it be development or passive investment in residential, retail, or commercial offices, the greater economic activity in metropolitan Melbourne and Sydney, underpinned by population growth, well defined planning regulations, and demand (which can be meaningfully researched), represent the best prospects. Both centres also require additional entertainment and hotel accommodation, although for the resort and hotel sector, the Queensland Coast also ranks strongly, from Surfers Paradise in the south through Brisbane to the Sunshine Coast, and ultimately, Cairns in north Queensland. Brisbane is now coming off the bottom of its cycle and Perth has peaked and facing tough conditions in medium term.

The timing of engagement with the market is different for developers compared with the considerations for passive investors. Acquiring land obtaining development approval and underwriting a project through pre-commitment, typically take a time period of 2 – 3 years for most major projects regardless of property sector, and therefore developers must have the benefit of research, and project carefully forward to likely conditions. In contrast, passive investors engage their full capital immediately, and for this reason need to have a detailed understanding of current conditions. There are therefore, two sets of information; one set for developer, the other for immediate passive investors.

 

Conclusion.

Currently, the Australian economy is under “watch”, many senior analysts, politicians and private sector leaders, agreeing with recently publicised summaries as follows:

“Australians should brace for a long period of slow growth as China’s economy cools and commodity prices remain weak”.

“Capital flight to the safe haven green back has affected the Aussie Dollar, which has lost more than 6% against its US counterpart in the last month.”

“Global economic woes will force the current Australian Government to cut its budget outlook as the Treasurer insists on making “realistic” forecasts, in response to factors outside of local control.”

These comments, in summary, have been drawn from recent editions of The Australian Financial Review, and The Australian, both accredited media daily publications. I think, in summary, it can be said, that Australia is now facing a period of adjustment in terms of global parity. Somehow its economy needs to adjust to account for its present lack of global competiveness or productivity, its ailing labour utilisation, it’s potentially increasing unemployment, and a return to a world order of higher interest rates just at a time when Australia’s economy needs stimulating, rather than suppressing. These are however economic issues of the moment, and although not to be underestimated, and pointing to a medium term period of economic adjustment for Australia, are factors that do not overtake or recast the underlying strong fundamentals that Australia will experience, principally strong population growth, and maintain its desirability as a safe haven destination at a time elsewhere in the world of so much disharmony, poor political governance, economic uncertainty, and increasing social and racial challenges.

Looking beyond any economic interpretation of any moment, Australia must in the longer term, 20 years, 50 years, or 100 years, stand tall, deservedly and enviably as a home for safe investment, providing acceptable returns at low risk capital preservation.

This article is an edited summary of a paper presented in Hong Kong on 20 October 2014 at The Asia Pacific Family Office Conference organised by Campden Wealth in affiliation with Institute for Private Investors and partners Ayaltis AG and Citi Private Bank. For those that may be interested a full copy of the addressed presented by Scott could be obtained by enquiry to Anita Barone-Scott – Marketing – anita.barone-scott@charterkc.com.au

 

About Scott Keck

Scott Keck, as Founder and Chairman of Charter Keck Cramer, has enjoyed a 46 year professional career in real estate in Australia as a consultant valuer and professional advisor to a range of private and public sector clients.

Having a broad experience of the national markets, and attuned to the needs of the investment community, Scott’s organisation which employs 180 staff has a strong research resource, which assists him in maintaining a well informed understanding of both the current scene, and the medium to longer term economic, social and demographic trends, which impact on market direction, and future opportunities.

Charter Keck Cramer is strictly un-associated with any Real Estate Agency, but rather is an independent objective analysis organisation providing a range of property related and property due diligence services including Valuations, Research, Advisory and Project Services.