by Terry Cunnew
Looked at through British eyes, there are some aspects of Australia which seem very strange. How can a country with a Labour government be going through many of the fundamental economic changes which in the UK are so closely associated with Thatcherism?
Yet it is a fact that under the present Labour administration Australia has seen the liberalisation of the financial market, which has resulted in the entry of major foreign banking interests, as well as the relaxation of the restrictions imposed by the notorious Foreign Investment Review Board (FIRB).
FIRB was a fairly pointless piece of xenophobic legislation which, in retrospect, seems to have served little purpose other than to keep out of Australia many useful potential sources of investment capital.
Under the old FIRB rules it was generally not possible for foreign investors to buy an existing commercial or industrial investment. Indeed, even for a new development to be retained as an investment the wicked foreigner was not allowed to own more than 50% of the equity.
Now a foreign investor who is prepared to risk taking on a development is free to do so (unless the scheme is reckoned to be against the national interest). The investor can also buy an existing investment outright if there is no competing local equity available on reasonable terms.
Foreign investors have also been set free to take a 100% position in resort and hotel schemes, and this is an area in which the Japanese investors have shown a strong interest, particularly along Queensland’s famed Gold Coast.
And the reality is that FIRB now regards itself as presening no bar whatever to foreign investors. Back in September a spokesman for FIRB admitted that there is in fact no legislation governing the board, and applications made by off-shore investors were voluntary.
The reality was that there was no force of law to back up FIRB’s requirements and that the only reason for foreigners not to evade FIRB registration was that the guidelines were so liberal that there was simply no reason to break the rules.
Indeed, there is a feeling in some Australian property circles that in reality FIRB is being allowed to wither on the vine, and that in effect it is being killed off without the government being so blunt as to actually say so.
Whatever the truth of the matter, the fact is that major off-shore investment is now taking place in Australia, with the Japanese and the New Zealanders taking the lead.
To date, the Japanese involvement has tended to concentrate on developments, usually in partnership with local interests, rather than on acquisitions.
So far there has been little sign of significant activity by British interests, which before the days of FIRB were a major force in the market. However, according to Sydney-based Herring Daw Pty there has been an increase in interest which they expect to be translated into deals.
The effect of FIRB was to divert British funds which would probably have been invested in Australia to other markets, such as the USA, but Herring Daw feel that the historic ties between the UK and Australia are still pretty strong.
As a result they forecast renewed British activity, albeit highly selective and likely to concentrate on first-class developments in prime locations.
However, say Herring Daw, it should not be forgotten that there are other investment opportunities apart from those in the major central business districts. The country has, they add, shopping centres which bear comparison with the best to be found anywhere, along with a demand for good-quality manufacturing, warehouse and hi-tech space.
What is more, overseas investment is regarded by some as a key factor in Australia’s continuing prosperity. In a speech in September to the Australian Institute of Urban Development, Jones Lang Wootton joint managing director Nigel Chamier pointed out that the country has neither the population nor the capital to sustain growth without the added element of foreign investment.
Looking specifically at the tourism industry, he pointed out that most development in this field is being carried out with foreign backing, either by straight equity investment or via a funding arrangement.
And if it were not for this offshore involvement Australia would not have the infrastructure for a tourism industry.
Some idea of the scale of investment activity comes from Chestertons International, who say that investors from Hong Kong, Singapore, Malaysia, New Zealand and Japan have stimulated a surge in development projects around Australia’s major cities.
In addition, local interests are also competing for a share of the market, with the result that development work in progress is currently valued at around $A4bn.
What is more, say Chestertons, investment sales in central business districts in the first six months of this year reached $A1.96bn, which was only $A600m short of the total for the whole of 1986. Sales in the second half of this year are forecast to run at the same level as in the first six months.
Chesterton International add that there is downward pressure on investment yields which can only be intensified as foreign investors come increasingly in to the market. A favourable exchange rate centainly helps, and the Japanese in particular see Australian real estate as being comparatively cheap and high yielding.
The September budget brought nothing which was seen as harmful to the property market. While the reduction in the depreciation allowance from 4% to 2.5% was not exactly welcomed, the market should be able to live with it. After all, as Herring Daw point out, the 4% rate had not exactly been in place long enough to become entrenched, having only been introduced about three years ago.
One element of the budget which should help the residential investment market was the reintroduction of negative gearing. By substantially increasing investors’ after-tax returns this move is expected to go a long way to revive the private-rented sector, which had fallen into something of a decline.
However, the improved market conditions which the reintroduction is expected to produce will probably not filter through until about two years hence, given the lead-in time to obtain development approval and actually build the property.
When considering the Australian real estate markets, it is important to get the country into perspective. It is, for one thing, vast — almost two-thirds of the size of the whole of Europe, including the European parts of the Soviet Union.
Into this huge area is crammed a population of about 15.7m! What is more, most of those people live in the country’s four cities of Sydney (c 3.4m), Melbourne (c 2.9m), Brisbane (1.15m) and Perth (1.1m).
Given that the total area of the country is 7.69m km2, it is clear that overcrowding is not one of Australia’s problems. Indeed, Australia’s cities have a tendency to sprawl, covering much larger areas geographically than their populations would suggest to those used to European cities.
This is understandable, since most Australians’ idea of a home is a free-standing house on a quarter-acre plot. Given such a sprawl, plus the fact that Australians think nothing of driving distances which seem extraordinary to British eyes, it comes as no surprise to find that major regional shopping centres are an important element in the market.
According to a recent study by Provident Shopping Centres Pty, of Sydney, 600 such centres account for 40% of all retail sales and just 60 of them take 15% of the total. The top 20 regional centres average 64,000m2 and the largest in the country totals 120,700m2.
Some 20% of the retail market is controlled by the major Coles/Myer group, which controls two of the three major department store chains — Myer and Grace Brothers — along with the dominant discount department store chain K-Mart.
Coles/Myer, with sales totalling $A10.4bn in the year to July 1986, are among the top 15 retail companies in the world.
David Jones, the third major department store chain, has been reorganised and revived to re-establish its position in the market.
Woolworth is the leading supermarket operator, with 27.5% of the market, while the growing Franklins discount supermarket chain has some 10.5% of the food market.
In the office market there is relatively less activity in suburban locations and a greater concentration on the central business districts, although both Melbourne and Sydney do have established suburban markets.
A recent study by Richard Ellis showed that the total supply to modern (post-1966) office space in the five major state capitals amounted to about 6m m2, showing an annual increase of about 10% over the past 15 years.
The same Richard Ellis study indicates that the general trend in investment yields over the past five years has been downwards in both Melbourne and Sydney, variable in Brisbane, mostly downward in Perth and upward in Adelaide, which has shown the lowest annual rental growth.
Melbourne investment yields are down from 7% in 1983 to a current 6.25%, while in Sydney over the same period they have fallen from 6.5% to 6%. Brisbane has seen yields fluctuating between 6.5% and 7% and they currently stand at 6.75%.
In Perth, investment returns have fallen from 7.5% in 1983 to 6.5% this year, although in 1985 and 1986 they fell as low as 6.25%. Over the years from 1983 to 1987 only Adelaide has seen a distinct softening of yields, which have risen from 6.5% to 7%.
Looking at who owns the major office buildings in the five principal state capitals (excluding buildings which are wholly or partly owner-occupied), the insurance companies come through as the largest single group, with 34.4%. Well behind them are the superannuation funds, with 16.9%, and overseas investors with a surprisingly large 15.6%.
Local investors are the next largest group, with 12.3%, followed by property trusts (9.1%) and the government (6.5%). The balance is held mainly by the banks.
Richard Ellis note that innovative ownership structures are being developed and that the future is likely to see the introduction of unitisation and syndication, along with other forms of ownership.
Before taking a more detailed look at the markets in three of the five major capitals, two words of warning about the Australian property market.
First, although Australia is officially on the metric scale this does not stop Australian property people from breaking out in a rash of square feet at the drop of a hat — this can make conversion about rental levels more than a little confusing.
Second, rents are quoted either net or gross depending on location. In Perth, for instance, rents are invariably quoted net, but in Melbourne and Sydney gross rents are the norm in the central business district while net is generally quoted for suburban space, and even then there may be exceptions.
Confusing, isn’t it?
