12-06-2013, 10:45 PM
A Must Read Article For Anyone Looking For Property Investment Down Under and The Impact on Hard Asset Related Equities
Be prepared to change because the economy certainly is going to
BY:FRANK GELBER From: The Australian June 13, 2013 12:00AM
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PROPERTY markets face significant changes in the next five years, with some sectors likely to be buffeted while others will prosper.
In my last article, I outlined those changes. This one looks at the consequences.
A quick recap. We can expect sustained falls in mining investment, a recovery in residential property and construction, followed by improved non-mining business investment albeit still 18 months to two years away, a fall in the Australian dollar initiating structural change and further falls in housing interest rates until the end of quantitative easing causes a rise in world, and hence Australian, rates.
Five years from now, I expect substantially lower resources investment, a significantly lower dollar and a shift towards non-mining sectors as the economy is rebalanced. These shifts won't be neutral, with winners and losers in the economy and in property markets.
Across the past five years the winners have been the mining-related industries and regions, importers and, for a brief period, industries servicing strong government spending and investment. The losers have been the non-mining industries and regions, particularly those servicing the trade-exposed industries.
Across the next five years, that picture will reverse.
The fall in the dollar will boost the competitiveness of trade-exposed industries such as agriculture, mining, manufacturing, tourism, education, finance and business services.
The winners will be the non-mining, trade-exposed industries and regions and sectors servicing non-mining investment.
The losers will be mining regions (we use a lot more resources in the construction phase than the operational phase) and import-related activities.
All this will make a huge difference to the property markets. In the near term residential property and construction will be stimulated by further falls in housing interest rates but impeded by weak confidence in a soft, patchy economy.
Perhaps a new government will help. The market still will be patchy between regions, depending on demand versus supply. And, hopefully, the recovery will spread to home improvements, presently extraordinarily weak, as confidence improves. A recovery has begun already in Perth and Sydney and should pick up Brisbane as momentum builds.
Office markets are suffering from the softness in the economy, cutbacks in government employment and determined business focus on cost-saving and cash preservation. While there have been some increases in supply, the main issues are on the demand side.
Tenants in non-resources states have been reluctant to take on space, keeping those markets weak. This will change. And those states will benefit as the economic flow-on from rising residential and non-mining investment comes through. On the other hand, office demand in the resources states will ease. A large proportion of Perth and Brisbane office space is occupied by businesses servicing the minerals investment boom.
This has marked implications for vacancy rates between the cities and will drive office rents, property values and investment returns.
Of the larger markets, Brisbane is and will remain oversupplied. Perth will become oversupplied. Adelaide and Canberra are oversupplied.
The Victorian economy faces two difficult years with declining residential building and cuts in infrastructure spending.
That leaves Sydney. Despite the prevailing wisdom that NSW is the basket-case economy and despite, or perhaps because of, aggressive cost-cutting affecting office employment and demand, with development curtailed in fear of Barangaroo, the NSW economy is performing well and will underpin a strong market into the future.
Industrial demand will run with the economy. Apart from the mining regions, this sector is soft now, but demand in non-mining regions will strengthen with the economy.
In the cities, there's plenty of industrial land to keep a lid on rents and property values. But there's not a lot of fat in the present environment, making suitable modern well-rented, well-located industrial property a solid investment.
The present strength of hotels is being driven by business travel and mining accommodation. The future fall in the dollar - we are forecasting US80c in three years, and it could be lower - will underwrite a recovery in tourism demand from domestic and international travellers.
My real concern is for retail property. I'm not so worried about internet and smartphone shopping. Those are challenges that will require significant responses from retailers in the future.
I'm more concerned about the impact of the dollar on the cost of the imported component of goods.
Increased retailer margins across the decade were underwritten by the dollar's strength, with retailers not fully passing on cost reductions.
Last decade, higher margins made retailing a much more profitable business, with fewer failures than in the 1980s and 90s. It will be much harder to pass on cost increases associated when the dollar falls.
That will squeeze margins and the ability to pay rents.
Certainly, retail property is a good cashflow business.
And many property investors love retail, but it faces significant challenges.
There will be huge shifts in the prospects for different property markets as the environment changes, making investment and management difficult.
Some of us working in the property market have to do the best we can with the cards dealt. Others can shift between markets.
Wearing my investment hat, I'm a risk-averse medium-term investor rather than a trader, working on a three to five-year horizon, and hence have to be extremely selective. This means avoiding resources-boom regions as too risky. There go Perth and Brisbane.
Of the markets, office is my pick, but only Sydney meets my criteria now, and Melbourne may in 18 months.
Frank Gelber is chief economist at BIS Shrapnel.
fgelber@bis.com.au
Be prepared to change because the economy certainly is going to
BY:FRANK GELBER From: The Australian June 13, 2013 12:00AM
Increase Text Size
Decrease Text Size
PROPERTY markets face significant changes in the next five years, with some sectors likely to be buffeted while others will prosper.
In my last article, I outlined those changes. This one looks at the consequences.
A quick recap. We can expect sustained falls in mining investment, a recovery in residential property and construction, followed by improved non-mining business investment albeit still 18 months to two years away, a fall in the Australian dollar initiating structural change and further falls in housing interest rates until the end of quantitative easing causes a rise in world, and hence Australian, rates.
Five years from now, I expect substantially lower resources investment, a significantly lower dollar and a shift towards non-mining sectors as the economy is rebalanced. These shifts won't be neutral, with winners and losers in the economy and in property markets.
Across the past five years the winners have been the mining-related industries and regions, importers and, for a brief period, industries servicing strong government spending and investment. The losers have been the non-mining industries and regions, particularly those servicing the trade-exposed industries.
Across the next five years, that picture will reverse.
The fall in the dollar will boost the competitiveness of trade-exposed industries such as agriculture, mining, manufacturing, tourism, education, finance and business services.
The winners will be the non-mining, trade-exposed industries and regions and sectors servicing non-mining investment.
The losers will be mining regions (we use a lot more resources in the construction phase than the operational phase) and import-related activities.
All this will make a huge difference to the property markets. In the near term residential property and construction will be stimulated by further falls in housing interest rates but impeded by weak confidence in a soft, patchy economy.
Perhaps a new government will help. The market still will be patchy between regions, depending on demand versus supply. And, hopefully, the recovery will spread to home improvements, presently extraordinarily weak, as confidence improves. A recovery has begun already in Perth and Sydney and should pick up Brisbane as momentum builds.
Office markets are suffering from the softness in the economy, cutbacks in government employment and determined business focus on cost-saving and cash preservation. While there have been some increases in supply, the main issues are on the demand side.
Tenants in non-resources states have been reluctant to take on space, keeping those markets weak. This will change. And those states will benefit as the economic flow-on from rising residential and non-mining investment comes through. On the other hand, office demand in the resources states will ease. A large proportion of Perth and Brisbane office space is occupied by businesses servicing the minerals investment boom.
This has marked implications for vacancy rates between the cities and will drive office rents, property values and investment returns.
Of the larger markets, Brisbane is and will remain oversupplied. Perth will become oversupplied. Adelaide and Canberra are oversupplied.
The Victorian economy faces two difficult years with declining residential building and cuts in infrastructure spending.
That leaves Sydney. Despite the prevailing wisdom that NSW is the basket-case economy and despite, or perhaps because of, aggressive cost-cutting affecting office employment and demand, with development curtailed in fear of Barangaroo, the NSW economy is performing well and will underpin a strong market into the future.
Industrial demand will run with the economy. Apart from the mining regions, this sector is soft now, but demand in non-mining regions will strengthen with the economy.
In the cities, there's plenty of industrial land to keep a lid on rents and property values. But there's not a lot of fat in the present environment, making suitable modern well-rented, well-located industrial property a solid investment.
The present strength of hotels is being driven by business travel and mining accommodation. The future fall in the dollar - we are forecasting US80c in three years, and it could be lower - will underwrite a recovery in tourism demand from domestic and international travellers.
My real concern is for retail property. I'm not so worried about internet and smartphone shopping. Those are challenges that will require significant responses from retailers in the future.
I'm more concerned about the impact of the dollar on the cost of the imported component of goods.
Increased retailer margins across the decade were underwritten by the dollar's strength, with retailers not fully passing on cost reductions.
Last decade, higher margins made retailing a much more profitable business, with fewer failures than in the 1980s and 90s. It will be much harder to pass on cost increases associated when the dollar falls.
That will squeeze margins and the ability to pay rents.
Certainly, retail property is a good cashflow business.
And many property investors love retail, but it faces significant challenges.
There will be huge shifts in the prospects for different property markets as the environment changes, making investment and management difficult.
Some of us working in the property market have to do the best we can with the cards dealt. Others can shift between markets.
Wearing my investment hat, I'm a risk-averse medium-term investor rather than a trader, working on a three to five-year horizon, and hence have to be extremely selective. This means avoiding resources-boom regions as too risky. There go Perth and Brisbane.
Of the markets, office is my pick, but only Sydney meets my criteria now, and Melbourne may in 18 months.
Frank Gelber is chief economist at BIS Shrapnel.
fgelber@bis.com.au