ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

Jul 20 2015 at 6:42 PM Updated Jul 20 2015 at 6:42 PM

[/i]How APRA rules will change real estate

Westpac chief financial officer Peter King warned the cost of holding higher capital under the new APRA rules would "inevitably be borne by customers and shareholders". Nicholas Rider

by Robert Harley
The increased capital adequacy requirements for residential mortgage exposures released on Monday by the Australian Prudential and Regulation Authority will ultimately impact on housing activity and prices.

Finance and real estate go hand in hand. The more cheap finance available for real estate, the more prices and activity soar. As finance contracts, so does real estate.

But the response on Monday was muted. Yes, the change will have an impact but not that much, and spread out over time.

Westpac chief financial officer Peter King warned the cost of holding higher capital under the new APRA rules would "inevitably be borne by customers and shareholders".

But competition, between the banks and with other finance providers, could limit rises in mortgage rates. The impact could be further masked if the Reserve Bank dropped its rate again, and the banks elected not to follow.

Housing investors should view APRA's move as one more restriction following the tightening of loan to valuation ratios, the increase in serviceability criteria and the reduction in rate discounts.

Investors buying off-the-plan, and due to settle after July 2016, need to have a buffer in place in case the apartments do not value as expected and the banks have tightened their loan to valuation criteria.

http://www.smh.com.au/business/markets/c...igfaz.html

'We ain't seen nothing yet': Chinese foreign investment in Australian property tipped to surge
Date
July 21, 2015 - 8:31AM

Sally Rose
Reporter


Australians might think Chinese investors have pushed up property prices, but "we ain't seen nothing yet", according to Colonial First State Global Asset Management chief economist Stephen Halmarick who is tipping the liberalisation of China's capital markets will inflate asset prices acrosss the globe.

In recent weeks there has been a lot of focus on the challenges facing China as it opens up its financial markets to foreign investors, and what the associated volatility means for other economies like Australia.

"But what will really matter for the world is how China opens up to allow its people to send money offshore. Australians might think they've seen a lot of Chinese investment in the Sydney and Melbourne property market, but we ain't seen nothing yet," Mr Halmarick said at a panel hosted by the Australian Institute of Superannuation Trustees in Sydney.

China's Shanghai Composite Index, surged more than than 150 per cent in the 12 months to mid-June before plunging 32 per cent in a matter of weeks.
China's Shanghai Composite Index, surged more than than 150 per cent in the 12 months to mid-June before plunging 32 per cent in a matter of weeks. Photo: Mark Schiefelbein
China's main equity market, the Shanghai Composite Index, surged more than than 150 per cent in the 12 months to mid-June as the bourse was opened up foreign investors, before plunging 32 per cent in a matter of weeks. Since the government intervened to stabilise the market with a capital injection in early July the Shanghai Composite has bounced back by 13 per cent. The direction of the Australian Securities Exchange has tracked the rocky path of China's market over the past month.

Aberdeen Asset Management head of fixed income Nick Bishop agrees that outflows of Chinese money in the years ahead is likely to have a far greater impact on global financial markets than the recent rise in inflows of offshore capital into China.

"China is a nation with a huge balance of household savings, because there has been no social safety net. Don't discount the ability of Chinese money to flow offshore and push up global asset prices, even if the economy slows down more than expected".


Mr Bishop said the biggest risk out of China would be a change in direction from policy makers.

"But we expect the authorities to continue to react to market volatility in a way that balances the challenges of the nation's structural reform push and plans to open up its financial markets with managing slower growth".

According to statistics from the National Bureau of Statistics China is on track to achieve its official economic growth target of 7 per cent in 2015, down from growth that was in excess of 10 per cent a few years ago.

"The official figures show China is still growing at 7 per cent, although it feels a lot weaker," Mr Halmarick said.

Many fund managers are sceptical of the accuracy of data released by the Chinese state, but it is nevertheless a pretty reliable indicator of relative changes, he said.

"If all of a sudden the official statistics start saying Chinese growth has slowed to 5 per cent then we'll know we're in trouble, but I don't think that is likely".

Macquarie Asset Management head of fixed income Brett Lewthwaite said the slowdown in China is being well managed by the State and tipped a "soft landing".

After all, China has the advantage of being governed by a centralised government with a 10 year fixed term. That makes it easier for policymakers to stick to their long term reform plans, despite setbacks caused by periods of turmoil.

"Nobody ever said the liberalisation of Chinese markets was going to be easy," Vanguard Asia Pacific head of investment strategy Jeffrey Johnson said.

Mortgage rates may rise as banks pass on cost of regulation: RBA
THE AUSTRALIAN JULY 23, 2015 12:00AM

Michael Bennet

Reporter
Sydney
QLD_CM_BIZ_RBA_10JUN15
RBA govenor Glenn Stevens says ‘some rise in mortgage rates’ could be expected. Source: News Corp Australia

Reserve Bank governor Glenn Stevens has given his blessing for the major banks to pass on the cost of stricter regulation to homeowners, saying it would not be “surprising or controversial” if borrowing rates were to rise.

The Australian Prudential Regulation Authority this week said the big four and Macquarie would have to increase average mortgage “risk weights” to at least 25 per cent, from about 16 per cent, requiring them to raise about $13 billion in capital.

Speaking in Sydney yesterday, Mr Stevens said the move was likely to lead to “some rise in mortgage rates from the major banks”, which shouldn’t be surprising after the Murray financial system inquiry recommended higher risk weights for the major banks to ­increase competition.

“It’s for the banks to decide of course if they do, but if they make that adjustment no one should find that surprising or controversial,” he said. “The whole point of it was to change the competitive landscape between the majors and the others ... that was the idea. You can’t do that unless some processes ­adjust.”

The comments are notable as it suggests regulators are not ruffled by the banks’ warnings that the flood of incoming regulation will be worn by consumers and shareholders. APRA has declined to comment beyond its statement unveiling the change on Monday.

“Customers will more likely bear more of the cost than shareholders,” said Morningstar analyst David Ellis.

While APRA had flagged higher risk-weights, it confirmed the first of several recommendations from the Murray inquiry and Basel Committee reviews that analysts said could require the big four to raise $40 billion in capital.

Mike Wiblin, an analyst at Macquarie, said the major banks would look to offset the higher cost through “regulator sanctioned” repricing of products like mortgages in the next 12 months, which “the majors do well”.

In May, Commonwealth Bank, National Australia Bank and Westpac supported profit margins by not passing on the RBA’s full rate cut to homeowners, while also lowering rates on deposits. Several smaller banks did the same. But without further RBA rate cuts the banks would have to make politically difficult out-of-cycle rate hikes to mortgages.

“We see potential upcoming RBA rate cuts as the most palatable repricing points,” UBS analyst Jonathan Mott said this week.

Yesterday, Mr Stevens confirmed further official interest rate cuts remained “on the table”, but tempered enthusiasm by noting longer-term risks needed to be considered, such as further stimulating parts of the housing market.

Several economists said the RBA appeared unlikely to cut rates again.

Deutsche Bank analyst Andrew Triggs said APRA’s higher risk weights would reduce the banks’ return on equity about 90 basis points in the absence of repricing, with CBA most affected and ANZ the least. “On average, we estimate the majors would need to reprice their Australian mortgage books by 21 basis points in order to hold their group return on equity flat, or less if the burden was shared by deposit repricing.”

Property market: Chinese buyers’ capacity to pay in doubt
THE AUSTRALIAN JULY 23, 2015 12:00AM

Samantha Hutchinson

Property Writer
Show me the money, Chinese told
Buyers agent Jie Feng on Sydney’s north shore yesterday. Picture: Renee Nowytarger Source: News Corp Australia

A string of vendors throughout Sydney and Melbourne are clamping down on settlement terms on multi-million-dollar deals as volatility in China’s ­financial markets raises doubts about Chinese buyers’ capacity to pay.

Chinese buyers agent Jie Feng likes to start business conversations off with two questions: where is your money, and how long will it take you to get the money out of China?

“I have to ask these two questions right away,” the Sydney-based buyers agent said. “Because if the money is in the sharemarket they might have problems.”

More than three weeks of falls wiped more than $US3 trillion ($4 trillion) from Chinese financial markets in June and early July, sparking fears of ripple effects around the globe that could dampen consumer spending and put the brakes on a relied upon source of foreign investment.

Locally, some executives have seen some effects of the stockmarket rout filter into Sydney and Melbourne.

In property, agents are reporting spikes in foreign investment while local vendors clamp down on settlement periods in fear of buyers who can’t pay.

“Some vendors are demanding very quick settlement periods, and it’s tough for buyers who can’t get money out of China quick enough,” Ms Feng said.

“It makes it very hard because most buyers typically want three, six months to settle.”

Agents in Melbourne see a similar trend.

“I don’t know what has sparked it, but settlement ­periods have come off dramatically and today the majority of deals are settling in six months compared to 18 months about a year or two ago,” CBRE director Mark Wizel said.

“You’re even seeing some as short as 30 days.”

While some commentators have identified local residential property and banking sectors as the most exposed to a sudden downturn in Chinese stocks, Ms Feng believes commercial property sales is where the effects are most likely to be felt.

“I’ve had lots of buyers who ask for long settlements because they’ve wanted to keep their money in the sharemarket for as long as possible because it was going up so much,” she said. “I worry what has happened to them now.”

Residential purchases are a different story, she argues.

“There might be an impact on residential (settlements) but it will not be huge,” she said.

Chinese buyers buying off-the-plan apartments have only put down a deposit of 10 per cent, she reasons, of which about 70 per cent is borrowed from the bank.

Mr Wizel believes the long-term vision of Chinese buyers has placed the commercial sector on a good footing to avoid flow-on ­effects of a Chinese crash.

“Most groups are set up in Australia long before they make an acquisition ... they’re meticulous planners and while they make decisions quickly, their plans leading up to execution are more extensive than people think,” he said.

“My view is the greatest opportunity lost is the one we never saw. The ones (buyers) that were looking three weeks ago are still looking today. It’s the ones that were coming next week that may have put off their plans for good.”

Some investors believe the instability will bode well for investment. “Chinese are learning the hard way that diversification is an important part of any investment strategy, and diversifying out of the Chinese stock market into the Aussie dollar is a smart thing to do, especially when the Aussie dollar is falling,” Moelis asset manager Andrew Martin said.

Mr Martin manages a string of funds dedicated to investors who are part of the federal government’s significant investor visa program.

The bulk of Mr Martin’s applicants have derived wealth from real estate, manufacturing and IT rather than proceeds from equities investments, he said, and clients have tended to store wealth in term deposits or cash holdings, rather than in shares. “I expect (Chinese volatility) to have a positive impact in terms investment in what we’re doing ... it’s only natural for people to want to put their money somewhere where things are more stable,” he said.

Property executives in the region agree. JLL predicts China’s outbound investment to rise to $US20 billion ($25bn) by the end of the year, up from $US16.5bn in 2014. “If this slide lowers confidence in the domestic economy, it will encourage even more outbound investment as the year goes on,” JLL research head ­Steven McCord said from north China. “Following the GFC, alternative assets, which include real estate, saw an increase in investment as investors turn to higher yielding, longer-term hard ­assets.”

AMP Capital fund manager Stephen Dunne is still predicting “outperformance” in the second half of the year, and is urging investors to remember the fundamentals of the Chinese market; that the pendulum that has swung so far into negative territory is also the same one that propelled the AMP Capital China Growth Fund to 12-month after-fee returns of 137.7 per cent. “Although the falls are very large, the recent gains have been much larger and sentiment could turn very quickly,” Mr Dunne said.

ANZ gets tough

ANZ has done exactly what the Australian Prudential Rregulation Authority wanted by being the first big bank to charge more for an investment property since 1995 with homeowners paying 5.38 per cent and investors 5.65 per cent.

The move is a smart one for the bank and effectively helps reprise its back book on 30 per cent of the $218bn it has lent to residential property purchases.

Investment property loan prices effectively merged with regular home loans in 1995 after two decades or so when the differential moved to as much as 100 basis points.

APRA has wanted the banks to slow investment property loan growth to below 10 per cent and ANZ’s move will help do just that.

It will be quickly followed by the other banks. Back in May when the RBA cut rates by 25 basis points to 2 per cent ANZ was the only major to pass on the full quota and it now has the cheapest home loan rate on the books.

Westpac has moved to increase conditions around investment loans to make them more difficult but the reality is the overwhelming proportion of investment loans go to the sections of the community who can afford higher rates, which offer bigger tax deductions.

http://www.bloomberg.com/news/articles/2...sm-revival

“Crocodile Dundee” star Paul Hogan enticed Americans to holiday Down Under 30 years ago by promising to throw another shrimp on the barbie for them. Not much has changed since then.

Tired hotels, outdated attractions like Sydney’s Darling Harbor and mediocre customer service mean Australia’s tourism industry isn’t making the most of a booming Chinese travel market at a time when it needs all the economic help it can get.

“Most people who arrive in Sydney do not like the hotels, even the 5-star hotels,” said Melinda Cai of Great Holidays Pty, which brings Chinese tourists to Australia. “Four-star hotels in Sydney are too small and old, they’re more like a motel than a hotel.”

Australia’s tourism industry is stuck in a 20th-century time warp after the nation diverted spending to the resources industry to cash in on Chinese demand for iron ore and coal. Now, as commodity prices tumble, mining investment dries up and the currency falls, the country is hunting for new sources of growth.

Jul 23 2015 at 3:32 PM Updated Jul 23 2015 at 3:47 PM
Property investors to pay banks change lending rules

Some banks could ask lenders to pay a higher deposit if they don't meet the extra cash flow requirements. James Davies

Share on twitter
by Kate Cowling
Investors who have been waiting to pounce on their second or third property might have to delay their plans, with new lending requirements potentially doubling the cash borrowers are expected to hold outside of their rental properties, analysis shows.

The big banks have tightened their lending criteria recently in a range of ways, amid fears the rental market could slow and in turn make it hard for some investors to repay their loans, Nerida Cole, managing director of Dixon Advisory's financial advice arm, says.

It means the money seasoned property investors generate from rental income and negative gearing offsets will no longer necessarily be considered as adequate security when the big banks assess loan rates.

"People who are more restricted with cash flow might find that the income that was previously considered [adequate] for obtaining investment loans is now heavily discounted," Cole says. "This means it will hold less weight in the bank's assessment of your risk potential."

How this will manifest will depend on the bank you're with. Sheyne Walsh, a mortgage lending specialist and principal of Kingsbridge Private, says: "Each bank is doing its bit to discourage investment lending and to appease APRA [Australian Prudential Regulation Authority], but they're all coming at it in a different way ... it's a moving feast."

CBA and Westpac, for example, have reduced the weight rental income has on its loan calculations by 40 per cent, Cole says, while ANZ no longer counts negative gearing towards lenders' ability to repay their loans. ANZ has already increased the rate on its investment property loan by 0.27 per cent to 5.65 per cent, effective on August 10, and other lenders are likely to follow.

ADDITIONAL CASH

Dixon Advisory's modelling shows the amount of additional cash an investor could expect to be asked to hold to cover a $500,000 loan might be between $10,000 and $12,000. "Holding" is a euphemism for either keeping the money in a deposit account or using another property as security.

Previously a borrower with a $500,000 loan and 20 per cent deposit would have reasonably been expected to prove cash flow of about $8600 a year before loan approval, after factors like rental income and negative gearing were accounted for. Dixon's modelling shows that sum jumps to almost $21,000.

For a $1 million loan, the expected additional cash flow could be as high as $22,000 under the new standards, a leap from $14,700 to $36,870.

The estimates carry a number of assumptions, such as a loan-to-value ratio (LVR) of 80 per cent (put in place recently by Westpac and BankWest), a principal and interest rate of 7 per cent and rental income of 4 per cent. The borrower is assumed to be on a marginal tax rate of 49 per cent.

Cole adds that some banks could ask lenders to put in a higher deposit if they don't meet the extra cash flow requirements and don't have adequate cash put aside.

Whether the measures will actually stop investors with property portfolios from proceeding with their next buy is another question.

Liam Shorte, a senior financial planner with Verante Financial Planning, says while it will make loans more difficult to get, there are ways around it.

"People who just do bricks and mortar may look for some way around it, [perhaps by] borrowing an bit extra against the [primary residence] house," he says.

(23-07-2015, 10:59 PM)greengiraffe Wrote: [ -> ]ANZ gets tough

ANZ has done exactly what the Australian Prudential Rregulation Authority wanted by being the first big bank to charge more for an investment property since 1995 with homeowners paying 5.38 per cent and investors 5.65 per cent.

The move is a smart one for the bank and effectively helps reprise its back book on 30 per cent of the $218bn it has lent to residential property purchases.

Investment property loan prices effectively merged with regular home loans in 1995 after two decades or so when the differential moved to as much as 100 basis points.

APRA has wanted the banks to slow investment property loan growth to below 10 per cent and ANZ’s move will help do just that.

It will be quickly followed by the other banks. Back in May when the RBA cut rates by 25 basis points to 2 per cent ANZ was the only major to pass on the full quota and it now has the cheapest home loan rate on the books.

Westpac has moved to increase conditions around investment loans to make them more difficult but the reality is the overwhelming proportion of investment loans go to the sections of the community who can afford higher rates, which offer bigger tax deductions.

Australian Construction Costs Dropping

Australia has some of the world’s most expensive construction markets, although the tide is starting to turn, an international report has found.

New York is the most expensive place to undertake construction activities, according to an analysis of residential and commercial projects in 35 markets around the world. The report by multinational professional services company Turner & Townsend also ranked Sydney at 10th, Perth at 16th, Melbourne at 19th and Brisbane at 20th place.

Senior economist Gary Emmett said Australia is becoming a relatively cheaper place to build, due to low interest rates and a falling Australian dollar.

“The 2015 report shows that compared to 2011, it would cost overseas investors paying in US dollars 13 per cent less to construct buildings in Australia, which is a significant reduction,” he said.

Mr Emmett said that with the exception of Sydney’s apartment market, the cost of construction is stable and the outlook moderate for the medium term.

“Overall, it is a great time to build. Construction costs should remain fairly stable although some residential construction trades may become increasingly difficult to source, adding pressure to costs,” he said.

“Foreign investors are expected to seek more opportunities here to capitalise on the favourable conditions to build projects.”

Meanwhile, the Turner & Townsend report found that the cost of building a detached house is $1,600 per square metre in Melbourne, $1,650 in Brisbane and Perth, and $1,750 in Sydney.

Building a prestige detached house costs $2,700 per square metre in Melbourne, $2,850 in Sydney, and $3,000 in Brisbane and Perth.

Townhouses cost $1,700 per square metre in Brisbane, $1,750 in Melbourne, $1,850 in Perth and $1,900 in Sydney.

Construction costs for low-rise apartments are $1,800 per square metre in Brisbane, $1,900 in Perth, $1,960 in Melbourne and $2,100 in Sydney.

High-rise apartments cost $2,500 per square metre in Brisbane, $2,700 in Melbourne and Sydney, and $2,900 in Perth.

Published on 23 July 2015

https://sourceable.net/australian-constr...-dropping/#

Most still think it’s a good time to get into property: survey
AAP JULY 24, 2015 10:02AM

Most Aussies still think it’s a good time to get into the property market, despite house prices surging in Sydney and Melbourne, a survey has found.

Sixty per cent of the 1,010 respondents polled in CoreLogic RP Data-Nine Reward’s housing market sentiment survey, released today, considered the June quarter to be a good time to buy property.

While still a majority, the figure was down from 71 per cent of respondents over the same period last year, and 80 per cent in the second quarter of 2013.

CoreLogic RP Data research director Tim Lawless said he wasn’t surprised fewer people were keen to buy, particularly in the hottest market — Sydney.

“Sydney and regional New South Wales-based respondents were the least optimistic about buying conditions, which can probably be attributed to the high rates of capital that have been recorded over the past few years,” Mr Lawless said.

Respondents were most optimistic about buying conditions in Tasmania, South Australia, Brisbane and Queensland, Mr Lawless said.

According to the survey, 65 per cent of respondents thought the three months to June was a good time to sell, making it the highest reading since the survey began in 2013.

The survey comes after RP Data’s most recent weekly figures, released on Monday, showed that house prices moved higher last week in Sydney and Melbourne, lifting the national average.

Price rises averaged 0.6 per cent in the five mainland state capitals in the week ending July 19, while annual price growth was at 10.5 per cent.

AAP

Jul 24 2015 at 6:15 PM Updated Jul 24 2015 at 6:22 PM

History's guide: what happens to investors when buying off-the-plan goes wrong

What looks like a solid investment when buying off the plan might prove to be different when the apartment is completed and it's time to hand over the money. Glenn Hunt

by Robert Harley
As regulators try to cool the property market and banks make investor loans more expensive, it's worth reflecting on what can happen to off-the-plan apartment buyers when when housing markets turn.

Nothing illustrates the dangers more than the experience of those who bought off-the-plan apartments in high priced towers on the Gold Coast last decade.

Buyers of off-the-plan apartments lock themselves into purchases that are not due to be completed for several years.

So far, in this boom, the experience has pretty good. The buyer has put down a 10 per cent deposit and then prices have risen 10 per cent. Essentially they have just made a 100 per cent profit on the initial investment.

But like all leverage in real estate, it can go very badly wrong when the market changes.

Finance can change. Rates can go up and banks can change criteria like the loan to valuation ratio.

Investment returns can change. If many apartments are completed at the same time, tenants will have more choice, vacancy will increase and rents weaken.

Ultimately prices can weaken.

On the Gold Coast last decade buyers were caught in the double whammy. Prices did fall, and the banks did tighten their loan to valuation ratio.

A buyer who had committed to a $2 million off-the-plan unit, felt very comfortable with a $500,000 deposit in expectation that the bank would fund 75 per cent of the purchase price.

But when time came to settle, the value was less and the bank loan to valuation ratio was much lower. The buyer needed far more deposit to make the $2 million sale. Many simply did not have it.

Then prices started to spiral down further as quick exits were made and the administrators stepped in.

Australia's current off-the-plan apartment boom may end far more benignly. But it is backed by an unprecedented number of offshore buyers and no one knows how they might react to negative market movements, on of offshore. So far all the movement, in currency and pricing has been in their favour.