Australia dodged the post-crash recession but slowing growth in China has hit the country’s mining industry, and the property industry is starting to feel the impact. David Hatcher reports
An impressive 24-year run of continuous growth has seen the Australian economy give birth to one of the most resilient property markets in the world. As one of the few economies to dodge recession following the global financial crisis, it has since witnessed record levels of inward investment and no doubt is in its pomp.
But the very reason the Australian market has kept rallying in recent years has, for the first time, drawn a few clouds to the horizon.
While most Western economies suffered as a result of their overreliance on the finance sector during the financial crisis, Australia proved hardy thanks to its largely resources-based economy, rich natural resources and strong mining industry.
It was also helped by China, which has an economy that is closely intertwined with the success of Australia’s.
China was eager to maintain high levels of output to grow and stave off the impact of global wobbles at the market’s nadir and as such did plenty to fuel Australia’s exports.
But the relative slowdown in the Chinese economy over the past year, coupled with a diversification away from manufacturing, has prompted an end to the mining boom in Australia. And spending on infrastructure by the private sector is expected to fall by A$17.5bn (£9.3bn) for the year to the end of June 2016, according to the Australian Infrastructure Metric.
Perth has suffered particularly badly and, to a lesser extent, so too has Brisbane. According to research by Savills, prime office vacancy levels in Perth are closing in on 20% and incentives equate to close to 45% of headline rents. In some cases more.
Major investors in the city such as Brookfield are having to take a long-term view.
“We believe in what underpins the market long term, like we do with Houston and Calgary,” says Kurt Wilkinson, president of Brookfield Property Partners in Australia. “They move in similar cycles and have similar tenants and we do think they give strong risk-adjusted returns over the medium and long term and we have done very well out of Perth.
“You just have to manage your risk with the right tenants, by developing the best buildings and making sure you don’t have lease expiries all coming up at the same time.”
But the concern over the mining economy is set against record national investment volumes and plummeting yields driven by capital from the Far East and China. Advisers are scratching their heads wondering if the market will have to cool off or whether such pricing is the “new normal”.
Total investment volume nationally in 2015 for properties over A$2m stood at A$29bn, up by 20% on 2014, according to Savills.
Fortunately for the Australian economy and its real estate industry, the country’s federal nature gives it a healthy amount of diversification. Melbourne is in and of itself a rounded centre powered by creative industries, manufacturing and, of course, sport. And Sydney remains in rude health as the financial capital and its economy closely tracks that of the US and its recovery.
GDP for the final quarter of 2015 stood at 0.6%, and 3% for the year, ahead of analysts’ expectations that had initially been dampened by the mining drop off.
Diversification is the central theme driving capital flows both in and out of Australia’s real estate markets. The investment into Australia by Chinese institutions, starting generally with a base portfolio of almost entirely domestic assets, is an obvious step into a market that is considered to be in the same region, transparent and has minimal time difference.
In July, China Investment Corporation bought a A$2.5bn portfolio of nine office buildings from listed property company and fund manager Investa in what was the largest deal of the year.
Burgeoning investment volumes have also been underpinned by Australia’s superannuation schemes into which Australian employers contribute 9.5% of employees’ salaries.
They fuel the domestic market but are now desperately trying to invest overseas.
“The Australia superannuation system has been firing for over 20 years. That capital is looking for a home and real estate is of growing interest to a pool of funds that is itself growing,” says Stephen Conry, chief executive of Australia for JLL.
With the sheer weight of capital attracted to the Australian market at present, there are few professionals in any area of the market walking around without a smile on their face.
Given there is a general shortage of opportunities for domestic and overseas capital to fight over, the impact of the end of the mining boom is likely to be considerably less on a countrywide scale than it would be for a less transparent, federal and saving economy.
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