Property Investment

The Australian property market is diverse, mature and sophisticated. 

The property market is broadly segmented as follows:

         1.      Commercial

         2.      Hotels, Resorts & Leisure

         3.      Industrial

         4.      Residential

         5.      Retail

Within each segment we will find specialist builders, developers, financiers, investors and a range of architects and consultants.

Some of these parties have developed expertise over a range of property segments and offer expertise over a broad range of property development and investment.

Participation in a particular segment is largely market and opportunity driven.  As the property market is diverse it is highly likely that some segments and even some geographical regions within segments will out perform other segments at any given point in time. 

The most effective overview of each segment will be achieved by referencing to demand and supply statistics which have been compiled from a number of sources.

1.      Commercial Property

Sydney has by far the greatest supply of commercial stock (4,718,270 m2) and the highest vacancy rate (9.7%), As of January 2006

Whilst some analysts have predicted a demand surge in this segment it is our view to "wait and see."

2.      Hotels, Resorts & Leisure Property

Sydney has a relatively strong market with occupancy levels in Sydney exceeding 70% since September 2003.  Available supply of rooms in September 2005 was 32,500 compared with September 2003 of just over 30,000 rooms.

Brisbane shows a total supply of rooms of 10,780 in September 2005 up from September 2003 by 1,030 rooms.  Occupancy levels over this period have been above 70% peaking in September 2005 at 81.1%.

Development opportunities in the hotel sector are worth reviewing in the current market conditions.  Great caution needs to be taken as the landscape is littered with failed hotel developers.

3.      Industrial Property

NSW's lack of resource development (outside of coal) means it is missing out on some growth in that sector, whilst its manufacturers are struggling against imports due to the strength of the AUD. Rate of industrial production for NSW and QLD can be seen in the chart below. The opening of the M7 in Sydney's west is set to reduce some business related costs, to the benefit of industrial demand

Industrial Production

While industrial growth has struggled on a broader scale the underlying strength of South East Queensland has supported a large amount of development activity, mainly seen in the Brisbane-Gold Coast corridor. Whilst land value continues to rise due to increase in demand, take up remains strong by ready access provided by the M1 boosting industrial activity, with warehousing, distribution and strata titled product prominent.

4.      Residential Property

There are numerous fundamental issues which influence the residential property market.  Perhaps the most fundamental issue is that of population growth.  The Australian population in 2005 was 20.2 million people.  The population is forecast to grow at 1.2% per annum i.e. approximately 250,000 people per annum for the next decade.  This equates to the need for approximately 70,000 new residential dwellings each year.

The factors which affect where and how this demand are met are varied.  Issues such as affordability, job growth, personal preferences and the age of the population are some of the issues which influence the market.

The demand for new dwellings can be met from new units, townhouses, villas or free stranding houses and to a lesser extent, cabins and caravans.  The suitability of which form of dwelling in which location is largely a function of micro-planning at local council levels.

In 2004/05 the state with the highest population growth was QLD (2.0%) followed by WA (1.6%) and VIC (1.2%).  There is little doubt that NSW (0.7%) was greatly influenced by the high real estate prices in Sydney relative to the other states (Sydney accounts for approximately 60% of the population growth in NSW).  As residential real estate prices have risen in the other states, NSW comparable affordability has improved and we will likely see a higher growth level in NSW in 2005/06.

It appears that the rate at which people were trading in their family home to pursue a life closer to the coast may have steadied, known as ‘sea change', (most likely because of comparable affordability) but is still likely to continue provided cost effective supply of land is made available.

The mining boom is likely to continue for the foreseeable future as the economies of China and India (in boom conditions) and the rest of the major western economies continue to grow strongly.  One of the notable impacts on the residential dwelling market is that higher disposable incomes will be in the hands of people in regions of Australia not previously thought of as "wealthy."  This has particularly been witnessed in QLD and WA. 

Job growth and security are also issues which influence the market.  Population will tend to follow jobs particularly when they are relatively highly paid positions.  Security of a person's job (or at least the perception of it) will also influence the buy/rent decision of the consumer.

Ownership of the dwelling market is largely in the hands of owner/occupiers and individual investors.  There are very few professional funds which own and operate residential property, (retirement villages being a possible exception but even in this industry the owner/occupier provides the capital and takes the real estate investment risk).  The effect of interest rates on investors and owner/occupiers cannot be underestimated.  In a time when Australian households have record levels of personal and credit card debt even small increases in interest rates can substantially slow the demand for residential dwellings.

In a recent review conducted on the effect of increasing interest rates on the affordability of housing in the Ipswich area (S.E. QLD) it was found that first home buyers could only afford a small increase in rates (no more than 0.5%) before a $350,000 home became unaffordable.  Trade-up buyers were likely to be substantially better off and could withstand increases of 2.5% to 3% before a $350,000 house would become unaffordable.  Whilst the numbers will vary around Australia the example of Ipswich is probably typical of most of the other residential markets.

Whilst it is difficult to predict interest rate movements, we need to form a reasonable view in order to forecast likely market conditions when our projects will be completed and ready for sale.  The three and five year swap rates quoted by the Commonwealth Bank on 8 August 2006 were 6.27% and 6.32% respectively.  This is the current view of the market of what return is required for a medium term interest securities.  Continued monitoring of these rates together with local economists forecasts help us to conclude that interest rates may increase by a further 0.25% before the end of the year but thereafter remain reasonably constant with perhaps some downward pressure by late in 2007.

The fundamentals underlying the residential property market are strong. Opportunities in land subdivision in the short term is a feasible investment.

5.      Retail Property

QLD's retail property markets have been through a period of exceptional strength, driven by population growth, the resultant housing boom and economic prosperity. With major assets tightly held and consumer spending growth easing from previous exceptional growth over the past 2 years, interest has turned towards value add opportunities rather than passive holdings. The following chart shows how exceptional growth was during 2003 (9.1%) and 2004 (9.4%), aided by population growth, employment growth and a rebound in international tourism.

Real Retail Turnover Growth - Australia & Queensland

With the Brisbane-Gold Coast corridor to be the focus of future population growth, it is no surprise that developments are set to proceed in this area over the next few years.

Uncertainty in the retail market, tied with investors holding onto their assets, has resulted in yields at low levels with this likely to continue on into late 2006.

Source: CMF Australia Ltd

Statistics courtesy of PRP and CBRE research.