Paul Little's private property company Little Group has made a $60.7 million offer for listed real estate services group Real Estate Corp.

The 37 cent a share cash offer has been recommended by the directors of the once-financially stricken group. The directors together hold 58 per cent, giving Little Group control of the company.

Mr Little, former chief executive of Toll Group, said the transaction would give the real estate services arm of Little Group, which is more known for its apartment development projects, a greater profile in the real estate services market.

Real Estate Corp, the biggest rent manager, has some 15,000 properties on its books nationally.

"This transaction will also give us the ability to flesh out the service levels we think are important in our chosen area of the real estate market," he said.

Mr Little said he was yet to decide whether to change the Run Corp name, which is well known for rental management in Melbourne, to the name Little, but said it would make sense to change the brand.

Little Group has a development pipeline exceeding $1 billion, mostly in Melbourne.

The group already manages 3000 properties, mainly in Victoria.

It has increased its property sale capacity through the acquisition of some big-name real estate agencies in Melbourne over the years. Mr Little said growing the company's service arm was part of his desire to deploy the type of "integrated" business model that was often cited as driving Toll's success.

"It really is about understanding what the customer wants, and I think quite often in real estate the service offering has been closeted around components in the industry," he said.

"As we started to break down some of the barriers and offer not just the opportunity for someone to buy one of our apartments but then for us to rent it for them and then one day sell it for them, we've found a huge interest in embracing this integrated or seamless approach to real estate." Little Group's takeover offer for Real Estate Corp comes after a separate $65.7 million offer from Western Australia's Rental Management Australia fell over last year.

The cash offer for Real Estate Corp was welcomed by the directors of the company, which has suffered some tough financial times over the past few years as it focused on improving its technological capabilities.

Mr Little said the group's technological platform, which is used by several top real estate companies, was a significant addition to the Little Group.

Real estate experts are expecting a property boom in Sydney’s west should a proposed airport at Badgerys Creek get the go-ahead, according to The Australian Financial Review.

The coalition government is considered close to giving a second Sydney airport the all-clear and Urbis managing director John Wynne says the positive economic impact of the project will drive higher property prices.

“Sydney’s second airport, wherever it is built, will be a catalytic project; projects which create jobs and increase infrastructure and population promote long-term economic growth,” he told the AFR.

Mr Wynne added that the proposed airport could see Penrith and Parramatta turn into CBD-style hubs.

The demand for home loans fell against expectations of a rise in December, according to the Australian Bureau of Statistics.

The data showed the number of home loans granted in December fell a seasonally adjusted 1.9 per cent to 51,692.

Bloomberg had expected the number of housing finance commitments to lift by 0.7 per cent in the month.

However, total housing finance by value rose 0.2 per cent in December, seasonally adjusted, to $27.050 billion.

CommSec economist Savanth Sebastian said the fall in the number of housing commitments in December was consolidation after a year of solid gains.

"The value of housing finance was up about 15 per cent on a year ago," he said.

"It really does suggest that the housing sector is the shining light of the Australian economy."

Mr Sebastian said he was encouraged by the 0.4 per cent lift in the number of new loans approved to build new homes.

"That's the key area to look at, it suggests that construction activity will be the big driver of the Australian growth story this year," he said.

"Not only does it drive economic activity but it also puts a lid on property price gains, at a time when the Reserve Bank of Australia is hesitant to raise the cash rate because of the weak labour market.

"So more supply coming on board will curb the significant price gains over the past 12 months."

Other data released by the ABS showed that Australian capital city residential property prices rose 3.4 per cent in the December quarter, and were up in 9.3 per cent, in the year to December.

Mr Sebastian said he didn't believe that residential property prices will rise as much in 2014 as they did in 2013.

"Investors will be a lot more circumspect in paying higher prices and towards the end of the year you'll hear more talk from the Reserve Bank about raising the interest rate," he said.

By a staff reporter, with AAP

China's wealthy and emerging middle class looking at boats on display at the Shanghai Boat exhibition center  (AFP PHOTO/Mark RALSTON)

Another weekend and another couple of days filled with anecdotes about Chinese buyers snapping up residential homes in Sydney, Melbourne and Brisbane. What are Chinese private citizens up to? Why are they so eager to buy non-liquid foreign assets – such as residential real estate – in countries like Australia?

Much of this is driven by push factors arising out of China, rather than pull factors emanating from Australia. To be sure, Australia is seen as a stable, comfortable, environmentally clean and rule-of-law country that is inherently attractive to many Chinese compared to the dynamic but politically and economically uncertain environment that is China. It is why more than half of China’s millionaires, according to a recent Huron Report survey of 980 people worth over $US1.6 million ($1.8 million), are looking to leave China for a Western country. The United States is listed as the most preferred destination. (Note to readers: many in the West think it will be a China-dominated century, but that’s not how its richest citizens seem to behave.)

Meanwhile, this is all very promising for existing Australian homeowners, although not so good for those wanting to get into the housing market. But the consequences for the domestic Chinese financial system could be serious in the longer term.

First, who owns the wealth in China? The common assumption is that there is a large and cashed-up middle class in the country, and these middle classes are sufficiently wealthy to transfer some of their capital abroad.  

Calling the majority of these cashed-up Chinese buyers the ‘middle-class’ is not really accurate. Using various surveys and methodologies, the general consensus is that the wealthiest 1 per cent of urban households in China (about 2.1 million households or 5.2 million people) have a combined net worth of about $US4.5 trillion. When one traces their liquid assets such as cash, bank savings and stock and bond holdings, the top 1 per cent of urban households own around 30-50 per cent of all such liquid assets in the country.

Incidentally, this group of the richest 1 per cent of urban households is also estimated to own around 30 per cent of all real estate assets in the country. In 2010, all financial and real estate assets were valued at about $US10.5 trillion. This means that the richest 1 per cent of households (2.1 million out of about 530 million households) own 40-50 per cent of the $US10.5 trillion worth of real estate and financial assets in the country.

Second, who’s doing all the buying? While the current or trading account is open, the capital account is largely closed, meaning that there are significant restrictions on the flow of capital in and out of China. Exorbitant taxes are also generally imposed on the purchase of assets in foreign currency, if such purchases are officially permitted and done by the book.

In response, Chinese citizens have become quite clever and skilled at ‘illegally’ transferring large amounts of money out of the country. This is done through schemes such as ‘over-invoicing’ of legitimate or false trading activity (i.e. effectively using a complicit trading company outside mainland China to exploit looser current account restrictions in order to take money out of the country), or else using financial services firms to set up complicated schemes to bypass capital account controls. For example, a 2012 report by Global Financial Integrity suggested that about $US3.79 trillion left China illegally through ‘over-invoicing’ of trade settlements alone.

This is important because it is overwhelmingly the uber-rich – covering the top 1 per cent of households – that have the nous, means and connections to exploit these techniques for capital flight. Capital flight involving millions of dollars each transaction is beyond the ‘average’ millionaire in China. In other words, much of the money entering the Australian and other residential property markets is doing so because of intricately constructed schemes for the ultra-rich that have been going on for around a decade.

Third, why are they taking money out? It could be that many want to emigrate. But while the majority of average millionaires want to leave the country in order to hold on to what they have and seek a better and more comfortable life in a Western country, the ultra-rich are more inclined to want to stay in China for a number of reasons.

One is that being intimately connected to the Chinese Communist Party, as almost all the ultra-rich are, they have no chance of accumulating similar wealth outside China’s CCP-dominated political-economy. As one indication of the importance of CCP connections for extreme wealth generation, the net worth of the 70 richest delegates at China’s National People’s Congress in 2011 was worth an astounding $US90 billion. More broadly, 90 per cent of the 1000 richest people tracked by the Hurun Report are either officials or members of the CCP.

So if they do not want to emigrate, why are they buying such large assets as Australian residential property for themselves or their children, many of whom are students in Australian universities?

One is that over-paying for an Australian residential home will hardly register on the personal balance sheets of the Chinese ultra-rich. Another is that real deposit interest rates remain close to zero or negative in China, as the government remains stuck in a pattern of encouraging investment over consumption (despite what the official press is saying). Why not speculate on a home in Sydney’s Chatswood or Melbourne’s St Kilda when the few million dollars would be losing value in the domestic banking system? Besides, local Chinese citizens realise that the fundamentals of the Chinese residential housing market are even more precarious than so-called bubble housing markets in countries such as Australia. In Australia, there is at least a housing shortage in major urban residential areas. In China, there is a huge housing surplus following the construction boom from 2009 onwards.

What might all this mean for the Chinese economy? The actual and potential scale of capital flight by the ultra-rich is truly scary for Chinese authorities and is one major reason why there will be no broad-based relaxation of capital controls. As calculations by Northwestern University professor Victor Shih indicate, a 20 percent reallocation of net wealth by the top 1 per cent of households would cause a substantial but controllable drain on the domestic financial system. But if the ultra-rich decided to reallocate 30 per cent or more of their net worth outside the country – and surveys indicate that this is a realistic possibility – then this would amount to flight of at least $US1 trillion leaving the country. In such a scenario, the People’s Bank of China will be faced with a choice of having to flood the domestic financial system with liquidity (and confronting the risks that such policies carry), or else suffer an illiquid financial system.           

Meanwhile, current Australian home-owners obviously have an interest in what the ultra-rich in China decide to do in the future. But what they do is more about what the ultra-rich think is happening in China, and less about the attractiveness of owning property in Australia.

Dr. John Lee is the Michael Hintze Fellow and Adjunct Associate Professor at the University of Sydney, non-resident senior fellow at the Hudson Institute in Washington DC, and a director of the Kokoda Foundation. 

Stockland shares have lifted after the group said it remains conservative in its full-year outlook due to continuing uncertain economic conditions but expects to achieve the upper end of its guidance after swinging to a first-half profit.

Investors were impressed by the news, sending Stockland shares 2.96 per cent higher to $3.83 at 1015 AEDT, against a benchmark index lift of 0.53 per cent.

Stockland Consolidated Group reported profit for the first half of fiscal 2014 attributable to securityholders of $298.1 million, compared with a loss of $147.1 million in the first half of fiscal 2013.

Total comprehensive income for the half attributable to securityholders was $311.1 million, compared with a loss of $151.8 million in the previous corresponding period.

Total revenue was $884.5 million for the half year, up from $791.9 million in the prior corresponding period.

The group will pay a distribution of 12 cents per security on February 28 to shareholders on the register on December 31, 2013.

Stockland said the operating environment was mixed during the half, with challenges in retail and office markets, although the group said retail continued to prove resilient with shopping centres achieving a solid result in soft conditions.

The group noted a significant improvement in its residential business, which capitalised on the improving housing market with a substantial uplift in sales, and lifted operating profit by 39 per cent to $39 million.

Managing director Mark Steinert said good progress made over the last year had been reflected in the first-half result.

"It is however important to note that economic indicators have been mixed, creating some uncertainty about what we should expect from the market in the second half," he said.

"We also continue to work through impaired projects in our residential business and optimising assets in our industrial portfolio as we position these businesses for stronger future growth. In the short to medium term this will constrain our earnings.

"In the second half we expect a positive seasonal skew in residential and retirement living earnings, underpinning a stronger second half earnings per share (EPS).

"We are confident we are on track to achieve the upper end of our guidance, and have therefore tightened this to five to six per cent EPS growth in full-year 2014, assuming there is no material decline in market conditions."

With AAP

Dexus Property Group Ltd is confident of achieving full-year earnings guidance and says it is well positioned to capture improvements in office and industrial markets it expects in fiscal 2015.

Investors sent Dexus shares 0.49 per cent higher to $1.03 at 1015 AEDT against a benchmark index lift of 0.53 per cent.

The group's net profit attributable to security holders after tax for the six months to December 2013 rose to $277.2 million, up 3.8 per cent from $267 million in the six months to December 2012.

Dexus said the result was boosted by a 15.5 per cent increase in office net property income to $175.3 million, compared with $151.8 million in the previous corresponding period.

Industrial portfolio net property income lifted by 2.9 per cent to $59.5 million, compared with $57.8 million in the first half of 2013.

Revenue from ordinary activities was $309 million in the half, a 0.3 per cent slip from $309.8 million in the prior corresponding period.

The group will pay a distribution of 3.07 cents per security for the period, a 6.2 per cent lift from the 2.89 cents per security it paid in the previous corresponding period, on February 28 to shareholders on the register on December 31, 2013.

Group reaffirms guidance after making takeover bid

Dexus chief executive officer Darren Steinberg said the group had a busy half-year while making a takeover offer with Canada Pension Plan Investment Board to acquire the Commonwealth Property Office Fund.

"We maintained our focus on driving returns from our existing portfolio, delivering a solid operational result which sees us on track to achieve our upgraded full-year 2014 guidance.

"We leveraged our capabilities to drive performance, reducing our exposure to leading risks in the near-term and carefully balancing our mid-term expiry profile."

Dexus said it is confident of achieving guidance of earnings of 8.29 cents per security in the 12 months to June 2014.

The group is forecasting a distribution of 6.24 cents per security for full-year 2014.

Dexus said it continued to actively manage its capital markets debt, reducing the average cost of debt by 20 basis points to 5.7 per cent and increasing debt duration by 0.7 years to 6.1 years during the half.

Finance costs were $61.4 million, an increase of $7 million after recent office property acquisitions and the on-market securities buy-back, Dexus said.

Goodman Group Ltd has flagged an improvement in full-year operating earnings after posting a lift in first-half profit, boosted by the performance of its overseas business.

Net profit for the half rose to $160.4 million, a 3.8 per cent improvement on the $154.6 million booked in the previous corresponding period.

Meanwhile, Goodman Group booked an operating profit attributable to shareholders of $296 million, up from $265.7 million in the first half of 2013.

Its offshore business contributed 53 per cent of operating earnings in the half.

Goodman shares were buoyed by the result, growing 1.26 per cent to $4.81 at 1015 AEDT, against a 0.07 lift in the benchmark index.

The industrial property developer said it is on track to deliver full-year operating earnings per share of 34.3 cents per security, representing a six per cent lift on the previous year.

“The strong underlying performance from our operations in the first half is attributable to the global diversification of Goodman’s operating platform, capital partner and customer relationships… provides us with a significant competitive advantage,” Goodman chief executive Mark Goodman said.

It will pay an interim dividend of 10.35 cents per share on February 21, to shareholders on the record at December 31, 2013.

The group’s distribution reinvestment plan will apply.

GPT Group says it is targeting $10 billion growth in funds under management and expects economic growth to remain below trend this year after its full-year net profit fell slightly.

Net profit after income tax expense attributable to stapled security holders fell by 3.9 per cent to $571.5 million in the year to December.

Total revenues and other income fell by 4.6 per cent to $948.2 million in the full year.

GPT Group will pay a distribution for the six months to December of 10.3 cents per stapled security on March 21 to shareholders on the record at December 31.

Chief executive officer Michael Cameron said although the group forecast below-trend growth, there was evidence of renewed confidence in the local economy, with stable low interest rates and a lower Australian dollar likely to support conditions improving.

"We believe that a quality portfolio with low costs will deliver the best returns over time," Mr Cameron said.

"We will continue to be opportunistic with our capital and ensure our capacity is used in the right way.

"In 2014 GPT is targeting a total return of greater than nine per cent and is confident the current portfolio will deliver earnings per share growth of three per cent for the full year."

This year GPT expects to have a 100 per cent distribution payout ratio of adjusted funds from operations, he said.

The group said it maintained a strong balance sheet, with low gearing of 22.3 per cent and significant capacity for asset acquisitions and security buybacks.

GPT said it reduced debt costs by 50 basis points and reactivated a security buy-back.

In 2013, the group completed $1.8 billion in transactions and developments, which it said significantly enhanced the quality of its portfolio.

The group said will continue to have at least 90 per cent of earnings coming from core Australian property, and is targeting growth of an extra $10 billion in funds under management over time.

Singapore-backed Australian Securities Exchange newcomer, Aquaint Capital, is looking to buy up to $400 million in distressed or run down property assets on the eastern seaboard.

Chief executive Tan Yang Po is in Melbourne and Sydney this week looking for two properties, in the range of $30 million to $200 million apiece.

A capital raising is expected over the next few months to help the Singapore-Malay group purchase the property assets.

Tan is also in town to increase the profile of Aquaint Capital, which hit the ASX boards in November.  It is the holding company of the Singapore-based property seminar empire of the same name.

The group runs 20 property funds and says it has about 4,000 investors, mainly in Singapore, the US, Germany and the UK. Investors are picked up through funds promoted at its seminars.

“Our strategy is to buy properties below market value, that are either distressed or that the owners have let become run down,” Tan told DataRoom.

For mature markets like Melbourne and Sydney where there are few bargains to be had in the inner city, Aquaint’s strategy is to look at assets – mainly office or retail -- in the surrounding areas.

Aquaint then spruces up the properties and holds them for three to five years before selling them at a profit.

However, in the less dense markets of Brisbane and Perth, Tan was looking at prime real estate in the CBD, where she thinks there are still bargains to be had. Areas enjoying investment in infrastructure by local government was also a key attraction.

Aquaint announced earlier on Thursday it would take stakes in four Malaysian properties, for a sum of $61 million. It may also tap the markets for equity over the next few months to fund the purchases.

The company raised $2.8 million to list last November at 60 cents a share.

Despite its success running property seminars in Asia, it is understood Aquaint Capital has all but ruled out following suit in Australia, largely because of negative local public perception around the practice.

“We are not doing the education part in Australia because there have been companies who don’t do it properly, we are not going to follow that,” Tan says.

Aquaint group’s pool of backers are said to be attracted by the transparency of the Australian property market.

Tan runs Aquaint with fellow property entrepreneur Soo Ming Chiang, who is a director.

Aquaint has also invested in property development funds with land in India and mortgages over heritage-listed houses in Germany.

Aquaint Capital is trading at around 55 cents, just short of its listing price.

 (Reporting by Amanda.saunders@businessspectator.com.au

Editing by Victoria.Thieberger@businessspectator.com.au )

UGL Ltd has been accused of “cooking the books” by the former leader of its property services arm, according to The Australian.

Robert Shibuya, who left UGL Property Services (now DTZ) in September last year, has included the allegations and claims of racial discrimination amid an unfair dismissal claim filed in California last week.

Mr Shibuya asserts his position was terminated due in part to “complaining about, protesting and opposing the defendant's 'cooking of the books' by misstating financial results and manipulating employee bonuses so as to deceive investors” and for “refusing to participate in such unlawful activity by presenting the misstated financial results to the board and investors,” The Australian reported.

UGL reportedly said the allegations were no more "ambit claims of a disgruntled former employee" and plans to fight the case and possibly launch counter-claims against Mr Shibuya.

The news came ahead of UGL's half-year results announcement, during which it said it was considering private-equity proposals for its DTZ property business but ruled out a formal trade sale process. The engineering contractor divulged demerger plans last year, but was later rumoured to be leaning to sale rather than float of DTZ.

UGL later released a statement to the Australian Securities Exchange noting Mr Shibuya's claims.

"These claims of financial manipulation and discrimination are completely baseless, and UGL notes that they are made in the context of a claim for monetary compensation for dismissal by a former employee," the group said in the statement.

"UGL intends to defend them vigorously.

"[UGL] is also examining potential counter claims against Mr Shibuya."

Australand Property Group Ltd has posted a slide in full-year profit and warned subdued tenant demand, as well as a lower than usual forward workload, could weigh on the year ahead.

In the twelve months to December 31, Australand posted a net profit of $135.33 million, a 25 per cent decline on the previous corresponding period's $179.97 million.

In the same period, revenue was $1.056 billion, a four per cent lift on the $1.015 billion in the first half of the previous year.

The group will pay an unfranked final dividend of 11 cents to shareholders on February 7, bringing total distributions for the year to an unfranked 21.5 cents.

Australand said, subject to market conditions not changing materially throughout 2014, it expects to deliver growth in operating earnings per security for the full year 2014.

The group said while business confidence had improved, operating conditions in the commercial and industrial sectors were expected to remain challenging for 2014.

"Leasing activity remains relatively subdued and the occupancy of the group’s investment portfolio has reduced reflecting these conditions.

"Investment appetite for well leased assets, however, remains strong and is expected to underpin valuations despite the softer underlying fundamentals."

Subject to market conditions not changing materially throughout 2014, Australand said it still expects to deliver growth in operating earnings per security for the full year 2014.

As in 2013, the group expects earnings to be skewed to the second half of the year.

UGL Chief Executive Richard Leupen is considering unsolicited private-equity proposals for the contractor’s lucrative DTZ property business but has ruled out running a formal trade sale process, as the firm looks to finalise a demerger this calendar year.

Leupen said today the group would look at PE proposals for its $1.3 billion property arm over March and April but did not want to attract the wrong kind of bidders by running a formal auction.

“Putting the company in a sales process is destabilising, commercially unsettling and extremely risky,” Leupen said, speaking on a media call after unveiling a 13.5 per cent rise in the group’s interim net profit, to $29.5 million. “We were never running a (formal sales) process … We are headed down the path of a demerger.”

Mr Leupen said UGL was pushing to finalise a demerger by the second half of calendar 2014, after initially flagging the split would be executed more broadly in fiscal 2015. A trade sale was “certainly not the company’s preferred path” but the board felt compelled to examine the “significant private equity interest,” which could be in shareholders’ interests, he said. “We don’t like the idea of opening it up to wide ranging bids ... We are trying to put the company in its right home." A large trade player buying DTZ could have negative consequences, particularly in terms of “people assets” and synergies, he argued.

It has been speculated that Warburg Pincus and TPG Capital have been sounding out banks on funding options for a deal.

Leupen said the significant interest from private equity was understandable given UGL was a business in transition. UGL was last year restructured into two distinct businesses – DTZ Property and UGL Engineering. UGL engaged Goldman Sachs to start working on a demerger in August, spending $3.05 million on it in the first half, its interim results announced today show.

Leupen said part of the reason for the long timetable for executing the UGL demerger was reducing debt to levels acceptable for two separate companies to carry. UGL’s debt-to-equity gearing ratio is about 35 per cent, which was too high, Leupen said.

DTZ should be run out of the United States, given the country accounts for 60 per cent of its revenues, he said. The physical demerger of assets would be completed by June but the financial separation of the two businesses depended on achieving the right gearing, prompting the group to decline paying an interim dividend.

UGL bought DTZ’s trading assets – which now account for about 20 per cent of the overall DTZ business – out of receivership in 2011. The DTZ operation enjoyed an 18 per cent jump in revenue for the first half to $1.08 billion, while EBIT also grew to $58.3 million, on the back of a pick-up in the US corporate real estate market. DTZ’s order book is at $3.4 billion.

UGL’s engineering arm didn’t fare as well, with earnings down 40 per cent to $35.9 million, and revenues off 1 per cent to $1.152 billion. Increased competition and tighter margins amid a cost-cutting drive by the big miners had hurt earnings for the engineering contracting business. UGL may shore up its cash reserves for engineering through asset sales or an equity raising, with the former seen as the option favoured by shareholders.

Reports emerged yesterday that former DTZ chief Robert Shibuya had lodged a court case in the US alleging he was made to sign off on DTZ “cooking the books” and that he was a victim of discrimination. Leupen today said the claim was “vexatious and extortionate.” The case had 13 different allegations, “and if we wait another three months it will probably widen to 25," he said, adding the allegations had no basis in facts.

UGL issued a statement to the ASX today saying it would defend the claims vigorously and was examining potential counter claims. The statement said the “claims of financial manipulation and discrimination are completely baseless, and UGL notes that they are made in the context of a claim for monetary compensation for dismissal by a former employee.”

When you buy residential real estate in inner city and suburban areas in Sydney and Melbourne where Chinese buyers are active, the price is often 10 or 20 per cent higher than ‘non-Chinese’ areas.

Behind that difference are call-centre engine rooms creating strong demand. It is also a market that carries hidden dangers.

Last week, I was yarning with old friends in the property business who had recently walked into a call centre in the middle of one of the most popular Chinese property buying suburbs, Melbourne’s Box Hill, and discovered tens of people talking in Mandarin and other Chinese dialects. There are similar centres in Sydney, where people are on the phone to residential dwelling buyers in Shanghai, Beijing and Guangzhou. 

At the same time, there were other Chinese operators handling the visa business. It is now much easier to get a visa to enter Australia and to gain residency by spending $5 million. The people involved in visas are much less likely to be simply buying existing real estate. There is a series of rules covering visa-related investment and the Chinese must buy or develop a business or develop a property. My friends’ experience indicates much of the visa money is going to go into property development.

In Melbourne, houses in Beaumaris and North Balwyn once had similar values, but North Balwyn has now soared ahead. The Chinese do not buy in Beaumaris. Similar stories abound in Sydney.

John Lee has indicated that a lot of the Chinese money coming here is coming via back-door routes (in other words, not officially being encouraged), although Chinese regulators are turning a blind eye (Capital flight is China’s house of cards, February 12).

Other major global cities are also experiencing big rises in Chinese real estate purchases, but a limited Australian market makes it more prominent here. 

As it turns out, the building of apartments in Melbourne and Sydney funded by Chinese developers is a welcome addition because it is keeping our building industry going while we wait for the tortuous process of getting infrastructure projects going. 

This is one of the biggest changes our society has seen the last 50 years.  We have often experienced periods where large overseas corporations made major investments in Australia. The Japanese property purchases in the ‘70s and ‘80s are a good illustration. (They later sold out and incurred big losses.)  But never before have we seen a flood of capital into the country in smaller lumps and often associated with residency. 

If it continues, it will result in a significant change in the property-related Australian business community. It would be excellent if some of this money was devoted to encouraging start-ups, particularly technology start-ups. But I suspect there will be a series of apartment blocks built and at the bottom of those apartment blocks will be a retail store – very often, a Chinese restaurant. 

One of the potential problems is that the Chinese developers concentrate their efforts in smaller geographical areas of Sydney and Melbourne, where they are building a vast number of one and two-bedroom apartments. There is a good market for these apartments, but they have limited appeal once a couple begins to have children. 

I can feel a looming glut. Indeed, we had warning from Harry Triguboff that there were signs in Sydney that more land was becoming available as councils realised the damage they had created in holding up development.

And as the land becomes available, there will be a large amount of Chinese capital ready to develop it. And it might all happen at once. That’s what creates temporary surpluses (Sydney’s property dam is about to burst, January 21).

It’s not just the Chinese who are having a love affair with Australian residential property – self-managed funds are now jumping on board in a big way.

To the extent that both are competing in the same market – inner city apartments and certain suburbs of Sydney and Melbourne – we have a dangerous cocktail.

The size of the self-managed funds investment in residential property was yesterday revealed for the first time in the annual superannuation trends survey by SMSF Professionals’ Association of Australia (SPAA) and Russell Investments.

The survey shows that lower interest rates saw the proportion of self-managed funds invested in term deposits and cash fall from 33.9 per cent to 31 per cent. But the self-managed funds still don’t trust shares and so, despite the market rise, the proportion of funds in equities actually eased from 37.1 to 36.1 per cent. The winner was residential property, which sky rocketed from 5.6 per cent in 2012 to 9.9 per cent in 2013.

It would appear that a great deal of the self-managed fund investment has been directed at the four big banks and Telstra, which have been seen as income generators. For capital growth instead of buying shares they have preferred residential property, aided by the new leverage rules. Remember that self-managed funds control just under one third of the superannuation market so this is a significant development. And it’s not surprising because most large companies from BHP down have ignored one third of the superannuation funds market and explained their strategies to big institutions. The self-managed funds responded by taking their equity money into what they knew – residential property.

Yesterday I explained the feverish activity taking place in the mainland Chinese community as they buy existing dwellings and off the plan. And this has attracted Chinese developers into the property market (Chinese money is driving a housing glut, February 18).

Given the size of self-managed superannuation this means that with just under 10 per cent of their money devoted to residential property they have become a very powerful buyer. My guess is that while they are not as large as the Chinese residential buying contingent they have become very important and of course, as always, negative geared individual investors are a force.

The combination of the Chinese, the self-managed funds and negatively geared investors means that it is very expensive for first home buyers to compete in inner city and other areas that are dominated by these investor trends. When groups of investors are all attracted to the same type of investment at the same time it often pushes prices much higher than is justified. This is the hidden danger behind that switch in self-managed fund investment strategies. The self-managed funds have seen that over a long period of time bricks and mortar investments performed well and doesn’t have anywhere near the volatility of the share market and that’s why dwellings are attracting superannuation money out of cash.

To the extent that self-managed funds are buying residential property outside the areas where Chinese are buying, faith in residential property may work longer term. But where self-managed funds are competing with the Chinese, watch out.

Australia and New Zealand share a lot in common and throughout history Australia has learned much from its little neighbour across the Tasman Sea. From voting rights to same-sex marriage, the Kiwis have often paved the way for their bigger and more conservative mate.

New Zealand is once again leading the way; this time with regards to housing policy and it is lesson that Australian policymakers should take on board.

On October 1, the Reserve Bank of New Zealand introduced temporary restrictions on residential mortgage lending, with high loan-to-valuation ratios. Banks were required to restrict new residential mortgage lending with LVRs over 80 per cent (meaning a deposit of under 20 per cent) to no more than 10 per cent of the value of their total residential mortgage lending.

These measures were undertaken to cool a housing market which had rapidly gained momentum and manage the systemic risks that can develop during boom periods. By reducing the level of risky lending and protecting lenders from their worst instincts, macroprudential policies can reduce the volatility of the boom-bust housing cycle.

Since the restrictions were implemented in October, the New Zealand housing market has slowed rapidly. Both housing loans and house prices are now on the decline and risky lending by low income households has dropped significantly.

The policies have worked exactly as intended. Loans with LVRs over 80 per cent have declined from a quarter of new bank mortgage lending to just 5 per cent after only a few months. These are data that is difficult to ignore.

The Australian housing market shares a number of similarities to New Zealand. Rising leverage and risky lending is a common feature and a high population concentration in urban areas has encouraged price growth to be more resilient than in the likes of the United States.

It has created the sense that property busts only happen to other countries; that we are somehow different or exempt. Surely it couldn’t happen in Australia?  Not with our 22 years of uninterrupted economic growth and once-in-a-lifetime resources boom. Right?

Except that Australia is very much part of the housing boom and bust cycle. House prices have fallen significantly on two separate occasions since the onset of the global financial crisis, despite the fact that we avoided a significant slowdown in the broader economy.

What would happen if the economy suffers a genuine setback, such as rising unemployment, a sharp fall in mining investment or government austerity measures? How does a combination of the three sound?

Macroprudential policies are one way to address a housing market that has become increasingly volatile. But these policies are not about saying that a bust is imminent. Rather it is an acknowledgement that no matter how smart you are or how many analysts you have there is a good chance that your economic forecasts will be wrong more often than they are right. Just ask the RBA.

Put succinctly, it is about risk mitigation and that cannot be overlooked when you are dealing with a $5 trillion asset class. Housing accounts for 60 per cent of household wealth and most of their debt. Our major banks have massive exposure to housing assets and state governments are overly reliant on stamp duty to balance the books. Even if you do not think there is a property bubble or that a bust is imminent, you’d be silly to ignore the downside risks if your forecast proves incorrect.

The RBNZ rightly acknowledged that historically low interest rates, which were necessary to support the broader economy, can give rise to risky lending by banks and a willingness to take on too much risk by households.

The RBA finds itself in the same predicament. Low interest rates are necessary to support an economy that is failing to create jobs and is faced with an impending decline in mining investment. But low interest rates have also encouraged banks to increase the share of loans with LVRs over 80 per cent and rampant property speculation in Sydney.

Macroprudential policies allow the RBA and Australian Prudential Regulation Authority to address the latter without removing the benefits of low interest rates for the rest of the economy. If the RBA wants to keep rates low, and they should, then they must follow the lead of the RBNZ.

Federation Centres has upgraded its full-year earnings expectations on forecast savings from debt restructuring, overhead reductions and increased earnings from acquisitions after posting a lift in first-half profit.

Statutory net profit lifted to $226.7 million in the six months to December 2013, compared with $115.9 million in the six months to December 2012.

Total revenue was $268.7 million in the half-year, down slightly from $269.3 million in the previous corresponding period.

The group declared a distribution of 7.5 cents per stapled security, payable on February 28.

The company now expects full-year earnings in the range of 16.7 cents to 17.0 cents per security, with distributions representing a payout ratio of between 95 per cent and 105 per cent of adjusted funds from operations.

Federation Centres managing director Steven Sewell said the group made good progress on restructuring its funding arrangements and rebranding its portfolio in the half.

"Although there are early signs that consumer confidence is improving, for the half year to December 2013 conditions remained challenging," Mr Sewell said.

The group has rebranded 24 key centres since launching the Federation Centres brand just over a year ago and expects to rebrand the remaining centres by December 2014.

The portfolio was expanded to 57 shopping centres in the half through the acquisition of Carlingford Court in Sydney and another 10 convenience and sub-regional centres valued at $327.7 million in the period.

Over a third of affluent Asians own an investment property overseas according to HSBC, with Australia ranked as one of the top destinations.

According to research conducted by market research firm RFi for the British banking giant, 9 per cent of affluent Chinese, 19 per cent of affluent Singaporeans and 26 per cent of affluent Malaysians currently invested in Australian property.

The research shows that amongst the future investment in Australia, affluent Asians are likely to favour smaller property markets such as Queensland and ACT over the larger markets of NSW and Victoria.

Of the affluent Asians looking to buy in Australia in the next year, 25 per cent intend to buy in Queensland, 23 per cent in ACT, compared to 20 per cent in Victoria, 18 per cent in New South Wales followed by 16 per cent in Western Australia.

HSBC’s Australian head of mortgages Alice Del Vecchio said that access to universities, holiday homes in Queensland and the large public service sector in Canberra may also be a drawcard for affluent Asian investors.

Real estate agents and property advisers who recommend investors use self-managed superannuation funds to invest in property may not be complying with the law, the corporate regulator has warned.

In a speech, Australian Securities and Investments Commissioner Greg Tanzer noted a "sharp rise" in promoters recommending investors set up or use an existing SMSF to buy property, saying they may not be licensed to do so.

"ASIC is concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise that they may be carrying on a business of providing financial product advice," Mr Tanzer said.

If someone does not hold an AFS licence or is not authorised by an AFS licence, they can only provide factual information to consumers above SMSFs, not financial product advice, he said.

Agents providing financial product advice may need an Australian financial services licence or authorisation under an AFS licence, he said.