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.
This article first appeared in The Australian Business Review.