In a matter of weeks, the seemingly endless blue sky in Australia’s apartment development world has darkened.
Stockmarket shocks across Asia and the en masse depreciation of Asian currencies raise a number of questions. At the top of the list: Will all off-the-plan purchases made during good economic times be settled on completion?
Because the number of foreign buyers in Australia is of an unprecedented level, there is no historical clue. Will some buyers default? If so, how many?
Collectively, these foreign buyers have bought billions of dollars worth of apartments. Most of these are still under construction, while others are in planning.
The biggest groups of offshore buyers of Australian apartments (and houses) come from China, Malaysia, Singapore, and, to a lesser extent, Indonesia.
China’s economic woes have hit all of these economies hard.
While China is buying less iron ore and coal from Australia, it has also cut back on imports of oil/gas, rubber and palm oil from Malaysia and Indonesia. In the first quarter of 2015, Indonesia’s exports to China dropped by a whopping 34 per cent.
Singapore’s export-oriented economy has also been hit by the renminbi devaluation.
The yuan’s 2 per cent devaluation should be inconsequential when compared to depreciation of the Malaysian ringgit, which is currently at a level not reached since the depths of the Asian financial crisis in 1998. Since the start of the year, the Malaysian currency has shed 23 per cent of its value against the US dollar.
The Indonesian rupiah has lost 16.4 per cent, and the usually strong Singapore dollar has fallen by 7 per cent against the greenback year-to-date.
Of course, it can be argued that when measured against the 37 per cent fall in Australian dollar since the start of 2013, depreciation of Asian currencies is relatively mild.
But the flipside of the extreme volatility of Australia’s currency (and the losses incurred by those who have already bought) may unsettle some, giving them yet another reason to walk away from settlement.
Australia’s real estate and housing development industry is convinced that what it sees as 'short-term' issues are unlikely to upset an individual investor’s long-term plan, which is to diversify investment, to house children when studying in Australia, or to migrate here.
Developers say few (if any) buy apartments in Australia with the idea of flipping them for capital gains.
But aside from currency movements and the gloomy economic outlook, other measures may also hinder the smooth passage of funds to Australia to settle real estate purchases.
Chinese authorities have reportedly tightened the outflow of capital, instructing financial institutions to place closer scrutiny on foreign exchange transfers.
The authorities are also said to be watching other channels of money transfer, such as foreigners operating in China as ‘business advisers’ whose real role is to help the wealthy shift money offshore.
Whether a fact or rumour, any suggestion of a government decree is enough for most Chinese to err on the side of caution. An unintended consequence of the anti-corruption drive is an ongoing paralysis in the public sector, which is also affecting the private sector. Few seemingly dare make a decision for fear of being caught up in the anti-corruption dragnet.
When in doubt, do nothing.
Buyers who need to send money out of China today may well run into a collective inertia brought on by fear of doing the wrong thing.
It is a well-known fact that Beijing can either turn on or turn off the money tap without warning. Macau and Hong Kong have experienced this at various times when the government has restricted the number of mainland visitors, causing a material impact on their economies.
Developers who now rely on the Asian and especially Chinese markets told Business Spectator they are not unduly concerned about settlements or future sales.
“The high net worth individuals that we deal with have already shifted their funds to Hong Kong,” says one source.
Meriton’s national sales director, James Sialepis, says it is possible that the new rules in China may affect some settlements. But until that happens, it is difficult to know for certain.
“If the restrictions are very tight and penalties very severe, then offshore investment may be affected. It is a concern, but we will have to wait and see," he said.
A large Melbourne developer who is just completing an apartment block says the settlement pattern for that project will tell the tale, adding, however, that some foreign buyers will use banks in Australia to finance their purchases.
The odd piece of unsubstantiated scuttlebutt has started to emerge about Asian buyers not seeing through a transaction after auction.
When asked about early signs of problems, Andrew Taylor, who has a good bird’s eye view of the Chinese outbound market, says he has not seen any change in Chinese demand for international property since the share market correction.
Taylor remains convinced that a major priority for the Chinese government is to make its currency more freely convertible. That will make it much easier for people to move their yuan to places like Australia when they want to buy up an apartment, or an entire apartment building.
“The Chinese spent $US52 billion on overseas property in 2014, and we expect them to spend $US220bn per annum by 2020,” says Taylor, who co-founded the world’s largest real estate portal, Juwai.com. Last year, Juwai.com sent around $US150 million worth of leads to agents and brokers overseas, including Australia.
“Regardless of any individual’s experience, we expect at least 25 per cent growth in international property buying in 2015,” Taylor told Business Spectator. His forecast will brighten the day of developers, who are focused on the Chinese market.
But for others, there are bigger looming concerns: they fear that cooling measures at home may stifle the appetite of Australian domestic investors.
Banking regulatory watchdog APRA has brought down a slew of measures to slow lending to investors, prompting banks to lift interest rates on investment loans.
The residential rental market has flattened. Research firm CoreLogic RP Data’s latest survey shows that rental growth in capital cities averaged just 0.9 per cent over the year to July -- the slowest increase since 1995.
Apartment prices have risen sharply in response to demand. And those yet to be built could cost even more because of the high cost of land content, especially in the central business district of Sydney.
Land prices have soared to an all-time high, although the heat has started to dissipate as developers who have already bought sites start to hit roadblocks when seeking planning approvals.
As well as higher land costs, development costs have been surging and will continue to rise (Little Manhattan: Sydney apartment prices shoot for the sky, July 22).
Be it currency depreciation, a poor bad economic outlook, a sharemarket rout, or apartment price hikes, one of these factors on its own may not be enough to upset market momentum. A confluence of these issues would be a different matter altogether.