Where to now?
Written on the 11 February 2009
Where to now?
2008 was a year that will go down in financial history with 50 per cent wiped off the share market, superannuation funds decimated and listed property trusts taken to the brink. Napier & Blakeley director Alastair Walker (pictured) answers the big question: Where will all of this leave us in 2009 and beyond?
WE are now in a ‘Catch 22’ market, which will make for a challenging year all round in property and development in Australia.
There is an inordinate amount of property on the market nationally — from residential housing and apartments right through to large retail and commercial properties and any number of development opportunities across all sectors of the market.
The problem is credit and debt funding. Australian banks no longer have the cash funds and backing they previously had from the larger offshore investors which makes it much more difficult for them to lend causing them to adjust their lending criteria.
I am aware of a recent example where a blue chip client, with AAA rated companies and virtually no debt, was unable to secure debt finance from their banker of more than 10 years to develop a commercial office building in which they would have taken more than 50 per cent of the available space. In another development funding application of only $20 million, it was suggested that the $20 million be syndicated across four lenders at $5 million each – unheard of in recent years.
The Australian property market is still in a state of adjustment (and shock) with valuers increasing yields almost on a daily basis leaving vendors with difficult questions to answer - should I sell, do I need to sell, will I be forced to sell and are there buyers at that price?
In coming years it is entirely possible that we will see a few ‘super property groups’ who, in conjunction with the banks as partners/managers in legacy JVs, are unable to sell or don’t want to manage property investments they’ve inherited. This scenario is certainly potentially bad news for tenants, but as banks will inherit distressed property that they cannot sell or entire property companies it may be inevitable.
Markets of course, always have two sides and there are a significant number of cashed-up investors large and small, local and foreign, who are asking the same questions but in reverse; ie; ”How far will prices fall and yields go up?” As a good old Jewish client of mine said to me: “I have my wallet out, but I’ve not yet opened it.”
Overseas investors still look at Australia as a prime investment target; we have legal certainty, a sophisticated property system and opportunity for growth before many other countries around the globe.
There have been a few recent examples of cashed-up private investors plunging in for large retail assets in excess of $80 million at yields of 8.5 per cent, but there are also lots of willing buyers with cash who are still unable to secure debt finance from the banks.
If you are sitting on development land, where are construction costs going this year? Simple, they are going down - maybe by as much as 10 per cent in certain geographic and sector areas.
Unemployment will rise and the availability of skilled and unskilled labour will go up, subcontractors’ margins will come down, builders’ small and large will have their order books slashed and this will, along with the current lower cost of fuel, decrease the cost of a raft of other items.
A weaker Australian dollar will cause imported materials and machinery to stay up in price, however generally our prediction is that costs for new start projects will be lower than they have been for some time.
Council planning departments, which have been overworked in recent times, should be able to process development applications in record time as the number of applications reduce, therefore reducing holding costs and making development generally more affordable.
So if you can finance your development (and maybe make a few sales) this will be the year to strike a deal to build.
Government and Superannuation
Every negative statement made by our politicians, journalists and industry pundits, causes many of these cashed up investors to sit back once more and wait, which fuels the continued loss of confidence.
In the early 1980s and again in the early 1990s the federal government increased the benefits of building and depreciation allowances leading to increased levels of development and investment buying which in turn stimulated the jobs market and brought much needed revenue into State and local governments through increased stamp duty revenue and the like.
If we assume that more than 10 million people are employed in Australia with an average wage of around $50,000, a nine per cent super contribution equates to $45 billion in contributions over the last year.
Fifty per cent of these funds are probably sitting in cash as the superannuation funds have been shy of the equities market in the last six months and their exposure ratios to property, even with the downgrading of property values, has gone up in most cases well above their comfort/risk levels, so they will not invest in property whether it offers good growth potential or not.
It’s an interesting conundrum for the superannuation sector and indeed the Federal Government. The funds are shy of taking risks to protect their stakeholders retirement, but as they have lost a huge amount of their stakeholders funds anyway by being conservative, should they play a part in creating growth, future wealth and assist the country in staving off recession?
By definition, a significant portion of superannuation contributors will not receive their retirement benefit for 20-30 years. Surely such a long term return requirement enables the funds to take some longer term positions enabling to play a positive role in rebuilding the confidence required in the economy?
Fasten your seatbelts and hang on for the ride.