A weak Australian dollar – friend or foe?
A weaker Australian dollar may be good news for our manufacturers and exporters. But what does it mean for property markets? Jason Huljich, CEO of Unlisted Funds for Centuria, looks at the pros and cons of a weaker dollar for property investors.
There’s no question that the Reserve Bank of Australia (RBA) is happy about the weaker dollar. In fact, the RBA’s Governor stated recently that a lower exchange rate would help rebalance the economy. Offshore buyers may also see the lower dollar as a good thing. Take China Investment Corporation’s purchase of the Investa Property Group’s portfolio and management platform in 2015, for example. Had they bought it a year earlier, it would have cost them an extra $1.2 billion on the back of the exchange rate alone.
This may be an extreme example but it does show the potential impact of currency values on investments. But is this a good or bad thing for domestic property investors?
Offshore interest in commercial property at an all-time high
According to research by CBRE, unprecedented activity, in particular from offshore buyers, catapulted commercial property sales to $28.4 billion in 2015. Of this, offshore buyers accounted for $11.7 billion, or 41% – the highest annual percentage on record. And for the first time, offshore buyers acquired more office property than domestic buyers.
Sales were dominated by Asian investors, but other offshore groups are also increasing – Europeans and Americans also see Australian property as a safe haven, and Sydney and Melbourne as global gateway cities. Indeed, according to figures compiled by Colliers International, Sydney is now the third most popular destination for global offshore investors, with only London and Manhattan more popular, albeit by a large margin.
The value of the AUD no doubt plays a part, but it isn’t the only factor. Historically low interest rates globally have meant that our interest rates, close to 2% above other major developed markets translate into very favourable yields from property compared with offshore alternatives, even with the cost of hedging taken into account. Yields from Australian office property in 2015 were in the range of 5-8%, compared with 2-4% on offer in some global markets.
Not all commercial property is equally appealing
While our property markets are generally seen as a safe haven for offshore buyers, certain sectors have greater appeal. In office markets, the principal target has typically been Premium office towers.
As a result, in our view, valuations in this sector have been stretched, and haven’t represented good buying opportunities for investors. Like us, many offshore investors are now looking more closely at A and B grade assets and, in the case of offshore buyers, properties which lend themselves to residential conversion. In fact, anecdotal evidence from Centuria’s experience supports this. When we recently sold two office properties, both of which were suitable for re-development, 75% of the offers we received were from offshore groups.
Residential property is different
Much has been made of the effect on residential property markets of overseas money, and it’s true there has been some upward pressure on prices as a result of, in particular, Asian investment. However, it’s important to understand that the majority of money flowing into the sector is from Australian citizens and residents. Some residential developments are sold offshore in their entirety, but this is quite rare, usually due to the requirements of the Australian banks financing the developments.
If an Australian bank is the financer, it will have a cap of anywhere between 10-25% offshore buyers, in order to minimise settlement risk. This is because the possibility of the market moving down during the construction period (typically 2-3 years) can have a serious effect on profitability.
If the market remains buoyant during the construction period there is no problem. If, on the other hand, the market falls during the construction period, it can be difficult to compel offshore buyers to settle. In some cases they would prefer to forego their 10% deposit rather than complete the purchase. Onshore buyers are easier to chase up. This means that for the majority of residential development projects there is a natural cap on the offshore participation.
So where should commercial property investors be looking now?
For Centuria, Sydney is the obvious choice. The NSW State Government is focused on building and improving infrastructure, the CBD metro is coming, and the new airport at Badgery’s Creek seems certain to go ahead. These factors will continue to have a positive impact on property values.
Having said that, Centuria is a value buyer, which means we will consider all markets, including counter-cyclical buys, if we can see long term value. In other words, properties which will deliver an attractive income yield, but also present opportunity for capital refurbishment, and re-positioning via active management. Our aim is to identify properties where we can add between 5-10% p.a. through improvements.
Each property will have different characteristics and risks and past performance is not indicative of future performance, however, our strategy has paid dividends for investors in the past. We have a track record of producing an average total return of 12.65% from the 32 unlisted trusts we have managed to completion over 18 years. And our latest offering was fully subscribed in a matter of days.
At the same time, when the cash rate is 2% and going nowhere, is it any surprise that quality property investments that may be more stable than some other investments are appealing? The right unlisted trust can offer the potential for attractive total returns with less volatility than the share market. In addition, high quality tenants underpinned by long term leases, can provide a strong and predictable income stream along the way.
In other words, despite the influx of offshore funds following our falling dollar, there are still very solid opportunities for property investors with the right focus.
News articles published on this site are general commentary articles that were produced for and published in the media. They should not be considered to be personal financial advice.
This news articles was published by Centuria Property Funds Limited (Centuria) ABN 11 086 553 639 AFSL 231149 on 24 May 2016. Centuria acts as the responsible entity of a number of funds, for which it receives management and performance fees. Units in the funds offered by Centuria can only be subscribed for pursuant to a current Product Disclosure Statement (PDS) when an offer is opened. Current PDSs are made available on Centuria’s website. We recommend that before an investment decision is made prospective investors consult their financial or other professional advisor and consider the relevant PDS. The information in this document is general information only and does not take into account the objectives, financial situation or particular needs of any person. You should consider whether this information is appropriate for you in light of your objectives, financial situation and needs. Centuria and its associates will receive fees in relation to an investment in the Fund as disclosed in the PDS. This document is not an offer to invest in any fund. You should obtain and read a copy of a PDS before making a decision to invest. Investment is subject to risk including possible delays in payment or loss of income and principal invested.
This document may contain some forward-looking statements concerning certain properties or the property market or economy more generally. Any statements that are not of historical facts may be forward-looking statements which are based on current expectations, estimates, forecasts and projections. These forward-looking statements are not guarantees of future performance or events and involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of Centuria. Centuria does not give any assurance that the results, performance or achievements expressed or implied by the forward-looking statements will actually occur and investors are cautioned not to place undue reliance on these forward-looking statements.