The forum featured three expert panellists: Garry Charny, Chairman at Centuria Capital Group, Jane Lloyd, Non-Executive Director at ISPT, and Andrew McCasker, CBRE’s Head of Debt & Structured Finance – Pacific Region.
Opening remarks from Jonathan Caplan, head of the ABL Property practice in Sydney, highlighted the context for this year’s forum, including disruption to the global and domestic economy from coronavirus and bushfires.
Jonathan outlined ABL’s close engagement in property finance, including our strong relationships on both the non-bank lender side and the borrower side, by developers, corporates and property funds, and also our involvement in advocating for important policy reforms in non-bank lending and borrowing.
A summary of the energetic and highly topical discussion facilitated by ABL’s Managing Partner in Sydney, Paul Rubenstein follows.
1. With serious hits to the domestic and global economy in the form of bushfires and the coronavirus, how might this affect the property industry?
- There is a lot of uncertainty around what will unfold with the coronavirus, given there is no current end in sight.
- It is not affecting the flow of offshore capital into the commercial property market, but it is currently affecting the demand for residential property by Asia based buyers.
- Some offshore institutions have cancelled mandates on buying property in Asia for 3 to 6 months, while still keen on buying property in Australia in the next 3 to 6 months.
- There is not enough money circulating in the economy and even if the Reserve Bank continues dropping interest rates, the circulation of money in tourism, retail and across the economy is being severely affected.
2. How has the impact of China affected the property sector and which parts are most vulnerable?
- Coronavirus is affecting the ability to complete projects and projects not yet under construction being delayed, especially with many building products sourced from China unavailable due to factories not producing and exporting from ports in China being severely reduced and the local supply chains impacted.
- Australia is very reliant on Chinese demand for iron ore and coal and these exports are at risk.
3. The coronavirus has focused attention on the world’s reliance on China for manufactured products. What do we do so that we’re not so reliant on the manufacturing capital for all our products?
- We will have to slowly move away from solely relying on products manufactured in China.
- However, it is unlikely that there will be a pivot in the near future as there’s no obvious alternative supply chain for Australia.
- We are locked into this now and the USA has an equal problem at hand.
4. Last year at this time we were pondering the impact of Justice Hayne's newly released report, particularly how quickly, broadly and effectively non-bank lenders would step in to fill the void. Twelve months down the track, are banks still in Post-Hayne hysteria? Will the big 4 banks make a comeback anytime soon or foreign banks?
- Non-bank lenders have positioned themselves in Australia so that borrowers understand the Big 4 banks aren’t the only source of loans.
- Offshore banks are in and out all the time, particularly Asian banks.
- The Big 4 Banks will return to the market, but they won’t hold the market share they have in previous years.
- The requirements for getting a home loan have become more onerous, with increased difficulty in terms of process and procedure.
- There is a lot more rigour around compliance and delivery of service. Compliance costs have already gone up by 500%.
5. The Reserve Bank Governor, Philip Lowe, has given his strongest signal to date that structural factors in the global economy could keep interest rates low for years, "if not decades”. Should we see low interest rates as the new normal?
- If the government doesn’t step in and listen to the Reserve Bank Governor and hold on to the surplus, it will have a terrible long-term effect. (Note: given events of the last few days this is sadly no longer the case with the government’s coronavirus stimulus packages).
- Rates aren’t going anywhere for our lifetime.
- Interest rates are continuing to contract and are incredibly low for the lending market.
- The long-term interest rate curb is a window into what the economy looks like, it’s a good time for borrowers.
6. How likely is that the RBA resorts to more unconventional measures? How would such a move affect the property market?
- The government does not have new ideas to fix the economy. Its only leverage is the interest rate, when it should really be building infrastructure.
- If you’re building surplus to use it, you’re supposed to have projects in the wings ready for them to roll out if they need to inject capital into the system.
- The government will continue spending to drive stimulation in the economy and drive confidence. In the new deal economy, building things is how you get an economy going.
- At 50 basis points for cash there’s not much further to go. Households are using any additional money they have to retire debt rather than spending it to help boost the economy, especially retail.
- Unconventional measures like quantitative easing are not going to happen. It would be a slippery slope for our long-term position.
7. Retail property investors can't and won't all sell out. What should they be doing to reposition their investments? Are we having different trends for retail versus commercial versus industrial property?
- There has been a massive shift in retail. If a business has good assets, understands what the customer wants and is delivering it to them, those businesses will succeed.
- Yet, we are seeing a shrinking of retail footprints in deference to other things happening on that property such as residential use.
- Commercial vacancy rates are low, good quality supply is moving online and rates keep going up. Commercial office vacancies also come back to employment issues in the medium term.
- Industrial is seeing the same trends – compression is going on that never used to exist. Gary: “I have never seen a rush to sheds like I’ve seen in the last two years. The rush to sheds is crazy – everyone is buying online to satisfy demand. Eventually, someone is going to say we now have enough sheds.”
8. In 10 years’ time, when we look back at 2020, where will the smart real estate investor money have gone?
- Look at population increases and buy quality assets where people are going to need infrastructure.
- The direct debt lending market corresponds to the direct debt owning model. Smart money is not only being invested in an asset but looking at expanding to get yield and participate in the property market.
- Domestic bidders outweigh offshore bidders.
- It’s hard to think about what future retail assets will look like. People aren’t consuming.
- Health care is an obvious emerging asset class.
- Australia has a large representation in sales from the Chinese market in Melbourne and a lot have on-the-ground investors. We are pitching towards that market and it hasn’t slowed down.
- People who invest on the basis of government subsidies such as wind farms get a short term high. Subsidies are a superficial driver; a smart investor can use subsidies but shouldn’t be looking at them solely.
- If you are in it for the long term, you’ll have made good and bad decisions, but it won’t matter. If you are in and out of the market and want to buy an asset, then you’ll take what you can buy on the day: “Some assets come up that are worth the stretch.” (Jane).