By Matt Whitby, Head of Research & Consulting, Knight Frank Australia and Paul Henley, Head of Commercial Sales, Knight Frank Australia
The value of the world’s leading prime residential property markets rose on average by 4.4% over the 2015/16 financial year, according to Knight Frank’s unique Prime International Residential Index (PIRI). This is the highest rate of growth observed over the last two years.
The latest move by policy makers in Vancouver to apply an additional tax for foreign buyers mirrors similar moves over the last few years across the Asia-Pacific. Most notably, Hong Kong and Singapore have added 15% additional buyers stamp duties, while the Australian states of Victoria, Queensland and New South Wales have also recently introduced various additional levies for foreign buyers.
- Vancouver leads the rankings for the fifth consecutive quarter. Prime prices have increased by 36.4% in the financial year but July saw the surprise announcement that the British Colombia Government plans to introduce a new 15% tax for foreign buyers, effective from 2 August 2016.
- Other top performers this quarter include Shanghai (22.5%), Cape Town (16.1%), Toronto (12.6%), Melbourne (11.0%) and Sydney (10.2%); all saw annual price growth reach double figures in the year to June.
- A breakdown by world region shows Australasia is on top; prime prices increased by 11% on average year-on-year (see Figure).
- Hong Kong has eclipsed Taipei this quarter to take the title of weakest-performing residential market. Prime prices slipped 8% in the year to June as supply increased and concerns over the slowdown in the local economy persisted.
- The majority of our top ten ranking cities have been on the receiving end of new cooling measures in the last 12 months.
The global economy is still in a precarious state lacking any real engine of growth. Low oil prices, deflationary concerns in the Eurozone, uncertainty surrounding the impact of the UK’s Brexit decision, weaker-than-forecast US GDP figures, the likelihood of US rate hikes commencing in December and the bond yield spike caused by the Trump ascendency.
While the global uncertainty continues, Australia is considered highly desirable for long-term wealth preservation. It also helps that Australia is highly ranked for lifestyle and well-placed for the education of future generations. This is despite the application fees that have been imposed by Foreign Investment Review Board (FIRB), as well as the foreign investor duties and land tax surcharges predominantly aimed at Sydney, Melbourne and Brisbane.
Locally, Australia has seen a steady recovery in non-mining activity towards a more services sector-dominated economy. The share market has experienced an upward trajectory over the course of 2016, whilst business confidence remains positive in this low-interest environment.
Three Themes for real estate investors
Low yields across real estate and fixed income are leading investors to balance and broaden their views of appropriate investment assets
Every time the global economy is on the verge of returning to a normal interest rate environment it is buffeted by an unforeseen shock. The latest chain of events in the EU and the uncertainty posed by a Trump presidency will leave real estate investors grappling with innovative
ways to build successful portfolios.
1. Pricing and portfolio rebalancing
Commercial real estate has benefited from major capital inflows in an environment of low interest rates and loose monetary policy across many major global economies. Any interest rate increases in advanced economies (other than the US) are on the back burner, following the UK referendum vote to leave the EU. However it appears we have moved from the ‘lower for longer’ environment into a period of rising bond yields, not withstanding 10-year bond yields remaining negative in Japan, Germany, Switzerland; around 1.40% in the UK, France and Hong Kong; and 2.70% in Australia, albeit up 40 basis points over the past month alone.
Real estate yields have fallen, leaving pricing at historically high levels, but with sensible risk premiums still in place. Despite real estate in many large global markets being perceived as late cycle, there are a number of factors that make the prospect of dramatic rises in yields unlikely, not withstanding the recent bond rout.
Going forward, a muted supply pipeline and low vacancy rates in many cities, including Sydney and Melbourne, is likely to keep property yields low. There has been far less reliance on debt finance in the current cycle when compared with the previous cycle. With the major pricing correction of 2007-09 still in the minds of many investors, owners and developers are considering the balance of their portfolios, while maintaining a solid asset allocation to real estate at circa 7%-10%.
Portfolio rebalancing exercises should keep liquidity in the market in the short-term as investors trade higher risk assets for lower risk, long income assets, as well as developing more large, urban re-gen, mixed-use sites.
Asian investors continue to expand their property allocation to Australia, as the currency remains low, albeit resilient. Destinations are broadening away from just Sydney and Melbourne, with Perth and Adelaide now gaining a share of activity.
2. Real estate to real assets
Property has always vied with many other asset classes in competition for capital, but over the last ten years definitions have shifted. Property has grown in scale from a small number of core sectors to cover a wide range of asset types under the real estate banner. Now real estate is often viewed by investors as an asset type that sits within real assets alongside infrastructure, which incorporates major ports, toll roads and bridges, airports, railway lines, power stations, telecom networks, and a myriad of other physical assets.
Infrastructure is local but portfolios can be diversified globally, and it exists in a physical sense. Due to the low yield investment environment, allocations to infrastructure are rising.
In July 2016, Brookfield raised US$14bn for the largest infrastructure fund ever, proving there is huge appetite for the asset class. In September, the Victorian state government successfully negotiated an AU$9.7 billion lease for the Port of Melbourne. The 50-year lease will see the commercial operations of Australia’s largest container and cargo port taken over by the Lonsdale Consortium, comprised of the Future Fund, QIC, GIP and OMERS.
Infrastructure benefits from many of the same characteristics that make property attractive to investors. It is scalable and provides a steady income, which is perfect for asset-liability matching. Global infrastructure investment should continue to be a driver of real estate investment going forward.
3. Buildings with beds
The days of building balanced portfolios around the trinity of retail, office and industrial assets are over. Residential investment is moving into the mainstream in countries where it previously languished, through growth of the private rented sector. Additionally, understanding a multitude of temporary and permanent accommodation options is becoming a necessity for large investors, as both demographics and globalisation support the demand for hotels, student housing, senior living and healthcare.
Demographics favour investment in housing for those at the beginning and end of their adult lives. University draws many people to new cities, and increasingly to new countries, and the trend of increased enrolment into tertiary education doesn’t seem to be abating. A lack of appropriate product in many cities has resulted in developer and investor interest in recent years, creating a new institutional property asset class that is large enough to feature in balanced and specialist portfolios alike. This phenomenon has been particularly obvious in Australia in recent times, with activity picking up strongly.
At the other end of the demographic spectrum, senior living and aged care home assets are experiencing similar supply and demand dynamics, as large ageing populations in the largest economies in Europe, North America and the Asia-Pacific have the financial means to demand better accommodation and care as they grow older. UN world population projections predict a 12% increase in the number of people aged over 75 between 2015 and 2020, and another 18% growth in this cohort by 2025.
Real estate needs to meet the demands of the growing number of people travelling for business and pleasure, with a range of hotel products to suit all budgets (from new hostels in Europe to six star resorts in the Middle East to five star hotels in Sydney) and duration (from basic single night business hotels to longer stay apart-hotels). Global passenger numbers will increase by around 5% p.a. for the next five years, and the hotel sector in gateway cities such as Sydney and Melbourne should continue to benefit from this increase in travellers.
Case Study – Sydney’s future as a co-living, co-functioning hub: The fixed address of the future will be your email.
Across the US and throughout Europe the popular collaborative co-working movement and the millennial trend of transience, technological reliability and lack of ownership is playing a key part in the emergence of a new co-living movement, powering the flourishing institutional private rental sector (PRS).
Since the mid-1970s social and economic changes in Sydney have altered the demand for alternative housing types away from the more traditional detached dwelling structure. A further 856,000 people are projected to call the Sydney Metropolitan region home by 2026, with 52% of residents anticipated to gravitate towards the inner and middle ring of the city. Technological advances, global mobility, essentiality of flexibility and a lack of affordable and/or desirable housing options will direct these people to a new form of institutionalised private rented housing.
This will be in the form of PRS or build-to-rent, where the asset is built or reconfigured for long term rent, not sale – a purpose built student accommodation model for young professionals and early families. While serviced apartments allow for space and privacy in your own surroundings, their key differentiator from hotels, they do not provide a sense of community or lifestyle meaning. PRS assets aim to fill that gap and this lifestyle-focus differentiates this new form of renting from any other. Only recently have the first groups begun to establish platforms to develop and operate in this sector within Australia, with Macquarie Capital and Greystar being one example.
Co-living blends this PRS concept a little further and introduces the ideas behind co-working. WeLive, an offshoot of WeWork, has already begun to offer private bedrooms and studios within residential co-living neighbourhoods, occupying a former office building in the heart of New York’s financial district and another located just south of downtown Washington DC.
The attractiveness of a consistent rental income stream in this low interest rate environment, coupled with a growing belief by millennials and the iGeneration in fostering community and meaningful relationships through the use of technology, will open the door to new real estate opportunities on our shores. Co-living and institutional PRS, as heralded in the US and Europe, may soon be the models adopted for development in Sydney, despite yields remaining low.
Adapting living city policies and creating a dynamic smart urban environment are high on the agenda of both the NSW Premier and the City of Sydney Council. The recently released Central Sydney Strategy suggests the adoption of new development controls which will limit residential and serviced apartment floor space in large developments to a maximum of 50% to provide for a genuine mixed-use outcome and stem the loss of employment floor space.
The new model of mixed-use development proposed in the strategy could lead to an increase in the feasibility and viability of PRS or co-living spaces within the Sydney CBD. Co-living and modern PRS structures will permeate Sydney’s CBD and fringe as quickly as co-working has risen as a global phenomenon.