Is property in Australia about to boomerang?
What goes around comes around in the investment world. Eighteen years ago I was lucky enough to be on the first Emirates flight to Melbourne to write about two-way investment and business opportunities.
My conclusion then was that Australia was a screaming buy with a seriously undervalued currency and bargain assets in a very safe country with excellent growth prospects. That proved true.
In both the GCC and Australia, annual GDP has grown to $1.5 trillion from US$200 billion since then. Asset prices have rocketed upwards and the value of the Australian dollar has more than doubled against the US dollar.
Business connections with the UAE have also greatly improved. Etihad, Emirates and Qantas now fly six times a day to Melbourne alone, and there are 126 flights a week through Dubai from Australian cities. Those who invested Down Under in the early days have done really well.
Last month, Melbourne’s Victorian-era Block Arcade was sold for an estimated A$90m (Dh307.4m) by the local Kearney family, who had bought it two decades ago for A$8m, a more than 20-fold gain in US dollars. Why are they selling now? Maybe their judgement is as good as when they bought.
For Melbourne looks ripe for a correction these days. Australia has become overdependent on trade with China, and China looks in trouble.
Only the Hong Kong economy is more exposed to Chinese growth than Australia, as about 50 per cent of merchandise exports are metal ores and coal. New housing construction in China fell by 27 per cent year-on-year in the first quarter. There are reports of steep discounting of 30 to 35 per cent among Chinese developers to sell apartments. It’s not a pretty picture and may well get worse before it gets better as the credit system implodes.
Even Melbourne’s foreign tourists are 80 per cent Chinese, compared to 1.5 per cent from the GCC. You don’t see many Japanese tourists these days and it could be the same story for the Chinese in the near future.
Shorting the Australian dollar is already a favourite trade to profit from the Chinese slowdown. That said, iron ore exports to China were actually up 35 per cent in the first quarter. Yet iron ore prices did suffer their worst one-day fall ever in March amid concerns about mounting stockpiles.
Still, if the writing is on the wall, then investors should be waiting for their big opportunity.
A recession would be likely to bring the exchange rate much lower again and prices would come tumbling down in Australia’s overleveraged real estate market, which has attracted plenty of foreign investment in the past few years. Melbourne’s central business district is full of new residential towers with units sold to Asian buyers.
You could easily argue that after two decades of uninterrupted growth, a correction could be larger than anticipated. For foreign investors that would be a chance to buy into the Melbourne economy cheaply, ready for it to resume its long-run 5 per cent average growth rate.
Melbourne has been the fastest-growing Australian city for some years now.
Basically the city will be growing towards the port district and to the West, and attracting many more immigrants, particularly from Asia. A special visa for those with more than A$5m to invest has brought more than 250 applicants, almost all from China.
Huge numbers of foreign students study in Melbourne and often decide to stay in what has been voted the world’s most liveable city. Clean fresh air and an urban environment to match any in the West are big pulls. This high standard of living is an attraction in itself, quite apart from the job opportunities in what is largely a service economy. Melbourne is the home to many banks and financial services companies that have mushroomed on the back of the $1.4 trillion Australian superannuation pension fund.
Expanding the city further is going to require multibillion-dollar investments in roads, tunnels, railways and bridges, much of it in public-private partnerships. Doubtless the regional sovereign wealth funds will be talking to John Butler, trade commissioner at the Victorian government’s business office in Dubai, about how to invest directly as these giant infrastructure projects emerge. It would be hard to imagine a more secure long-term investment combined with the geographic diversification of Australia.
For individuals, the same opportunity will exist through investing in equities and real estate at the appropriate point in currency and economic cycle. That could be a lot closer than it looks right now.
Peter Cooper is the editor of ArabianMoney.net
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Published: May 2, 2014 04:00 AM