In my last post I did a bit of pondering about what the surge in Chinese property buying would mean for Australia. In fact, you’ll notice a lot of pondering in this article if the length of it is anything to go by.
That’s why I’m calling it the final chapter of our conversation… (But like all good Hollywood movies, there’s a sequel around the corner).
I think it’s obvious now that the Chinese are having a big impact on the market right now. The question is, where will it end and who can I profit?
First up, will it end?
It seems that some people are worried that the Chinese boom in Australia might go the same way of the Japanese boom in Hawaii.
That is, it might send prices through the roof, and out of the reach of locals. And then, if it goes bubble, it might pop all over our faces.
Today, I’m going to finish explaining why I don’t think it will play out that way, and what the best way for investors like us to play it might be.
First, it’s important to keep it all in perspective. At last count, through the 2012/13 financial year, Chinese buying only accounted 7%, or $4.2bn of the $60bn foreigners invested in Australian commercial and residential property.
And that’s still third behind the US, and then Singapore.
So, China is still a long way from dominating the market as a whole.
I think the stories we hear about the Chinese sparking bidding wars between themselves at this stage still only apply to certain pockets – like the Gold Coast, or some leafier areas of Sydney.
Never-the-less, the Chinese presence is definitely growing. That $4.2bn last year was up from $1.1bn in 2009, and practically nothing before the GFC.
And according to CB Richard Ellis, a large global real estate firm, Australia is the third most popular property investment destination for the Chinese – sharing the podium with the US and Canada.
So it’s definitely on the rise. And with some agents in some areas now marketing directly to the Chinese (like on the Gold Coast), it looks like the Chinese presence in Australia is only going to grow.
So it’s interesting to think about what areas the Chinese buyers are attracted to. We’ve heard a lot about the purchase of million dollar mansions, but activity at this end of the market isn’t really going to move the market as a whole.
It’s the Chinese buying below $1m that means that’s going to have a big impact on the market – and is what’s got everyone talking.
John McGrath reckons there’s three key reasons why the Chinese are buying in Australia. One is on the expectation of capital gain, and to secure an investment in stable off-shore market.
Second, is to house their children attending university in Australia. Third is to secure a potential residence for themselves.
It’s true that Australian education has become big business. Last year, education posted $14.5bn in exports so it’s big bucks.
And the Chinese are one of the most highly sought after, and fastest growing education markets on offer.
LJ Hooker in Southport reckons it’s the local university that is creating such strong Chinese demand in their area. But they’re not buying their kids mansions. Anything below $300,000 is attracting a lot of attention.
So compared to the boom in Japanese buying, particularly in Hawaii, Chinese buying has a more practical, pragmatic flavour. They’re not being sold on glamour and glitz.
Well, ok maybe some of them are. One Chinese investors shelled out $68.5m for the ‘six star’ Versace hotel at Main Beach on the Gold Coast last month.
What even is ‘six star’? Gold-leafed toilet paper?
But my point is that, for the main, it doesn’t look like the Chinese are losing their heads, and just buying anything with an Australian postcode. It’s not speculative buying (buying based solely on the belief that prices will go up and they’ll be able to sell it at a profit later.) It’s property with a purpose.
Because remember that the Japanese bubbles we saw in Hawaii, and to a much lesser extent, here in Australia, were really an extension of a bubble that had already blown itself out of proportion in Japan.
The Japanese financial system had been built on easy credit, and cosy and opaque collusions between the banks and industry.
It was part of the ‘Japanese way’ that companies bought and held the shares of the companies they did business with. It was just how they cemented their business relationships.
But this meant that it was common for development and construction companies to be major share holders of the banks – the very banks that leant them the money to fund their projects.
I think you can see the problem there.
As the bubble peaked, and the government kept interest rates low, you could just throw money at anything and make money.
And so the Japanese developers started looking off-shore. A hotel in Hawaii. A golf-course in Cairns. Whatever!
The actual economics of the projects didn’t really matter. It was like no-one really cared if the project ultimately turned a profit or not. The money cake was going round. Just cut yourself off a slice.
And what that meant was that the Japanese were effectively exporting their bubble. The bubble in Hawaiian property in the 1980s, wasn’t a Hawaiian bubble. It was really just an off-shoot of the Japanese credit bubble.
But oddly enough, this is exactly not the reason why the Chinese are investing here now.
The Chinese have been trying (and reasonably well so far) to keep a lid on bubbly property prices in China. They’ve clamped down on the shadow banking sector, and even jacked up rates for a while in 2010 (though it almost caused the economy to stall, and was quickly reversed).
It’s these tighter credit conditions at home that are causing Chinese investors to look off-shore. Chinese banks won’t lend to you to buy Chinese property. But property in a mature and stable economy like Australia? Sure thing.
The Chinese are attracted to Australian property for exactly the same reason you and I are. It’s a growth market in a large, mature and politically stable economy. It’s simply just a good investment.
This is the pragmatism behind the surge in Chinese investment.
So the big question is (and I know you’re thinking this)…
How can I make money from the Chinese spending spree?
Earlier, I argued that Chinese buying has a very different flavour to the Japanese buying of the 80s and 90s.
Japanese purchases were driven by easy credit at home, and a belief that everything they touched turned to gold (and if it didn’t then it was someone else’s problem.)
Chinese buying seems to have a different flavour. Sure, there are some high-end vanity plays – casinos and hotels and so on. But the bulk of property purchases seem to be focused on actual housing needs (for university students for example), or on the actual investment qualities of the property.
Which is why Chinese buying is having such a notable impact on the broader direction of the market (in a way that top-end-of-town buying by the Japanese never did.)
What’s more, the Japanese adventures into off-shore markets came in the final days of the Japanese credit bubble. As opportunities at home dried up, the Japanese just had to find a way to keep the game going. And so they went hunting for projects over-seas.
But China is still a long way behind where Japan was in the 80s, in terms of development. Take a look at this chart here.
This looks at national income per capita for a coupla countries. It indexes them in time to the year when income per capital was US$1,000.
For Japan, that was back in 1962. Almost 50 years ago. For China it was 1995. Less than 20 years ago.
This is one of my favourite charts, because it shows just how far China has to go to catch up to Japan – to successfully make the transition from developing to developed country.
It tells us that we’re only 20 years into a 50 year process.
So everything that we’ve seen out of China so far, is nothing compared to what’s about to come. In terms of resource demand, in terms of property demand, it’s just the thin end of the wedge.
But it also tells us that Chinese investment is coming from a very different place. It’s not the last days of a dying empire, casting around for something that will keep the credit binge going.
It’s coming from a country just starting to step into its economic might. That’s just starting to feel the power of wealth.
So we’ve got a new player in the Australian market, and one that’s not going anywhere anytime soon. With quality universities and a stable economy, I expect we’re going to remain in the top 3 of China’s investment wish-list.
But that’s not to say we might not see pockets of the property market get bubbly at some point. There’s a tidal wave of money coming our way, we’re going to have to be on our guard.
But of course that doesn’t mean that sitting on the sidelines is the best strategy. It took ten years for the Japanese property bubble in Hawaii to blow itself out. If you played your cards right and timed your run well, you could have made some serious money.
If we get a Chinese bubble in some pockets here – and who knows, we might – there’s still money to be made on the way. We’ve just got to be extra savvy and pay extra attention to our timing.
And even then, in terms of getting our timing right, at the very least I think we can expect to the time scales expanded out. The population of China is ten times the population of Japan. So that 10 years could well be 50 years. We’re only getting started.
But one thing’s for sure. The surge of Chinese investment is going to create some serious opportunities for those of us who play our cards right.
It’s going to be a longer-run play (this booms not going to blow itself out in 5 years), but I’d consider inner-city apartments, and university areas are going to be the big winners here.
The other thing to consider I reckon is that new arrivals to a country tend to like to live near their compatriots – like Aussies in London. So areas that already have a strong Chinese presence will likely to lead the way.
The Chinese also don’t seem to have the same aversion to higher-density housing that
Aussies have, so some sub-division or development plays could also be winners in this environment.
Affordable areas around the Gold Coast and the university could be particularly juicy prospects in this context. I still think the high-end of the Gold Coast is over-blown, and therefore a bit riskier, but student accommodation can often offer good returns on a cheap investment.
There’s also going to be secondary effects in broader markets. For example, the Chinese aren’t buying in all areas of Sydney, but pressure in one suburb puts pressure on surrounding suburbs as well, which then spreads throughout the entire city.
So even if you’re not tapping into the Chinese market directly, if you can get close enough to the action, you can reap the benefits.
And as I’ve said before, after years of under-building in Australia, the supply demand balance here is already tilted towards under-supply. The on-going presence on a major new buyer will only tip the balance even further towards under-supply and rising prices.
It’s a case of a rising tide lifts all boats. It’s just one more reason why I think right now is potentially the best buying opportunity of a generation.
It’s time to make the most of these exciting times.