Chinese developers have a massive advantage over their Australian counterparts. Is it unfair? Maybe. But it’s radically reshaping the Australian property landscape.
It’s kind of hard to cut through all the hype and hear-say about the influence Asian, and particularly Chinese developers are having in Australia.
There’s a shortage of cold hard data, but no shortage of opinion.
The general consensus seems to be that they’re having a huge impact, and it’s only getting bigger. I haven’t seen anyone out there saying it isn’t true, so I guess that’s what we’ve got to go with.
And I’ve picked up something in a few places in the last week or so: and that’s the report that Chinese developers are paying just 1% finance.
They pushing ahead with huge, multi-million dollar developments, and paying just 1% interest on their project finance.
As I’ve written about before, China is awash with liquidity. Since the end of the 90s, China has been hoovering up US dollars to try and keep a lid on their currency. Now they’re sitting on a mountain of cash.
But that makes them a little edgy. The US economic house-of-cards has looked a little dicey more than once in the past ten years. It feels like the wheels could come off any second.
And so now the Chinese are trying to cash out. They don’t want to sell dollars and buy Yuan, because that will push their currency up and they’re still massively reliant on exports to drive growth.
So they’re looking to turn fictional money into tangible assets. There are citizen schemes to encourage individual gold buying. And of course, there’s real estate.
A massive, unprecedented, global land grab.
Think about it. 1% finance. Inflation is running at 1.6%, so it is literally giving money away.
You might wonder what the Chinese banks are thinking, but this is China. The government’s hand is in everything. Super-cheap money is really just an extension of Chinese foreign policy.
But 1% finance gives Chinese developers a massive advantage.
Not only that, but in Australia, marketing costs normally add another 5-10% to the budget on larger scale developments.
But the Chinese are working on entirely different scales. Global developers like Greenland have developments on the go across the developed world, and a massive network of potential buyers in China.
I’ve heard some people say that Asian developers will sell as much as 80 or 90% of their stock to non-Australian residents.
Marketing costs for a company like Greenland are in a completely different ball-park.
And all that means that Chinese developers are 10-15% ahead of the game before they’ve even begun.
And that’s before you take account of the fact that the Chinese do ‘big’ well. They’ve cut their teeth on massive high-rise developments. Even the largest projects here are just middle of the road by Chinese standards. There’s economies of scale involved in larger projects and the Chinese know how to exploit them.
And with an edge on scale and finance, Aussie developers just can’t compete.
And so a lot of them have just stopped trying it seems.
Business Spectator was reporting that property agent Balmain Group recently hosted a lunch for 30 or so of their regular clients in Victoria, many of them old-time Greek and Italian developers.
None of them are buying.
In fact many of them are selling. Chairman Micahel Holm says, “Some are selling part of their land bank. They simply think of a number, double it and put on a development profit.”
Apparently, many local developers are selling their land for nearly as much profit as they could expect were they to develop the sites themselves.
They might only make 80% of what they’d make doing it themselves, but there’s no risk. So why not? Just flip it on to an Asian developer and go fishing.
And I’m talking some big names here.
Grocon sold the former Carlton & United Breweries site in Carlton, Melbourne, to a Chinese company for $60 million.
And Goodman sold an industrial park in Erskinville in South Sydney, a large potential residential site, for $350 million to Hong Kong’s Golden Horse Holdings – reportedly the highest price ever paid for a residential site in Australia.
And of course this land grab is pushing up prices. Development sites have risen by up to 40% in the past two years.
This is huge!
Where will it end?
It’s tempting to say the Chinese are crazy and this bubble will have to burst soon. But the Chinese developers know what they’re doing. They’ve got a lot of runs on the board now, and they know how to turn a deal.
What’s more, they’ve got the full weight of the Chinese government behind them. It’s an officially sanctioned spending spree, and if any of it goes sour? Well, there’s still this mountain of useless cash just sitting around.
Don’t worry boys, we’ll bail you out.
I think in 20 years we might look back at this point in time and say that this was when the internationalisation of Australian property really began.
In the mean time though, property has a rocket under it. And importantly, the balance of Australia’s housing stock is steadily shifting towards units.
To me, that means that there’s going to be an on-going premium attached to our beloved detached housing stock.
Buy time I reckon…
… in case you missed the signals coming out of China.