Amal Awad sat down with Westpac’s Frank Allen, director of property markets, to discuss funding, commercial property, Asia and the current economic uncertainty.
Are you an optimist or are you feeling negative about the future?
Well, I’m generally known as Mr Doom and Gloom amongst friends – generally developer friends. I’m not pessimistic about how things are going to pan out, but certainly not overly optimistic. I think there’s challenges ahead, not necessarily just … what’s happening in the Australian economy, but more what’s happening globally.
On sentiment then, financially aren’t we in a better position? We haven’t had the same trials as other countries?
We have had the same trials, we’ve just managed them a lot better. We’re sort of blessed in a way because we are now located close to a strong economy in terms of China and Asia. If you want to look at China’s growth, [it is] expected to slow as they try and remove the speculation in the residential market, as they’re trying to slow things down to control inflation.
But they still have an underlying development plan to urbanise their economy, to make it more self-sufficient, rather than reliant on exports. Our economists say it’s not an export-led market anymore, it’s an investment-led market.
We will benefit from that in terms of the demand for our resources, and while that may be specific to some parts of Queensland, WA and the Northern Territory, at some stage the flow-through happens.
Some feel China’s appetite isn’t insatiable and that the shift from export to investment will have an impact. Well, that’s been happening for the last five years, it’s nothing new.
So why is now considered by so many as a ‘boom’ era, but in five years it will be a different story?
It’s because the mentality about mining is always boom/bust. When the first resources boom started to take hold in, say, 2005/2006, there were so many … past CEOs from mining companies saying, it’s a super boom, it’s a short boom, it’s got its normal three-year cycle.
It is unprecedented, so it’s hard to say when will it peter out. The key thing you need to look at is that, with the Chinese economy growing at 10 percent, it’s growing too fast. I think the considerations of our economists is that China needs to grow somewhere around 8 percent, and that’s still pretty solid growth.
Asia is obviously a significant region to us. Is the US economy now less significant to our economy?
No, because it’s the world’s largest economy. It still has a major impact on growth everywhere. China, despite wanting to move into a domestic-based economy, still has a fairly heavy reliance on exports.
In terms of property sectors, which do you see performing best now and in the near future?
The office sector is the one we consider will probably be performing the best. It will have some areas performing better than others. The Melbourne market has outperformed … expectations over the last, say, five, maybe 10 years in terms of some of the forecasts that I’ve been working on. It’s had a very solid base … to let it grow and give good returns.
You have a look at the vacancy in Melbourne, you have a look at the supply that’s coming through – the supply is building up, but if the economy continues to move along quite nicely, it’s a good steady return.
The hottest market at the moment is Perth, but it’s a question of how quickly the resources sector has turned around demand in that area. It has turned around far quicker than we anticipated, and is absorbing space quite quickly and leading to very strong rental growth. But there’s supply coming through, probably from the middle of next year and it’s a question of how sustainable the demand is.
One of the comments I got recently from leasing agents was that Perth could outperform over the next 12 months, meaning the 12 months to mid-2012, but then if it does, there’ll be some form of a correction when supply comes through.
Which sector is performing most poorly?
If you rank the sectors, I would place retail as probably the one that faces the most challenges. That’s largely because of the lower starting yield it’s coming from and trying to generate income growth on top of that. The trouble is, generalising just about retail, [that it] is going to be the poorest sector.
There again, the major regional shopping centres – even some of the not-so-major, but those that are managed very well … and continually trying to drive increased retail sales in a probably slower retail sales environment – they will continue to do reasonably well, they will continue to grab a reasonable share of the total market and be able to increase rents.
How about the importance of strong anchor tenants?
From a pure investment point of view, any investment you look at, you’re looking at secure cash flows. That’s where I think commercial property is a good investment at the moment, and looking at potential for the future. Because if you’ve got a good tenant, you’ve got a good long lease in place; even if there’s going to be limited rental growth, or the rental growth is fixed, you’re still looking at a fairly solid return.
What about funding and availability of capital?
It’s probably back to what it was pre-2003. You actually have to qualify for your loan. Your equity investor wants a certain return and is looking at that return more from the underlying fundamentals. It’s ‘What’s the underlying cash flow that’s coming from this’, rather than, ‘I wonder how much capital growth they can get from it’.
Who do you think is going to miss out in the short to medium term from this lack of funding or hesitancy to lend money?
A speculator. Essentially, someone who is looking at an asset and saying they would like to put very little of their own money in but get the balance made up from either debt or investor equity because there’s a good chance they can turn this property [or asset] around.
Is it a big players’ market?
Not necessarily, because the property market … goes from $1 million right up to the $700-$800 million – I don’t think we’ve had a billion-dollar sale yet. But it is so diverse. You tend to find that the smaller end of the market, which is played by the private players … actually has a greater turnover rate than the bigger end of town.
How are you positioning Westpac and your clients with respect to a potential second wave of the GFC?
Obviously we monitor what’s happening in the marketplace, and what’s happening in the global marketplace, and the impact that has on our cost of funds and how that might flow through. We talk to our clients on a regular basis about how things are panning out there.
The good thing is that [domestic] banks have shifted to a far more deposit-based level of funding than reliance on overseas funding. It still has an impact when the cost of funds goes up, but our rate in deposits … is something that has reduced that dependency that was there prior to the GFC.
Do you think there will be a second wave of the GFC?
Not to the same extent. The thing is, you can say the cost of overseas funds [have] lifted to the same level as the GFC in September this year, but the trouble was it wasn’t from such a low base as it was before and it wasn’t such a shock.
If you want to put a positive spin on what’s happening in Europe and what happened in America, [it’s] that they’re in such a weak condition that no one will be surprised if something goes wrong with that.
How are institutional and other investors faring?
The major AREITs, our private investors, all forms of property investors – there was that period during the GFC where they had to recapitalise because the values fell, but those that are still holding [and owning] property, the income flow is coming through; we weren’t really that badly affected by falling income flow. They seem to be doing okay.