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How Big Business and Government play with our future - Part 2

Written on the 16 February 2017 by James Cagney

(A five minute read)

In my previous article I focused on mining and manufacturing and the affect they have on property investment. If you missed last week's Finance and Property Update you need to click >>> HERE.

Mining and manufacturing are two of Australia's primary income earners and an understanding of where they are today and where they are headed is crucial to your investment plans.

All is not well in the Retail industry as more Australian jobs are on the line. Belinda Tasker of the Australian wrote "Two of Australia's fashion brands, David Lawrence and Marcs, are the latest retailers to find themselves up for sales after landing themselves in financial strife. The move throws into doubt the jobs of 1130 staff employed by Marcs and David Lawrence in Australia and another 42 in New Zealand". Retail statistics is an important indicator of the state of the economy because it shows the spending trends which affects the economy.  We need to keep an eye on this sector over the next few months. To see how Spending Trends affect the economy of a region click >>> TRENDS.

A sector to keep your eye on before investing in residential property is in the commercial property trends. This gives you an idea where the jobs are now and into the future. It is also good to know the "who" and "where" the developments are within Australia so you can follow the employment flow.

"The office market is facing a decrease in supply nation-wide, says Ken Morrison, Chief Executive of the Property Council of Australia, which is likely to drive vacancy rates lower."
"For cities like Sydney and Melbourne it is likely to mean pressures on rents, and in cities like Darwin and Perth which have extraordinarily high vacancy rates, it will mean a welcome reprieve for property owners," said Morrison.

A report published by Knight Frank in January 2017 stated:

"Nearly 40 percent in value of residential development sites were purchased by Chinese developers and investors during 2016. The figure is up 12% in comparison with 2015 and up by 36% from 2012. The report, The Rise of Chinese Developers in Australia Market Insight: January 2017 found that Chinese developers and investors purchased $2.4 billion worth of Australian residential development sites in 2016, some 9.4% stronger than 2016."

"Opportunistic developers, many for the first time, considered Australia as the destination in which to build their next development after becoming household names in homeland China. It was considered, and still is to some extent, worth the risk to build a first-time signature development (even if profitability resulted in just a 'break-even') to be accepted as a reputable developer by the local Australian market." 

"In the past three years, Chinese developers and investors accounted for over 25% of disclosed total sales each year with 2016 recording a share of sales as high as 38%. Long-term strategies must now be devised to allow for the Chinese government to tighten the ease of outbound capital flow and local lenders - limiting funding to control their liquidity and satisfy APRA requirements."

"But one thing is clear Chinese developers are determined to succeed in Australia, both now and for many generations to come." As reported by Knight Frank.

This is Great news for Australia. Rosanne Barret and Ben Wilmot of 'The Australian' reported on 1st February " that the Chinese giant R & F Properties has committed to build 10,000 apartments in Springfield in South East Queensland - an ambitious plan valued at more than $6 billion. R & F Properties ranked in the top 10 developers in China with revenues of $.US.3.36bn (Aud.$.4.3bn) in the first 6 months of 2016 made a splash in 2014 aggressively buying four development sites in Brisbane and Melbourne."

This is great for jobs in South East Queensland and the potential of investment property as pressure for rentals increases and yields improve as workers flock to the area for employment that has been sadly lacking in Central and North Queensland. . Once yields improve investors tend to flock to that area. This stage is important to note in the property cycle. Once "Hope" in a market is evident then we quickly enter the growth stage in the property cycle.  You can see how this happens in "The Property Cycle and Cycle of market Emotions" which i developed to show investors when to invest in property. You can access this model by clicking >>> CYCLES.

Spending on infrastructure is the biggest influence on city and regional population and economic growth. Respected property researcher and commentator Terry Ryder recently wrote:

"In my view, the most significant factors are the underlying local economic conditions and the level of spending on infrastructure."

"It is not coincidence that the No.1 ranked economy is NSW and that the city with the biggest infrastructure spend, by a wide margin, is Sydney. That's been the case for the past three years, a time during which most markets across metropolitan Sydney have had a strong price growth."

"The No.2 ranked economy is Victoria, helped by strong population growth, and the infrastructure spend is reasonable, though well below Sydney's. Not coincidentally, Melbourne has been the second strongest city market on price growth, though at levels well below the genuine boom levels of 2001 to 2003."

"The economies impacting Brisbane, Adelaide, Canberra and Hobart have largely been mediocre and infrastructure spending has been relatively weak in recent years. That's reflected in the absence of price growth to match Sydney's."

"It is, again, not a coincidence that the recent rise of prospects for Hobart real estate has happened alongside an improving state economy and sharply rising spending on infrastructure in Tasmania."

"Adelaide, too, is showing signs of an improving market, supported by solid economic and real estate indicators and significantly rising spending on infrastructure."

"Meanwhile, Western Australia now ranks in CommSec's 'State of the States report' as the worst economy in the land and Perth has the weakest of the city real estate markets. The Northern Territory is also faltering and Darwin's property market is in a similar condition to Perth's. Prices in both cities have been going backwards for three years and record low interest rates have not helped them."

"Beyond the capital cities, there are multiple different scenarios in the many thousands of different markets. Some, including regional centres close to Sydney, have had periods of solid price growth. Others, like both the Gold and Sunshine Coasts in Queensland, have had elevated activity without yet delivering major price escalation. Most regional markets, however, have been walking rather than running and several, notably those impacted by the resources sector, have experienced a significant decline."

"We're a massive nation and the real estate conditions are as diverse as the range of temperatures you'll see on a weather map on the evening television news."

This article which appeared in the "Real Estate Conversation" on the 14th February 2017 is a must read and please note my comments thereafter to ensure you are not caught by the hype:

"The Victorian planning minister Richard Wynne has approved a new 1,434-hectare suburb 30km north of Melbourne's city centre. The suburb will accommodate 15,000 new homes and 42,000 people, and will have two town centres, five schools, community facilities, and expects to provide jobs for 7,000 workers. "Conservation areas will be protected and will be bordered by walking and cycling paths.  The development will include 340 hectares of open space featuring red-river gum forests, a network of dry stone walls, and protected heritage buildings. Local and state governments will use the $408 million raised through development levies to fund infrastructure and community facilities. The plan sets aside land for the future extension of the Epping Rail Corridor and a future train station in the heart of Wollert. Wollert is a 10-minute drive from the existing train stations of Epping and Craigieburn. Wollert will include developments by Villawood Properties, Evolve Development, AV Jennings, ID_Land, and Greencor Developments.Phil Hannah, COO Villawood Properties, told The Australian Financial Review that the demand for Wollert's properties at its Rathdowne Estate was strong, with more than 60 lots sold in the past two months. With projections that the population in Wollert will grow by 40% by 2031 and the focus on transport infrastructure and educational facilities under Plan Melbourne, demand for land in the region is set to accelerate,he said."

Please avoid rushing to buy property in these fringe suburbs despite the hype from the States, Local Councils and big business. Suburbs in the fringes of cities quickly move to a price peak as developers create the urgency. They boldly advertise  "To get into the area before it is all gone." Once the state has reached it's peak it take a long time to reach the next growth phase.  The money these 'giants in property development' have to throw at advertising these suburbs is enormous. People rush to buy house and land packages in these "Community Living" estates and builders always oversupply the market in the short to medium term.  In my "The Property Cycle and Cycle of Market Emotion" model you will see that the 1st peak in prices is achieved in 3 to 5 years and the correction and stabilisation can take 9 to 14 years before the next growth cycle. See what I mean by this by clicking >>> CYCLES.

If you buy in these fringe suburbs to live for the long term then that may be a good decision but if you are a property investor you need capital growth to get equity to be able to invest on an ongoing basis.  These new estates rarely provide this capital growth in the medium term and your goal to have a profitable property portfolio will be severely hampered. Avoid at all costs the "Me Too" research method which these developers and marketing spruikers exploit.

In the next article I discuss "Why experts so often get it wrong about the property market".  Click >>> WRONG to go to this article. Most property research companies will have released their January 2017 figures in the next few days. I will study these and the "expert opinions and market predictions for 2017". Let's see who is on the money and  who has already missed the mark. As always I will give you my views.

If you would like to talk to James Cagney about investing in property call: +61 416 137 645 or click >>> HERE.

DISCLAIMER

This is not financial advice. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity.

This information was written and compiled by James Cagney.  The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Asset Finance Pty Ltd.

ACKNOWLEDGMENTS:

Thank you to the resources of Terry Ryder, Property Observer, The ABS, BIS Shrapnel, Michael Matusik, Property Monitors, Colliers, On the House, Corelogic, RP Data, Residex, SQM, Herron Todd White, NAB Residential Property Survey, Australian Bereau of Statistics, Peter Wargent, Port Phillip Publishing, Economy & Markets, Harry S. Dent and the many others for the material discussed above.


Author: James Cagney
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