On 3 December 2014, Andrew Constance, the Treasurer of NSW, and Sean Unwin, the Australian CFO of Colliers International, spoke at BDO’s Infrastructure: Future Growth and Challenges event in Sydney.
The event was chaired by ECP CEO, Chris Brant, and attended by more than 30 industry experts.
The speakers and guests evoked many of the trends and sentiments highlighted at the 2014 Property Congress.
Our team has kept a watchful eye on the industry pulse over the past 12 months. From Chinese capital to the expansion of Western Sydney, here are three standout insights for Infrastructure FY14.
There’s money in Asia-Pacific, and it needs to go somewhere
As explored in our Property Congress Highlights, funds have accumulated in Asia as a result of limited investment in the past. This may result in a surge of investment in Australia.
Taiwan is an example of a neighbour with $10B available for investing, and evidently there’s a sizable opportunity to seize. Beyond the proximity advantage, the Australian Real Estate Investment Trust (A-REIT) market – one of the most developed in the world, dating back to the 1960s – is well poised for attracting capital.
In fact, Sydney is currently 10th in the world as a destination for investment in office space, and Australia has also seen a momentous jump in Chinese investment between 2007 and 2014.
Sean Unwin shared that Singapore has traditionally been the hub for funds in the region – we need to wrestle this mantle from them. He also suggested that government initiatives – particularly with commercial properties – are necessary to help establish Australia as the ultimate harbour for REITs’ money.
The Treasurer agreed and said the private sector should build where it can. The public sector is less effective at it and should delegate.
He also emphasised the need for holistic, long-term investment in infrastructure ‘when fund flows from an asset, say the sale of Port of Newcastle which enjoyed a 27x multiple, it needs to be reinvested in another asset.'
Interestingly, the Port of Newcastle was purchased by a consortium which included the China Merchant Group.
Evidently, our infrastructure is gaining traction on the global stage, particularly in APAC, and Australian investors and developers should prepare to captivate the funds at large.
There’s an undersupply of residential housing in NSW, and our Asian neighbour knows it
Chinese investment is a significant driver of demand in real estate across Australia.
Whilst there is no sign of slowing growth in NSW housing, it has plateaued in Victoria. There are three times as many apartments being built in the Melbourne CBD compared to that of the Sydney CBD.
However, the Treasurer notes that the contrast may not be as stark when including the Bay area adjacent to the Sydney CBD.
The undersupply in Sydney is apparent, but is there unsustainable supply in Melbourne?
Unwin explains that there are some 20 million Chinese nationals who wish relocate to Australia. Chinese investment has been fuelling the rise of student accommodation and Melbourne should continue to be propped up by this demand.
In fact, Chinese investors are paying a 10% premium for commercial property with the long-term view of converting them to residential estates.
This aligns with our findings from the Property Congress:
- Australia’s property market is highly valued, but robust. Migration is one of the factors driving demand and default rates are consistently low
- There’s strong demand for rental property. This sector continues to represent an excellent opportunity for investors.
Despite cases of extreme oversupply – ghost cities – Chinese investors are still showing a veracious appetite for infrastructure. Unwin says HSBC expects 7% growth in the Chinese market this year.
Mid 2014 interest rates were expected to increase towards the middle of 2015. However, recent reports of a slump in business confidence have induced two of the four major banks to change their position on interest rates.
Regardless, these are longer-term investments and investors should – at minimum – consider contingent de-risking plans.
Expected oversupply from Barangaroo - Parramatta to become a hot spot
Barangaroo will add 250,000 metre square of office space to the CBD, and office vacancy is expected to exceed 10% in Sydney.
The expansion in Parramatta will add even more space with 300,000 square metres.
However, the Treasurer says the State is invested in giving the suburb the uplift it needs. He said 'we’re moving 100,000 metre square of offices from the CBD to Parramatta – that’s 3,000 jobs.'
Elaborating on NSW’s investment discipline, he said with West-Connect, 'we take the patronage risk early equity and then recycle capital through the successive stages. We’re appealing to both the equity and debt market to inspire investor confidence.'
Whilst the path forward is riddled with complexities and challenges, it’s clear that Australian Infrastructure can give astute investors – here and overseas – meaty returns. Watch this space.