Will the fall of the Chinese Yuan give height to Australia's commercial property market?

Will the fall of the Chinese Yuan give height to Australia's commercial property market?

There has been much debate around Chinese investment into Australian property over the past 18 months, but one area of the conversation that remains largely undiscussed is their interest in Australia's commercial property.

 

Having spent many years working as a financial advisor in Hong Kong, I've learnt a thing or two about what makes the Chinese tick, what is a compelling offer versus an ordinary one, and how there are some specific traits that investors from the east are interested in versus those from the west.

 

Before getting into the specifics about what makes a commercial property a worthy investment for the Chinese, it's important to recognise the current state of play with China's stock market and how this may or may not have implications on the future of commercial property in Australia - or more aptly, for those who choose to invest.

 

Over the past two weeks we have seen China's stock exchange plummet to a 7 year low as the government has taken measures to devalue to Yuan. However, despite an immediate global nervousness about the implications on stock markets - to the effect of a $3 trillion loss across Europe - China is already showing signs of resilience and renewed focus on what lies ahead.

 

According to CBRE’s Global Chief Economist Richard Barkham, China is one of the world's wealthiest economies with approximately US$4.7 trillion of savings.  So, as restrictions on capital movements are gradually eased, it is believed these savings will be deployed into the accumulation of overseas financial assets, including real estate.

 

Irrespective of the perceived effects of China's stock market movements, there have been compelling factors for some time now which see Chinese investors lining up to purchase Australian property - commercial or residential.  These include China's investment restrictions whereby the banks reduce investor loans for each subsequent property purchase, in addition to Australia's accommodating regulations for foreign investors - with the introduction of a 3% foreign investment levy only implemented as recently as 1 July 2015.

 

This explains to some extent the interest for Chinese investors in Australia's commercial property, but perhaps of greater interest is how investors are valuing the return of these commercial properties?

 

As a business man, developer and long time commercial property investor, I have always had a rule of thumb that I will not purchase a commercial property (nor does it make commercial sense to do so) if it is not generating a yield of at least 6-8%. 

 

For Chinese investors, we see a very different situation, with many prepared to invest in commercial properties that have a yield as low as 2-4%.  Whilst seemingly at odds with the way Australian's do business, this Chinese willingness to purchase investments with relatively low yields has to do with a number of factors, including:

• Whilst deemed a shorter term view, investment that allows capital to be taken outside of the Chinese economy is considered a priority, with many investors having no desire to repatriate their money back because of the perceived benefits of keeping it offshore.
• Highly regulated laws are driving Chinese investors offshore, with countries like Australia, Canada and the UK proving fertile grounds for investment for people with sufficient upfront capital.
• Commercial and industrial assets are worth their weight in gold, with good tenants and rental income - particularly longer term tenants - proving of greater benefit than higher yield.  In many instances, a long term tenancy is supported by a greater loan (e.g. a ten year tenant secures an investor a 65% loan).  In turn, this works in the favour of those selling commercial investments, with a long term tenant escalating the value of the asset.

 

Whilst there are some straight forward monetary drivers for Chinese investors in Australian commercial property, there are (and will always be) some more sentimental drivers for such investments.  From the perspective of an Australian property developer and investor, I believe there are a few key factors that will support the future of Australia's commercial property market over the next five years at least, namely:

 

• Business sentiment: As long as business sentiment remains stable in Australia, we will continue to see strong growth in foreign investment.  With Australia's real estate sector consistently performing as one of our country's strongest sectors, as long as this continues I believe we will see ongoing interest from both local and offshore investors who want to get in on the action.

 

• Under investment: Over the last 6 years I believe there's been a large underinvestment in commercial property in Australia. As mentioned earlier, whilst property has been a buzz word for the last two years at least, nobody is talking about commercial property.  This could be a case of chicken and egg, as I also believe there haven't been that many quality commercial properties available, but it could be due to the fact that people haven't been selling as many because the appetite hasn't been there.  Irrespective, it only takes someone else to be interested for the market to take off.

 

Finally, reverting to the context of China's current stock market volatility and whether this will have any impact on the role Chinese investors play in acquiring Australian commercial property?

 

According to economists evaluating the potential long term impacts of China's stock market crash, the econometric evidence around the Yuan's mild devaluation suggests that currency plays a very small role in transactional real estate investment, with OECD real estate markets still of great value to those wanting to take their money outside of China.

 

And, if this small move towards a more market-driven currency contributes to a further loosening of capital controls, then the move will be unequivocally positive for real estate values in Western countries.

Author Info Nicholas Smedley

Nicholas Smedley is the Managing Director of Steller, a Melbourne-based property development company he started ten years ago that specialises in medium-density apartments in Melbourne's inner-ring suburbs. Nicholas is also a former investment banker and is on the board of the Haven Foundation.