[+] Money Flows for Living Sector Boom

Australia’s construction industry is facing a battle on many fronts and it’s all happening at once. But the challenge to address the nation’s undersupplied housing market is a tough nut to crack, amid the huge volume of big infrastructure projects absorbing the nation’s building capacity. “We can’t do everything and we need to figure out what to prioritise,” ANZ Research senior economist Catherine Birch says. While the ANZ’s house view is that a “soft landing is still the most likely scenario” despite recent volatility, Birch says the last mile will likely be the hardest in terms of taming the inflation beast, which would trigger cash rate cuts and ease the pressure on Australia’s housing market. “I think there’s a big question over the projects we are prioritising, because right now we are trying to do multiple things at a high level, we need to pick housing up significantly,” she says. “It’s both a demand and supply issue in the housing market. Following the lockdown period we all decided that we didn’t want to live with other people anymore, the average number of people per house declined a little, and that was estimated to add to demand the equivalent of 140,000 homes when we had next to no population growth. “I was expecting to see that average number of people per household to lift again, reflecting some of those affordability challenges. We haven’t really seen that, it’s flattened out at that lower level.” ▲ ANZ Research senior economist Catherine Birch says Australia ’ s looming infrastructure pipeline is testing the nation ’ s priorities for its limited building capacity. Meanwhile, the annual home completions data is also running at its lowest ebb in 30 years. On the supply side Birch says construction insolvencies were still running high and creating disruption within the market, home prices have gone up and input costs have gone up even more, creating significant challenges in the market. Green shoots emerging for challenged feasibilities But there might be some hope on the horizon for developers grinding away at their feasibilities, according to MaxCap’s head of research, Bruce Wan. Wan says the potential for “modest rate cuts” in November would help projects to stack up, and ANZ is forecasting a cash rate of 3.6 per cent by the end of 2025, down from its current 4.35 per cent. Capital is also flowing into the living sector and away from office and retail, according to his research, which indicates real estate equity has taken a big hit in an underperforming market, according to Wan. “We’ve seen dramatic writedowns in office assets and shopping centre values—even in the darling asset class of industrial and logistics we’ve seen some loss in value there,” he says. Wan says while employees are returning to the office it is not enough to inspire confidence in investors. Investors are equally cautious about the retail sector due to the increase in online shopping and the prevailing narrative around the cost of living crisis. Investors shift to debt lending They are moving into the living sector and Wan says the housing shortage will be driving the living sector for a few years to come. It’s all about finding defensive assets and there have been some very big structural shifts in money markets, according to Wan. “There’s been a very sustained shift from public capital markets to private unlisted markets to avoid some of that volatility in the market. The credit market people are moving from public markets to private markets for the better risk-adjusted returns and we’re seeing quite substantive flows there,” he says. “We’re also seeing a structural change from equity to debt. In a world where interest rates are higher for longer the move from zero interest rates has effectively transferred a lot of wealth from borrowers to lenders. “At the same time the equity piece of owning an office building or a shopping centre, they are declining, people are losing money on these things, while the credit piece is still collecting interest payments and making good resilient returns. So we are seeing it move from people owning the asset to people lending against the asset. “There’s also been a clear structural shift in asset allocation. Investors are still very rightly nervous about the office exposure.” More private capital is flowing into construction lending. Wan says the defensive play was providing a very stable double-digit return, which was why many superannuation funds were moving into this space as well. ▲ MaxCap ’ s Bruce Wan says traditional banks are retreating from lending against large-scale developments. Banks retreat from residential development lending Wan says there had also been a significant retreat from banks on lending against residential developments. “There are areas where regulators are asking for far more stringent, far more tighter, more capital backing in terms of lending against development and construction projects,” he says. “For $1 of conforming development banks are only allowed to lend out $1 as opposed to the $5 you can lend to a low loan-to-value ratio. Where it’s non-conforming and it doesn’t have the pre-sales commitments or the vanilla metrics that you would see in the conforming developments, you can only lend out $0.67. “It’s for this reason that we are seeing a structural retreat by banks out of the development projects into the more vanilla residential loans where they can have a much bigger multiplier for their capital as well.” ANZ Research’s Catherine Birch says that, although there were challenges in the market, the bank is predicting the economy will “continue to slow, the labour market will continue to ease, and inflation will continue to come back down to target next year”. And Wan’s advice for the year ahead? “Live a little,” he says. “We expect the living sector to be outperforming by a clear margin, particularly the office and the retail sector for the foreseeable future, and we see a very good road ahead in terms of returns.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Money Flows for Living Sector Boom

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