Australia
- The most illiquid direct
property
market in the world ...
By
John Garimort, M. Sc. AAPI.
Director, Property Investment Research
For the Property Sector, Nirvana matches all of the substantial
benefits that the asset has to offer (secure cashflows that deliver
growth, long duration, low volitility) with liquidity. To many,
this occurred with the growth and respectability that the LPT sector
has achieved during the 1990's. Others believe that as LPT's have
matured, they have become exactly like their father and exhibit
all the qualities of an equity with only a hint of their mother's
property charm and stable characteristics. Many of this latter group
(those that consider LPT's to be more an equity investment than
a Property investment) are pinning their hopes on the APX as a viable
opportunity to deliver "liquid property".
This argument
continues, but given the property sector's desire to grow, we have
seen the development of various property products within this country.
Now that these products have also matured, what type of direct property
market does Australia now have and what type of market have we set
ourselves up to look forward to? The following commentary argues
that we have set ourselves up for one of the most illiquid direct
property markets on the planet, and that there is little that we
are in a position to do to change this outcome.
Investor
Demand Profile
The consolidation of property ownership within Australia is probably
the most significant on the globe. Estimates of the amount of commercial,
industrial and retail property assets that are available for ownership
in Australia vary considerably. The PIR Estimate is around $165,000,000,000.
In the broadest of estimates, we see this as comprising the following
ownership.
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Half
of the market is controlled by professional property funds management
groups (LPT's, Wholesale Property Fund's (WPF) and Syndicate
Managers).
Each of these groups is keen to expand their ownership of the
assets in this pie.Corporate Australia is currently demonstrating
a desire to move assets off the company balance sheet, and a
portion of privately held assets could also be considered to
be available.
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Neither of
these groups are seenas adding to demnad levels for investment property.
The consolidation
of ownership of property assets within the Australian markets is
set to continue because a consolidation of demand is also occurring.
Access to capital is the most fundamental of determinants of investor
demand. If we analyse the demand structure of our market (using
the above segmentation), it can be argued that only half of the
market has access to capital. It seems to me that the managers of
LPT's, WPF's and Syndicates will each see an increase in the access
that they have to capital. The growth in managed funds (and therefore
property investment) is almost a legislative certainty given this
country's policy on retirement funding. It can be argued that the
corporate sector has access to funds, but in the main they seek
to spend that capital on projects other than real estate. The balance
of those that have sought to own property investments generally
do not have the capital resources to dedicate to the improvement
of assets.
The conclusion I am drawing here is that access to capital drives
demand and that capital will become increasingly concentrated in
the hands of a limited number of influential players. However, those
few are expected to have significant appetites for property assets.
Given this outline, it is reasonably clear that there will be a
significant increase in demand for property assets.
So, lets consider
the scenarios for an increase in the supply of property assets to
satisfy this demand.
I indicated earlier that the corporate sector was unlikely to substantially
add to demand levels for investment property. On the supply side
of the equation, I accept that the corporate sector will provide
assets that the property fund management industry will acquire.
So too will the private investors, however it is my belief that
the amount of assets that will appeal to the fund management industry
fund is significantly less that the 52% of the pie that they currently
own. Our estimates suggest only one quarter of these assets are
likely to be suitable. It is my argument that the Corporate and
Private sectors will not deliver a supply bonanza.
GDP on anyone's
estimate is not expected to deliver any significant sustained economic
growth for Austalaian enterprises. As a direct result demand for
new premises by tenants in any sector of the real estate markets
(retail, office or industrial) is not expected to produce any real
boom scenarios. In specific terms, GDP needs to grow in excess of
9% each year to keep pace with only superanuation fund generated
investment demand. Unless we see occupier demand reaching these
levels, new supply is going to fall short of investor demand for
assets.
The last point
to illustrate with respect to supply is that it has become extremely
rare for professional fund managers to sell assets. Generally they
have not needed to sell to fund the expansion of existing assets.
Nor have they needed to liquidate assets for capital to buy better
assets as capital has generally been forthcoming. There has been
no real need to trade assets to secure capital.
Add to the
"no sale" argument the fact that professional manger's remuneration
is generally based on the value of the assets managed, there needs
to be a fairly compelling case against an asset for the Manager
to be motivated to sell.
If we summarise
the above arguements, it is expected that the market will see a
smaller number of investors with access to steady capital inflows
for investment in the property sector. Without doubt the size of
the property investment pie will grow, but not quickly enough to
satisfy investor appetites. Retention of the ownership of assets
and limited new supply simply means that the availability of assets
for acquisition becomes limited.
The level
of liquidity that will potentially exist in our market will not
be determined by demand. It seems reasonably clear that the demand
for property assets to invest in will be significant. The level
of liquidity that the Australian market will have will be governed
by supply, and it appears that the supply of assets.
