Australia Focus : The Real Estate Romance

It took Ebola and China GDP numbers to move the AUD and not the RBA minutes, which is not that surprising.

AUDUSD 5 DAY CHART

AUDUSD 5 DAY CHART

 

It’s been a quiet week without the major central banks saying much for the Australian dollar to outperform most of the other major currencies, against the EUR, the CAD, the JPY and the GBP, along with the Asians except for Korea.

I see a handful of property headlines this weekend involving brave Singaporean companies cashing up on the the land down under.

1. Ascott, Capitaland’s subsidiary, invested in Quest Serviced Apartments while Ascott Residential Trust bought 3 operating serviced residences in Sydney for AUD 83 mio. http://business.asiaone.com/property/ascotts-deals-quest-will-boost-its-aussie-presence

2. Meanwhile jewellery company Aspial launches the tallest building in Melbourne’s Southbank in Singapore on Saturday, for lucky Singaporean investors to own a share of the tallest residential building in the Southern hemisphere.  http://www.straitstimes.com/news/business/property/story/tallest-condo-melbourne-aspial-preview-spore-saturday-20141024

I laud their foresight for height is indeed a necessity in Southbank, a highly flood proned area near the city centre which is not my idea of residential. (link to flood map : http://www.abm.org.au/adaptationproject/isitsb.html) Yet Asians love being near the shops and the city and Chinatown.

For Australian property investment is not about returns these days. It is all for Love – because Australia is one of the top migration destinations of the Chinese.

The current massive wave of cashed-up investors from China throwing money at Australian residential property is not primarily motivated by immediate rental returns or eventual profits.

A study by Hong Kong-based equity brokers CLSA, including data from more than 50 meetings with industry contacts, says the phenomenal investment will continue for at least another three years.

As this chart shows, China is now the number 1 source of foreign-capital investment in Australian real estate. CLSA says anecdotal evidence indicates that foreign investment from China has continued to increase in 2014.

“There are a number of drivers behind the growing interest – the most important of which have little to do with simple investment choices,” CLSA says in its report, The Magic Dragon – Chinese Investment and Oz Housing.

A key reason is increasing emigration options, by having property in the preferred destination country.http://www.businessinsider.com/chinese-investments-in-australia-grow-2014-10?IR=T&

The same can be said for Singaporeans, I suppose for I, too, had my Australian emigration dreams till late last year. A story for another day.

But hold on to your horses.

CLSA compares the current wave of Chinese investment with the Japanese real-estate investment in the late 1980s.

In the late 1980s and early 1990s there was a large and rapid buildup of Japanese investment into Australian property which was followed by an even more rapid decline and exit from the investments.

Japanese investment in Australian property rose from close to zero in the 1980s to $65 billion, only to collapse by 70% in 1992.http://www.businessinsider.com.au/this-is-why-mainland-chinese-love-australian-property-2014-10#ixzz3HEehLlPX

Yes. My mom bought a property in Perth back in 1994 and it was cheaper back then than her car in Singapore. But if there is one thing Australia has plenty of, it would be land.

Foreigners can only sell property to local Australians subsequently which is no wonder that “Australia’s millionaires pour more of their wealth into real estate than the rest of the world’s rich” as the country turns into a nation of landlords and tenants. http://www.businessspectator.com.au/news/2014/10/21/property/wealthy-australians-favouring-property

For that reason, we can expect the AUD to remain supported for the long term with real money on the bid unable to resist the allure of real estate romance.

The week ahead will be a rocky one for the currency that will face off against a global backdrop of volatility that will primarily emanate from the FOMC on 30 Oct (2 am Singapore time) which is followed, hours later, by the BoJ.

Economic data galore will keep the markets busy throughout the week and we have local Australian data in home sales, import and export prices, PPI and credit growth.

I still like the AUD dollar even as the probability of a rate hike has been pushed far back into 2015 or later. The latest index shows market pricing in a -0.09% change in rates for the next 12 months, which means 2.5% is the best we are going to get for a while.

The main risks remain slowing China, commodities and the risks we don’t usually think about – https://tradehaven.net/market/better-start-thinking-about-the-risks-we-dont-think-about/.

 

I would trade AUD on the long side into next week given that the market shorts have built up in the past month and the EM currencies are on a recovering path which eliminates the need to hedge in AUD.  Target still the elusive 0.89.

EURAUD has come off in the past week and I believe that there will be a bounce next week to sell into (after European banks stress test results out in a few hours).

AUDSGD, too, is on a recovery path and is looking good. I would expect 1.13 to be taken out in the near term (~ wink~ especially if Singaporeans rush for that building launch).

On the bonds front, it is worthwhile to note the Australian banks are upping the ante on capital raising , probably front running their European and American counterparts.

Australian banks are estimated to require another AUD 68.7 bio in extra capital and Goldman is bullish on their equity. http://www.bloomberg.com/news/2014-10-23/goldman-asset-snaps-up-aussie-banks-as-capital-concerns-overdone.html

Recap of last gross dividend yields (before tax).

ANZ 7.53% (net 5.27%)
CBA 7.27% (net 5.09%)
Westpac 7.85% (net 5.5%)
NAB 8.17% (net 5.72%)

I suspect the capital raising will help assuage the risks that Fitch ratings pointed out last week regarding Australian bank risks. http://www.reuters.com/article/2014/10/15/fitch-australian-bank-risks-have-risen-w-idUSFit79244020141015

And they are still in this year’s top 20 safest banks in the world. https://d2tyltutevw8th.cloudfront.net/media/document/global-finance-names-the-worlds-top-50-safest-ban-1410210873.pdf

Leaving you with the indicative bond prices which still look good, perhaps not to buy this week, but to stick to existing positions that should deliver decent returns, especially if you fund in SGD.

For the rest of the world, nothing beats buying that Australian apartment (flood prone or not, as long as its near Chinatown) and dream of getting that visa to live there.

aud bonds