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City&Country: Cover Story-- Building Down Under

Stable Aussie economy and government a big draw


Australia has long been an education and tourist haven, and a preferred migration destination for many Malaysians. Its culture and weather are elements that make it a lovely place to study and live.

While astute Malaysian investors have been buying property in Australia for reasons like migration, children’s education and investment, Malaysian developers too are making their presence felt Down Under with a number of them either buying land and developing projects or entering into joint ventures with Australian partners.

Despite potential pitfalls, Australia continues to provide investment opportunities. Besides, there is a downtrend in the country’s property market at the moment.

According to Leonard Ng, Rescom Asia’s director of property investments, “House prices across Australia were dampened by weak purchaser sentiment through 2010/11. There have been concerns about the economic conditions and with GDP growth easing and weakness in employment conditions, confidence in the property market seems to be at an all-time low.”
Rescom Asia is an integrated property investment house with its head office in Melbourne, Australia, and provides various property-related services.

Real estate agents marketing Australian properties in Malaysia, such as Tang Chee Meng, CEO of Henry Butcher Marketing Sdn Bhd, and Ian Chen, CEO of Jalin Realty International Pte Ltd, concur.

“Generally, the property market in Australia’s major cities was stable in 1H2011 but experienced a slowdown in 3Q2011. Consumer confidence dipped due to the eurozone debt crisis, uncertainty in US economic recovery and high exchange rates between the ringgit and the Australian dollar,” Tang observes.

Chen highlights an article published in Australian newspaper The Age on Dec 1, 2011, which reported that Australian house prices have dropped in 11 of the past 12 months, with Melbourne and Brisbane leading the downward trend.

However, he says, the prospects are brighter this year. “I believe 2012 will be a good time to start picking up quality properties at good locations that were previously expensive to some,” he says. Chen is also optimistic due to talk that the Reserve Bank of Australia will cut interest rates to stimulate the economy this year, which could be the catalyst for a property uptrend in Australia.

Thanks to a stable Australian economy, many Malaysians are parking their money in the country. In the Foreign Investment Review Board’s (FIRB) annual report for 2009-2010, it was reported that Malaysia invested A$612 million in real estate investments.

Chen says, “Based on our record, the sales [of property in Australia to Malaysians] have been growing every year, by around 20% a year since we started six years ago. More Malaysians are investing in Australia due to the strength of the Australian economy and stable government.”

He believes the benefits of investing in Australia include “steady returns, easy rents, proven track record of capital growth, friendly tax environment, a hedge against inflation and diversification of investments”.

Malaysian property investors can reap the benefits of stable and consistent capital appreciation and rents. “For the last 40 years, Australia’s median house prices have been growing strongly at around 10% a year,” Chen says. “There are low vacancy rates of around 2%, meaning the rental market is very tight whereby two houses out of 100 are available for rent.”

Thanks to Australia’s growing population, demand for houses exceeds supply, he adds.

Caution needed
However, Rescom Asia’s Ng cautions Malaysian investors to not be “overzealous” in buying properties in Australia. “While we are in the business of selling Australian properties, we do not see any specific benefits to buy property in Australia at the moment as the market here has been probably outperforming the Australian market.” he observes.

“The fact that commodity prices, and hence construction costs, are ever increasing, coupled with the relatively weak ringgit, means the cost of replacing a home will only go up. For that reason, it makes sense for Malaysians to buy property in Malaysia to hedge against inflation.”

One has to be aware of gimmicks by marketing agents, like unrealistic rental guarantees and bogus buyback promises, he adds.

Another aspect to be aware of is to know what type of property you are buying Down Under. For instance, a scheme called the National Rental Affordability Scheme (NRAS) in Australia has been advertised in Malaysia with guaranteed returns. It was launched in 2008 and, according to Ng, “NRAS is a scheme orchestrated by the government to shift its ever-increasing liability of public low-cost housing to the private sector”.

“This scheme encourages private developers to build properties to house those on government assistance. Developers will need to find investors to buy these ‘low-cost’ properties,” he explains. Currently, many low-cost houses are sitting on prime land and by shifting those living there to other areas will free up the land for development and unlock its value.

While investors in the scheme are guaranteed returns from the government, it is “as long as their property is rented out to people who are qualified to rent them. They could be people who can’t afford to live in ‘normal’ houses — basically Australians who are entitled to government assistance”, says Ng.

Investors need to be mindful of the nature of the property as an asset class, he advises. More importantly, when the investor wants to get out of it, who will buy the property from him and how much will it be worth? The majority of lenders in Australia restrict loans to such properties as they could be classed as “specialised” securities and potentially take a much longer time to sell, Ng points out.

As an alternative investment option, he proposes that Malaysian investors consider property options rather than physical property. These are similar to share options, except that the “stock” is a yet to be built property, says Ng, adding that Rescom offers such options.

This is how it works: Rescom will book or underwrite a certain portion, say, 50% of units, off the plan at a discounted wholesale price of about 15% to 20%. It will then sell these units to purchasers who pay an option fee of 15% at a discounted price per unit. Then, during the two years that it takes to build the property, they do not pay anything further.

However, six months after the option is purchased, they can either: (i) sell the property at a fixed retail price and make a profit; (ii) keep the property and proceed to sign the contract of sale at the opted price and wait for the building to be completed; or (iii) not proceed with the contract and the purchasers get their option fee, a 15% deposit, refunded when the property is completed.

If a purchaser wishes to exercise his option to sell, Rescom has exclusive rights to sell the property of all the option holders at the recommended retail price at a public property launch and charge a nominal commission for a successful sale.

In case no buyer is found, Rescom will return the 15% deposit with a fixed interest return. “This benefits both the developer and property investors,” explains Ng. “The developer gets to proceed with the construction of the project without having to worry about sales, especially in a bearish environment.

“The buyer has the flexibility and time to decide without the burden of committing to buy a property and the burden of securing a loan and finding a tenant. And yet he benefits from the potential gains when the next person buys the property at retail prices. In the worst case, the buyer still gets his money back after two years should the property not be resold at a higher price. Rescom underwrites the risk of any unsold units and holds them in a property trust.”

For those considering buying property for migration purposes or for their children’s accommodation while they are studying in Australia, Chen of Jalin Realty suggests looking at properties in the capital cities like Melbourne, Sydney, Brisbane and Perth — and to do some homework.

“Deal with developers and property agents that are reputable and have a good track record,” Chen advises. “Understand your financial standing by consulting a banker or mortgage broker, and tax accountant. Look for a good property manager that will assist you in managing your property and buy the relevant insurance policies, like landlord insurance, and get a lawyer to advise you on the foreign purchaser’s rights and duties.”

Looking beyond local shores
Malaysian developers are also looking to Australia to extend their reach beyond local shores. One such developer is S P Setia Bhd, which officially launched its Melbourne project — Fulton Lane — in November 2011.

This is the developer’s first project in Australia and it has already acquired a second piece of land in South Yarra on St Kilda Road, Melbourne. “Our strategy of marketing our overseas projects in Malaysia is merely in recognition that the S P Setia name has a lot more weight in Malaysia than it does overseas,” says Tan Sri Liew Kee Sin, CEO and president of S P Setia.

“We have a large database of satisfied customers who are looking to invest in quality properties overseas. Our track record and presence and branding in Malaysia give these prospective overseas investors added comfort and confidence, which explains why the Fulton Lane project has performed even better than our expectations.”

Fulton Lane is a A$470 million city apartment project comprising a 28-storey tower and a 45-storey tower with retail space on the ground level. Some 80% of the shorter tower has been taken up, mainly by Malaysians, while the take-up of the taller tower is over 30%. The buyers are from Melbourne, Singapore, Indonesia and Hong Kong.

S P Setia’s second Australian project in South Yarra is targeted at the locals. To be built on just over two acres, the residential development will have a gross development value of A$250 million.

Another Malaysian group — TA Global Bhd — recently launched its first residential development Down Under. It is no stranger to the Australian property market, thanks to its investment ventures. TA Global’s first property investment in Australia was in 1997 when it acquired Wales House heritage building and redeveloped it into Radisson Blu Plaza Hotel Sydney — a 362-room five-star hotel that opened in July 2000, just before the 2000 Sydney Olympics, says its executive director Kimmy Khoo. In 2009, the developer acquired Westin Melbourne, a freehold 262-room luxury full-service hotel located in the heart of Melbourne’s central business district.

TA Global’s first residential project is called Little Bay Cove, Sydney, in New South Wales. It is a 50:50 development sponsorship arrangement with Charter Hall Group, Khoo explains. Charter Hall Group is one of Australia’s leading fully integrated property groups with 20 years of experience in managing high-quality properties on behalf of institutional, wholesale and retail clients. Charter Hall has over A$10 billion of funds under its management in the office, retail, industrial and residential sectors. The group has offices in Sydney, Melbourne, Brisbane, Adelaide, Perth, Warsaw and Chicago.

Little Bay Cove is a A$600 million master-planned community on about 33.6 acres along the coast and is 20 minutes from the Sydney CBD. Once fully developed, the development will offer 570 dwellings, comprising land allotments, architecturally designed courtyard homes and apartments, many with coastal views.

“We recognise the value and prospects of the Australian economy, which has been growing due to its resource-rich deposits.

“The group aims to diversify its earnings base in Australia and its alliance with Charter Hall provides a rare opportunity to participate in an exciting, master-planned residential development project in Sydney and partner a strong integrated property group with a proven track record,” Khoo says.

“From a development perspective, TA Global sees Little Bay Cove as an opportunity to build its presence in the Australian property market as the project already has all the relevant approvals and construction finance in place.”

A Malaysian developer that has made its mark in Australia is Mulpha International Bhd. The property group has established itself in Hong Kong, China,

Vietnam and Singapore, but more than half of its overall assets, comprising hotels, a hotel school, offices, residential developments, a ski resort and investments in associates, are held Down Under through 100%-owned Mulpha Australia.

One of its ongoing projects is Sanctuary Cove in Brisbane, a 1,171-acre residential enclave that offers residences amidst amenities such as championship golf courses, harbours, restaurants and harbour side cafés and fashion boutiques. Moreover, there is a 293-berth marina, a recreation club within a residential resort, country club and the five-star Hyatt Regency Sanctuary Cove. The integrated development has a GDV of A$2 billion.

Mulpha International also has a 26% stake in property investment company FKP Property Group and has active projects across Australia’s eastern seaboard. “FKP has active master-planned residential land, including communities in Victoria, namely Saltwater Coast, Point Cook; New South Wales’ Norwest, a joint venture with Mulpha and the soon to be launched Mulgoa Rise in Sydney’s West; and Queensland’s Peregian Springs, Ridges and The Rochedale Estates,” says its executive chairman Lee Seng Huang.

Given its presence in Australia since 1994, Mulpha International is in a unique position to recognise opportunities in the country and capitalise on them. “The property market in Australia compared with other countries globally is mature and sophisticated,” explains Lee.

He notices that in Australia, supply is more controlled, giving more price stability. “For example, because of the tough planning laws in Australia, prices held quite steady throughout the global financial crisis. Australia has rigid planning rules that control residential, hotel and retail supply. This has resulted in a relatively stable real estate market. It is also a very liquid and institutionalised market, making buying and selling much more transparent.”

Future launches in Australia by Mulpha International include two apartment developments — the 144-unit Aerial in Melbourne that will be completed in May 2012, and the 77-unit Luxe in Sydney anticipated to be completed in 2013, Lee divulges.

“We’ve two apartment developments in Brisbane — The Milton (298 apartments) on which we expect to start construction in April this year and the recently launched Albion Mill where we have seen strong enquiry levels to date.”

Developers unfazed
The eurozone debt crisis, which weighs heavily on stock markets and economies, does not seem to bother Malaysian developers. Says S P Setia’s Liew, “Macroeconomic conditions are beyond our control. What we can do is ensure that we do not overpay for our landbank, which ensures that even in the worst case, our holding cost for the landbank is manageable; and also ensure that we launch our projects credibly with sufficient take-up levels, which means construction costs are at least covered.”

At TA Global, Khoo does not see the eurozone debt crisis having an adverse effect on its project. She points out that property development in Sydney has been relatively shielded from the downturn — there was a slight drop in the preliminary price index for established houses in Sydney of only 0.3% from September 2010 to September 2011, according to the Australian Bureau of Statistics in September 2011. Moreover, Little Bay Cove has a five-year development duration. Hence, Khoo does not anticipate the current crisis significantly impacting the overall project.

As for Mulpha International, Lee says, “While Australia has been largely insulated against the eurozone debt crisis, if Europe does not contain its troubles, all countries worldwide will be ultimately affected. The question is, to what extent?

“Australia will be impacted to the extent that liquidity in its banking sector is affected. Moreover, the impact isn’t so much on property values and prices. It’s more on consumer confidence and sentiment. Supply and demand tend to weigh heavily on property prices in Australia.”

While the current economic woes could pull the plug on well-laid-out plans, property still remains a popular choice for investors. However, with the increased uncertainty in the market, selecting the right consultants and developers is vital to ensuring one’s investment is not at risk.


 

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 891, Jan 2-8, 2012

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