Warning: date_diff() expects parameter 1 to be DateTime, string given in /home/zincipbi/public_html/wp-content/themes/gazette/single.php on line 33
By Nichola Saminather – Apr 11, 2012 10:01 PM GMT+0800
Asian developers including Fraser & Neave Ltd. (FNN) and SP Setia Bhd. (SPSB) are building a record number of apartments in Australia, betting on a market where local companies have been sidelined by tight financing.
Frasers Property Australia, a division of Singapore’s third-biggest developer, is building a A$2 billion ($2.1 billion), 2,000-unit project in Sydney with Japan’s Sekisui House Ltd. (1928) In Melbourne, Malaysia’s SP Setia is constructing the two-tower Fulton Lane development and Hong Kong-based Far East Consortium International Ltd. (35) is building the 2,600 apartment Upper West Side complex.
Companies from outside Australia are building about 13,000 units, or 32 percent of the apartments being planned or built, a record share, according to property broker CBRE Group Inc. Backed by capital from their home countries, the groups are moving deeper into the market even as prices decline, seeking an advantage over local developers, who have been constrained by lender demands for higher equity investments and that more units be sold before construction is started.
“There’s still occupier demand for residential, and if the local developers aren’t able to deliver, then that presents an opportunity for overseas developers,” said Kevin Stanley, Sydney-based executive director for global research at CBRE. The foreign companies are “predominantly working alone, and many of them have established operations here, which suggests that these groups want to be here for the long term.”
Asian companies are responsible for more than 90 percent of the apartments being developed by overseas firms, CBRE said. Singaporean firms are constructing 37 percent of the foreign projects, followed by 20 percent from Hong Kong and 12 percent from Malaysia, the broker said.
Apartment prices have fared better than detached houses as Australia’s property market retreated over the past year. Apartment prices fell 2.5 percent across the nation’s eight state capital cities in March from a year ago, less than the 4.7 percent decline for houses, according to Brisbane-based researcher RP Data.
Approvals (AUBAC) for building apartments and renovations slumped 16 percent in February from the previous month, while those for detached homes dropped 3.4 percent, the statistics bureau said on April 2.
A decline in apartment permits is partly the result of limited access to financing following the global financial crisis, the government’s National Housing Supply Council said in its State of Supply report in December. With an increasing number of single-person households and those without children, demand for apartments is expected to outstrip demand for detached houses, it said.
About a quarter of Australian households are made up of people living alone, the fastest-growing group, Melbourne-based think tank Grattan Institute said in a report last month.
Even as home prices slide, demand for rental property is climbing as potential buyers put off purchasing amid concerns that the housing market is slowing. Apartments in Australia’s eight capital cities had rental yields of 4.8 percent in March, up from a low of 4.4 percent in September 2010, according to RP Data. Rental yield is defined as the gross annual rental income as a percentage of the purchase price. The rental vacancy rate dropped 0.1 percentage point to 1.7 percent in February from January, SQM Research numbers show.
Frasers Property Australia has A$3.5 billion of property developments planned, including the 11-building Central Park project in central Sydney, Chief Executive Officer Guy Pahor said in October. The development is expected to create 255,000 square meters (2.7 million square feet) of floor space, including shops and offices, at the former Kent Brewery site in the inner suburb of Chippendale.
In Sydney, where Frasers is building 80 percent of its projects, prices rose 1.1 percent in the three months ended March 31, while the average across Australia’s eight capital cities was unchanged, according to RP Data. Almost a quarter of Sydney residents lived in apartments, compared with 13 percent in Melbourne, 7.1 percent in Perth and 8.4 percent in Adelaide, according to the statistics bureau.
Frasers and its partner Sekisui House Australia in October arranged A$550 million in syndicated debt from Australia & New Zealand Banking Group Ltd. and Bank of Tokyo-Mitsubishi UFJ Ltd. to fund the Central Park project. Frasers had been financing development internally, with backing from its parent.
Kuala Lumpur-based SP Setia entered Australia in 2010, purchasing the Fulton Lane site in Melbourne’s center with capital from Malaysia, Choong Kai Wai, the company’s Australian chief executive officer, said in a phone interview.
“Setia’s goal is to broaden our income base, so we looked for locations that were near to universities and shopping centers, with strong demographic growth,” Choong said from Melbourne. “We want to eventually deal with Australian banks. They’re knocking at our door.”
Banks have become more stringent in their lending to developers, often requiring as much as 100 percent of units to be sold before construction and deposits as high as 30 percent of the project’s value, said Ross Griffiths, chief credit officer at Commonwealth Bank of Australia. Still, there is an appetite to extend loans, he said.
“If there’s demand for the property and it financially stacks up, then there’s money available,” Griffiths said at a conference in Sydney in March. “There are certainly developments that are happening, by developers who are well known to us, with a track record and pre-sales.”
In contrast, smaller developers are facing “stricter collateral, covenant and pre-commitment requirements” than in prior years, the Reserve Bank of Australia said in its Financial Stability Review on March 28.
Australian developers also face higher borrowing costs than their Asian counterparts. Australand Property Group (ALZ)’s weighted average cost of debt was 8.1 percent as of Dec. 31, Mirvac Group (MGR)’s was 7.4 percent, and Perth-based Finbar Group Ltd. (FRI)’s was 6 percent as of June 30, company statements show.
Fraser & Neave said its average borrowing cost for the year ended Sept. 30 was 3.23 percent. While Choong declined to provide SP Setia’s borrowing costs in Malaysia, he said they were lower than Australian firms.
The Australian central bank has left the overnight cash rate target at 4.25 percent for the past three meetings. Singapore’s three-month interbank rate was 0.40 percent yesterday; Malaysia’s benchmark rate has been at 3 percent for five months; and the Hong Kong Monetary Authority, which doesn’t have an independent interest-rate policy because of the local currency’s peg to the U.S. dollar, has kept its base rate at a record-low 0.5 percent since December 2008.
“Developers, particularly in the medium-density, smaller apartment blocks, are having real issues getting finance, even with presales,” said Andrew Harvey, senior economist at the Housing Industry Association in Sydney. The entry of overseas groups “will be another difficulty in an already difficult environment.”
SP Setia returned home to market the first tower at Fulton Lane last July, selling 70 percent of the 28-story building’s 291 units, Choong said. Many buyers were investors seeking rental returns or to house their children while in university, he said.
The developer, which last month began pre-selling apartments in the second, 45-story tower, has so far sold more than a third of the 487 units in Australia and Malaysia, and is planning sales campaigns in Singapore, China and elsewhere in Asia, Choong said. SP Setia has purchased a second piece of land in South Yarra, a riverside Melbourne suburb about 5 kilometers (3.1 miles) south-east of the city center, for a development it plans to begin marketing in September, he said.
Lending conditions are particularly tight for residential developments in Melbourne, driven by concerns there will be an oversupply, the RBA said last month.
Melbourne, where about 42 percent of the apartment projects are being built by overseas groups according to CBRE, has seen price declines exceed the national average.
Home prices in Melbourne fell 5.4 percent in March from a year ago, compared with an average drop of 4.4 percent across Australia’s capital cities, according to RP Data. The number of homes up for sale in Melbourne rose 23 percent in March from a year earlier, SQM Research numbers show.
Some international groups have “immersed themselves in the speculative allure” of Australian property despite falling prices, said David Lawson, director of the Center for Economic Stability Incorporated, which was co-founded by Steve Keen, author of the book “Debunking Economics.”
“Right now, investors around the world are pursuing any market potential for gains, and there are still many groups out there promoting the Australian property market despite its recent lack of performance,” he said. These investors “will find themselves under increasing pressure in the coming months.”
That hasn’t stopped Far East Consortium, which is developing the A$1 billion, four-tower Upper West Side project in Melbourne’s center, funding close to half the project with equity from Hong Kong, and the remainder with local bank debt, according to Craig Williams, the company’s Australian director.
Far East has sold almost the entire 700-unit first tower, to be completed late this year, and more than 80 percent of the second tower’s 584 apartments, Williams said.
More than two thirds of Upper West Side’s sales are to Australian purchasers, Williams said. About half the buyers in the first tower, and 65 percent in the second are investors, said Lauren Sheldon, residential project marketing associate at Colliers International, who is responsible for sales of the Upper West Side apartments.
“We specifically target off-market sites that we believe will have a certain market niche to them,” Williams said. “Every three or four years, someone forecasts doom and gloom. But we’ve sold and settled every apartment we’ve ever built.”