Property and the China effect

PORTFOLIO POINT: Some parts of the market’s top end are being pushed up by China-based buyers, who can add good feng shui to the usual list of sought-after attributes.

A new type of buyer has emerged in some of the most expensive residential property markets across Australia. This buyer type has deep pockets, is often very well-informed and has flown 8000 kilometres from China with the intention of buying an Australian property.

It became obvious to me that the market was changing when the auctioneer called for bids in both English and Mandarin recently. So who are these mainland Chinese property investors? What property types and locations are they interested in and are they actually having an effect on property prices in our major capitals?

One thing that is apparent is that although there are plenty of anecdotal reports about their buying habits, hard data is lacking. What we do know is that in March 2009 the Foreign Investment Review Board relaxed the rules on foreign investment for established properties and conveniently dropped the reporting requirements, which leaves us with little official information to gauge how much the market is being affected by foreign investors.

Agents in areas where China-based investors are active tell us that these buyers are highly competitive and are prepared to pay a premium for properties that fit their requirements. As this trend emerges, Australian investors should understand how these buyers may affect market conditions and negotiation strategies.

Chinese investment in Australian property did not begin overnight but it is certainly gaining traction. China is the third-largest source of migrants to Australia and now the source of many new property owners; 70,000 new permanent residents from China arrived in Australia last year, quite apart from the full quota of business migrants and a growing number of students and others with temporary visas.

Australia’s largest apartment developer, Harry Triguboff, is on record as saying: “Around $200 million of my sales are from buyers from China each year.” Triguboff, whose company Meriton has built thousands of apartments across Sydney, says the proportion of Chinese buyers in some developments could be as high as 60%. Numbers from FIRB for 2007-08 have China-based investors buying almost $17 billion worth of property. Agents in certain precincts believe that activity has grown considerably since.

Chinese motivations for investing here are reasonably uniform. They view substantial Australian family homes as a stable hedge against uncertain treatment of their business interests by Chinese bureaucrats or a change in the yuan’s valuation. They’re also attracted to the prospect of outright property ownership in Australia compared to 99-year leases in China.

Interestingly, what we now know is that specific locations and property types attract Chinese investors, some of whom seem willing to pay premiums of 20–40%. The right block of land with a large family home or even a knockdown house, leafy streetscapes, access to good schools and local cafes and “Western lifestyle” is attractive.

Just as attractive is the feng shui of suburbs on hills overlooking or near water. These combinations make Melbourne suburbs such as Balwyn, Kew, Doncaster and Box Hill, or Sydney suburbs such as Rose Bay, Watsons Bay, Vaucluse and Double Bay, highly sought after.

And the competition they bring can be fierce. Melbourne agent Tim Fletcher says Chinese buyers have pushed final prices much higher than expected, resulting in a ripple effect in some recent sales. An example was a Burwood East house auctioned on March 20, where a reserve of $650,000 was bypassed quickly on the way to a sale of $905,000. The buyer intends to demolish and rebuild. Fletcher says an increasing number of Chinese buyers in the $3–4 million price range are competing for prime properties.

Double Bay agent Michael Pallier agrees that specifics such as land value and feng shui are important to Chinese investors. “They know the value of the land and that is what they are looking for, but they are also very aware of the importance of houses and gardens with the right feng shui elements,” Pallier says. Green conifers are planted in graveyards in China and are considered bad luck, as are front doors that align with back doors or roads that meet the front door. He says feng shui experts often attend property viewings to ensure buyers make the right decision. When the right series of factors align, Chinese buyers can be prepared to pay premiums of millions of dollars.

However, this is limited to activity in specific markets and should not concern most investors, who typically spend $500,000 to $1.3 million. It is the higher-end residential properties that they are interested in.

Foreign investors, and Chinese buyers in particular, are not likely to be factor in the price you pay for your investment property. They are not a large part of the broader Australian property market and reports that they’re pushing prices up right across the board are incorrect.

Whether this market will grow is unclear. At one end of the spectrum, alarmists point out that the wealthiest 1% of the Chinese population accounts for 11 million people or equal to half Australia’s population, so it would only take a very small percentage to invest in Australian property for distortions to start appearing in the market. Before we all start to panic, the numbers we are still seeing makes this extremely unlikely.

Tim Fletcher says Chinese investors represent 10% of the market at the premium end, a percentage that has not grown in the past six months. “There may be a perception that it’s getting out of hand with a surge of demand right across the board leading to prices lifting everywhere but it’s just not true,” Fletcher says.

The issue of foreign investment in Australian real estate has become the subject of monitoring by the Reserve Bank. According to governor Glenn Stevens, the “question of the role of foreign purchases is an important one and it’s one we’re giving some attention to”. That also means politicians will need to be watching how the trend plays out. Already the media interest has made it a hot topic, which may bring political pressure to on immigration levels to the forefront.

Meanwhile, buyers interested in the same small sections of the market as Chinese investors should be sure their finances allow for the increased competition.

Property Q&A

This week:

• Buying in Sydney.
• Valuing property.
• Inner suburban price strength.

First home in Sydney

I am 22 and have just graduated as a botanist and landed my first full-time permanent job. I’m looking to buy my first property as both an investment and a place to live. Should I Iook for a small three-bedroom house in Sydney’s western suburbs or a one-bedroom flat in the inner suburbs?

First, let me congratulate on your graduation and your first permanent job. Well done. Before you go out and buy your first property, you should determine whether this is primarily a place to live or a property for investment purposes. You’ll need to rate your property choice one way or the other, 60/40 or better in order to get some clarity around the selection process.

From an investment perspective, you are much more likely to get better capital growth from a well-chosen flat in an inner suburb. Property in high demand, high land value suburbs usually proves to have better capital growth when the market is strong and is more resilient when the market is weak. These properties also have a greater ability to attract tenants or buyers during all kinds of market conditions.

It sounds like you have a limited budget so I would start by looking at a small, but well positioned one-bedroom flats. Concentrate on locations with good access to public transport, shops, recreation and within walking distance of cafes and restaurants. If you stick to small established apartment buildings and units with a conventional floor plan and an allocated car park you should be able to find a property that will achieve above-market average growth.

Remember growth in capital value is driven by underlying demand, and that’s the key to property investment.

What’s my property worth?

What is the best way to value an investment property? I have read that the property market has cycles like the stockmarket but you can’t look up the price of a property day to day. I have had mixed experiences with valuers who have written reports with deficient research. I have invested in two apartments in Sydney: one in northern Sydney in Willoughby in a block of 40, and the other in inner city Darlinghurst in a block of 109. I am not sure who to trust when seeking an estimation of value.

Yes, there is a property investment cycle that describes the behaviour of property values over four different phases of a cycle that last between 14 and 18 years. Unlike the stockmarket, the price of properties does not move on a day-to-day basis but over longer periods, generally seasonally or if something dramatic happens – but that is unusual.

There are a couple of methods you can use to estimate the value of your property. If you asked a registered property valuer for a valuation, they will look at sale prices achieved by comparable properties over the past 12 months, land values in the area and make an assessment of the intrinsic value of your property. On the other hand, an experienced and knowledgeable local real estate agent could provide you with a market appraisal, an estimate of what they think the property would sell for in today’s market.

An appraisal is only the agent’s opinion and when agents are viewing a property for a potential client, they tend to be a little optimistic. On the other hand, a sworn valuation uses sale prices and land values from the past year and so they tend to be conservative and can underestimate what price the property would achieve under competition. The reality probably lies somewhere between these two figures.

No matter which method you use there is no magic method that will tell you exactly what the property is “worth” or what it would sell for. If you need to value your property for some official purpose, I would use a sworn valuation. If you would just like to know what price your properties are likely to achieve in a sale, then have three local and reputable agents appraise your property and use the average of the three appraisals as the likely fair value.

Inner-suburban strength

I went to an auction the other day close to where I live in Melbourne’s inner suburbs. It was a very nice four-bedroom family home, which sold for $2.4 million. As everyone applauded at the end of the auction, I couldn’t help thinking that this price represents 40 times the average salary. When I bought my house in 1978 (it is fairly similar in size and position), the price was about eight times the average salary. Are we all just kidding ourselves?

It’s an excellent question and I know exactly what you mean. Despite being absorbed in the property market seven days a week, every now and then when I hear the bids being called out it still sounds a little incredible. But to answer your question, no I don’t think we’re kidding ourselves.

Just five years ago, I gave a speech to a group of business leaders in which I predicted two-bedroom apartments in inner Melbourne would be worth $500,000 five years hence. Nearly everyone in the room looked at me as though I were mad and yet today my firm struggles to find a one-bedroom apartment in the inner suburbs much below this price. The resilience of residential property’s growth not only challenges our ideas about what a property is worth, but is based on some pretty simple economic facts, particularly that demand is outstripping supply all over Australia.

In your case, what today’s prices show us is how much the market appreciates a location close to all the infrastructure services and amenities of urban life. My analysis of the market suggests that this trend will continue, particularly in a city characterised by increasing traffic congestion. I think we’ll find the prices paid for properties in inner suburbs, and particularly for spacious, well-positioned houses in these areas, will continue to surprise for some time into the future.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.