Something new under the sun

Australian society is undergoing some fundamental changes. Smart investors will exploit these trends in the years ahead.

PORTFOLIO POINT: New trends in finance and property offer opportunities to smart investors.

Around the time of the Australian Open, my wife Barbara and I often share a meal with Harry Triguboff and his wife Rhonda. And on those occasions I normally learn about changes looming in the Australian lifestyle which, although they may not directly impact on investment policies, are certainly fascinating when you start thinking about your children and grandchildren plus longer-term developments.

The wonderful thing about Triguboff is that you always know where he is coming from. Through his Meriton group he is Australia’s largest apartment developer, concentrating on Sydney and Brisbane. So when he talks about government and Reserve Bank policies you know he has a bias. For example, as I will discuss below, he believes it is only a matter of time before the banking system is re-engineered so Australians can benefit from low global interest rates. If the banks themselves don’t do the job, governments will.

But Triguboff also has a keen eye for what is happening in his own market and so a couple of years ago he told me that there was a huge rise in the popularity of inner-city apartments with no parking spaces. Young people were living without cars and relying on public transport to take them to and from work or college. Inevitably this would change shopping, eating and other habits.

But they do need cars at the weekend and so car rental companies are developing that specialise in small car rentals to this market. We are looking at a significant lifestyle change, which will hold back the development of car ownership.

It also underlines the extra cost of living in the outer suburbs, where two cars are usually required. But in 2011 new trends developed in inner-city apartment living and those trends are gathering pace in 2012.

Prospective tenants and buyers of apartments are asking for much larger refrigeration space because they are buying food in bulk. Coles, Woolworths and the major shopping centres are organised around regular visits but inner-city dwellers are beginning to shun this trend and are going to centres where they can buy large quantities of food at a discount. And remember: they only drive at the weekend.

In addition, although only two people normally sign the lease agreements, it would seem that a lot more people are residing in many of the apartments. Living intensity in Australia is increasing sharply. This increase in living intensity will mean that a lot of the forecasts of housing shortages in Australia are going to be wrong.

When I drive to outer-suburban Australia I see enormous mansions being built. The living intensity trends that Triguboff is seeing in his apartments will transfer to these dwellings and multiple families will use them in the future. Already children are bringing their partners home to live in the family dwelling. Children will follow, particularly as child minding is becoming unaffordable for most people so it will return to families and/or the cash economy.

Although housing affordability has improved, our dwellings are among some of the most expensive in the world, so people on lower incomes are going to amortise the cost over more than one couple – either via rental or purchases. Triguboff says that if government building rules and council permission were streamlined, inner city apartments would me much cheaper. But the enormous bureaucracies in governments and councils make streamlined decisions very difficult, in my view.

I think we are going to see superannuation partnerships develop whereby two or three people will take advantage of the new superannuation rules and their SMSFs will partner to buy residences for rental to a non-connected party.

Australians have been reluctant to buy inner-city apartments in Sydney and the prices have been maintained thanks to buyers from China. As interest rates fall, many will return to the market but the bigger longer-term fundamental change, in my view, will be to use superannuation funds to buy residential property.

This greater emphasis on residential property will in part be a reaction to the great volatility that we have seen in the sharemarkets and reductions in term deposit rates. Until now, those with cash on the sidelines have been able to get good returns from term deposits. But if banks reduce bank deposit rates significantly, investors will take their money out of the banking system and look elsewhere.

In the next few months we will see a battle between politicians and bankers. It is highly likely the Reserve bank will lower the official cash rate either this month or next. And when they do there will be great pressure on the banks to lower their lending rates by the same amount.

But while overseas loans cost more than local term deposits, the fall in mortgage interest rates will continue to be less than official rate cuts. As I discussed last week we need to consider a different approach to the funding of our banks so that our market can take advantage of the fact that our currency is the flavour of the month so enormous sums of low cost money are available.

It just so happens that no one wants to put low-return money into banks, despite Australia’s banks being among the safest in the world. We are going to be required to make fundamental change to our banking system so that the low-cost money available to Australia is channelled into the housing and business sectors. But whether the new business models required to achieve that benefit will deliver the banks the same level of profit is a major question for the future.

Moreover, it is not just banks that need to undergo fundamental change. Many other industries will require re-engineering so there is going to be a great difference in the experiences of companies in the same industries. When the market thinks a company is doing well in the current environment the shares respond, and where the company posted poorer results than expected the shares are savaged.

Given the fundamental changes that are taking place in so many industries there is going to be a continuation of wide variations in performance and consequent sharemarket volatility. In turn, if term deposit rates fall, this continued volatility in the sharemarket will push money towards real estate.

For those considering buying property, spend the next few months studying the trends in your target market. Sydney had been one of the poorer-performing real estate markets but it now looks like turning into a winner – particularly in the inner suburbs.

I am always wary about buying too far from home, as you are often conned. Harry Triguboff is of course a fan of inner Sydney and Brisbane, but each capital city has its own set of opportunities.