The tidal wave of Asian money rushing into Australia's inner cities

The inner city residential property development markets of Melbourne and Sydney are experiencing a sudden and spectacular boost. For many Asian and Chinese investors, inner-city property investment in Australia is replacing gold as a hedge against possible difficult times at home.

While this has been happening for years, few were prepared for the latest set of events. It started slowly in the early weeks of January and February this year: Chinese and other Asian investors began buying apartment development sites that had secured permission to build, and are funding those developments using Chinese rather than Australian banks. In turn, most of the apartments will be sold to Chinese and other Asian investors.

In the following months, the size of the Chinese investment rose substantially and the price of inner-city land in Melbourne with permits to build has quickly doubled. A similar trend is taking place in Sydney.

The 2014 escalation has been so rapid that many Australian developers are now saying that there is no point in undertaking developments because you can make your money gaining permits and selling the land to Chinese and other Asian investors.

Accordingly, this will change the nature of new property development in our two largest cities, and will spread to other centres across the country.

Under the old practices, Australian banks made life tough for developers. To get bank funding for an apartment development, developers had to pre-sell a substantial portion of the proposed apartments ‘off the plan’. In addition, to qualify for an Australian bank loan only about 15 per cent of a project could be pre-sold to Asian investors because the banks argued the pre-sales to these investors were unenforceable contracts. These were tough hurdles, which saw many developments struggle. In Sydney it led to the apartment dominance of Harry Triguboff’s Meriton, because Meriton had the financial strength to finance developments.

The combination of the difficulties in gaining permission to build and the bank financing rules restricted the supply of apartments. We are now seeing a rapid increase in apartment development because Australian banks have been by-passed.

The Chinese and other Asian banks lend at low interest rates and do not have Australian bank lending restrictions on ‘off the plan’ sales to Asian investors.

Why the rush of Asian money?

There are many forces, but substantial fortunes have been made in China and other Asian centres, and people want to diversify their asset bases in case something goes wrong. While they want to make money in the longer term, in the short term security and asset diversity are the main motivations. A large component of the developments, including windows and fittings, will be supplied from Asia. 

Many believe there is increased nervousness in China about lower future rates of growth and a possible social backlash. Some even suggest China’s aggressive stance on disputed territories is really a smokescreen for economic difficulties at home. The jailing of Bo Xilai, who was once considered a likely candidate for promotion to the elite Politburo Standing Committee, made a lot of Chinese nervous because like Bo, they have made large sums out of corruption.

Similarly in London we have recently seen vast amounts of Russian money plunged into property in the city as a result of the turmoil in Ukraine. In previous generations that sort of money used gold as a safe haven. Now it's inner-city property. The official statistics in Australia show very modest increases in overseas investment in Australian property and that won’t change because these giant offshore-funded and pre-sold developments usually miss the statistician’s radar.

Meanwhile private investors and self-managed superannuation funds are also big investors in the apartment market so the rate of apartment development is not going to slow in our major centres.

Many Chinese investors may be happy to leave their Australian apartments empty, as they do in China.