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Monique: Asia-based buyers will not dictate Melbourne property market

February 25, 2013

We are, by many accounts, living in the Asian Century; a time when the nations of the world’s largest continent, led by China, will dominate the global economic, social and cultural landscape.  In light of the enormous strides since just the turn of the Millennium by the likes of China, South Korea and India, and the rise of brands like Samsung and Lenovo, it’s not a forecast I wish to contest (although forgive me if I don’t extrapolate too much from the success of Gangnam Style!)

From a property investor’s perspective, the more pertinent and contestable issue is whether and how Asian-based or –migrant buyers will impact the Australian residential property market and how one can profit from this phenomenon.

There are of course hundreds of developers out there currently marketing Australian properties to overseas buyers.  We know this because non-resident non-citizens (overseas buyers) and temporary Australian residents have to seek approval from the Foreign Investment Review Board to invest in Australian property. In 2011/12 10,118 real estate approvals were granted worth $59.1bn in total. This was up 42% on the previous financial year.

But to understand what really is going on, one needs to dig a little deeper. First off, only around a third, or $20bn, of real estate investment in 2011/12 relates to residential property. And around a fifth of that figure – $4.1bn – is made up of temporary residents in Australia buying property. These people are required to sell up when they leave (unless they subsequently obtain Australian citizenship or permanent residency).

The balance of the residential real estate investment – around $15.5bn in 2011/12 – essentially relates to off-the plan developments, either by individuals or by development companies marketing to overseas buyers.

$15.5bn is a big sum of money, and whilst annual figures jump around a fair bit, the trend is up, growing at around 7.5% a year since 2008/09.  This number is especially big if you are a developer struggling to market your property to locals, a not uncommon issue today.

To my mind, there is a significant amount of two-tier marketing going on. This is the unsavoury practice of promoting a product (in this case property) to foreigners and/or out-of-towners in the wilful knowledge that they don’t know what they are getting because they are unfamiliar with local underlying prices, trends or conditions. It’s by no means a new concept in real estate.  There are countless Victorians and New South Welshmen and women who have been sold lemons in the Gold Coast property market over the years. Due to adverse publicity, it’s become increasingly difficult to fool Australian interstaters, so developer attention has turned to those living overseas.

Putting aside this ethically questionable behaviour, I’ll return to the central question: can individual investors profit from this scenario? Well, one strategy might be to ‘follow the money’; to also buy off-the-plan property and see its value grow in line with Asian demand.

Unfortunately, this strategy doesn’t work. Why? Whilst ostensible demand maybe growing, it’s being more than matched by the supply of off-the-plan properties. Quite simply, there is no scarcity value for high rise towers or fringe suburb McMansions.

Incidentally, notwithstanding the number of zeros in $15.1bn, it’s a drop in the ocean in terms of the annual turnover of the Australian property market. In the year to November 2012, the ABS recorded $500bn in mortgage financing for property purchases (excludes refinancing). So at best, the overseas market represents a low single digit percentage of the overall residential market.

Will that change in the future? I doubt it.  Rightly or wrongly, there is almost political unanimity for keeping a tight rein around what overseas citizens and temporary residents can purchase.  Indeed, the greater likelihood is a tightening of the rules, which could have detrimental impact on the off-the-plan property market.

We may be in the Asian Century, but property remains predominantly a domestic affair.