Apartment outlook brightens as Chinese buyers come rushing back

The return of Chinese buyers to the apartment market has completely altered the outlook for our two largest cities.

New apartments under construction in Port Melbourne. (Picture: Ian Currie)

In a stunning reversal, the overseas Chinese have dramatically re-entered the Sydney and, to a lesser extent, Melbourne off-the-plan apartment markets. The long-term outlook for the apartment market in our two largest cities has therefore completely changed. And, as I describe below, there are also trend changes on the Gold Coast and in Brisbane.

A Chinese banking expert told me in Melbourne yesterday that the word from the Chinese banks is that the Chinese government’s clamp down on smaller investors taking money out of the country is likely to be eased later in 2017 — hence the scramble by overseas Chinese to re-enter the market now to buy off-the-plan, with settlement some years away.

Although for Melbourne the re-emergence of overseas Chinese as buyers in new developments is a great sign, the city still has an enormous problem in relation to apartments that are almost complete but which overseas Chinese buyers unable to access the money they need to settle the purchase.

There is a staggering 15,000 apartments to be settled between now and June 30, with the bulk of contracts with overseas Chinese who cant extract from China much more than 30 per cent of the money needed. We are looking at a funding requirement of something like $7-$10 billion, although a chunk of that will come from locals and local Chinese who do have the funds.

The Australian banks have loaned heavily to the developers of these apartments but turned their back on the developers’ Chinese customers, which has created the potential crisis because they dominated the market when the contracts were signed. Admittedly, the Reserve Bank and APRA played a role in the banks’ decision to snub the Chinese but the bank-backed developers would not have gone ahead had they known their bankers would turn their backs on the developers’ customers.

Accordingly, Australia is being forced into a massive, globally-oriented rescue effort where many hundreds of millions of dollars are being channelled to non-bank institutions to enable the funding of 70 per cent of the purchase price of Melbourne apartments. The Chinese can usually extract the remaining 30 per cent out of China, including the first 10 per cent they paid as a deposit.

The interest rate on the loans is usually 8 per cent, which is high, but the money is available. The lenders to the smaller apartments that are being completed are gaining great comfort from the fact that there has been an enormous swing in the global student population towards Australia in the wake of President Trump and the UK visa restrictions. Overall student numbers are up 20 per cent in 2017 and Melbourne is a major participant (Education and tourism to ride high on Trump’s orders, March 7). That means that the underlining rental/purchase demand for smaller apartments will be strong.

It is stunning that one of Australia’s single biggest rescue efforts bypasses our banking system. That is not good long-term news for banks because their rivals that operate outside APRA rules are now going to become much stronger.

Back to Sydney and no one is more surprised by the turnaround in Chinese demand than Harry Triguboff. His Meriton group is the largest owner and developer of apartments in Sydney.

Six months ago Harry was watching the Chinese struggle to find the money to settle the apartments as the local banks said “no”.

To stabilise the market, Triguboff moved in as a financier. He was expecting that the withdrawal of the Chinese would trigger a 10 per cent fall in Sydney apartment prices, which might have even blown out to a 20 per cent fall but, partly thanks to the government created superannuation mess, negatively geared local Australian investors joined the market as buyers in much bigger numbers. But now, with strong demand for both houses and apartments in Sydney, Harry has put his off-the-plan development prices up 3.5 per cent and the market has taken no notice.

Overseas Chinese are now snapping up some 50 per cent of Meriton apartments sold off the plan. Australian-born Chinese are taking around 25 per cent and Australian investors/first homebuyers are taking about 25 per cent.

Suddenly, with the Chinese back as buyers, the future development of the off-the-plan market is less dependent on Australians. But they are vital in the completed apartment market where Chinese can’t settle.

As explained above, the unofficial word from China is the clamp on small investor money leaving the country to buy apartments is unlikely to go on for much more than one year. Clearly Chinese investors believe that this message is correct so they are feeling much more confident to commit to a settlement date a few years down the track.

I suspect that one of the factors that is boosting demand in Australia is the very same force that is boosting our overseas student numbers and our tourism — a lot of people no longer want to study, tour or invest in the US. Given the Melbourne apartment crisis, Trump’s “Make America Great Again” strategy could not have come at a better time. But Triguboff is nervous about the latest rise in Sydney real estate might go too far and create another boom.

Any big jump in apartment prices will almost certainly flow into much higher prices for land and might cause banks to act very aggressively on the market. So, while Triguboff is a big winner from the latest developments, he is also apprehensive.

Triguboff has noticed a limited sample of skilled younger people who are unhappy about the burden Sydney real estate puts on their lifestyle and some are moving to Brisbane or the Gold Coast. This may be contributing to the very strong demand for Gold Coast apartments — a market that was very weak. Brisbane is also responding.

One of Australia’s largest cottage builders told me this week that in Melbourne he is seeing strong demand from Indian and Sri Lankan migrants who are leaving Sydney for Melbourne because the real estate values are so much lower, particularly in outer areas.

It is becoming increasingly difficult for young professionals who can’t see substantial rewards in the future to live in a city like Sydney. Meanwhile, Triguboff says that, at this stage, a Sydney exodus represents only isolated incidences and there is no trend. He is buoyed by the fact that, finally, New South Wales has a planning minister who understands the need to increase supply of apartments and houses. That is only way you keep the lid on prices.