Prepare for an avalanche of apartment construction
Phew, that was a rush. In the last few weeks we have just witnessed an unprecedented scramble by overseas investors to invest in residential apartment developments, which will maintain building construction rates for at least a year.
Billions of dollars were involved and Melbourne and Sydney were the two key recipient cities but the investment also spread to other state capitals.
But now the rush is over and overseas buying of new Australian apartments is going to be much lower for some time.
Until two days ago — June 30, 2015 — those seeking Australian visas as part of the Significant Investor Visa program were allowed to invest well over half the required $5 million in residential real estate developments
From July 1, the amount of residential real estate development that can be counted towards an individual’s visa application has been reduced to 10 per cent of around $3m, or about $300,000. In other words, a purely token amount, hence the scramble to invest funds before July 1.
The majority of the funds invested were channelled through special real estate investment funds that were able to buy large apartment chunks for those seeking visas.
Even before the latest scramble, these massive funds have underwritten big slabs of the apartment boom in Melbourne and Sydney.
It will be some time before we know the amounts involved in the latest rush and where they were directed but it would seem that Melbourne was the major beneficiary because in the CBD more than 20,000 apartments had been approved and less than half had started construction, so the city was able to offer stock to satisfy demand.
However, Sydney has Harry Triguboff’s Meriton, which has the strength to provide finance.
The vast bulk of the new developments are one or two bedroom apartments, so Australian accommodation and living styles are about to be transformed.
It is likely that this avalanche of apartment construction will cause a short-term surplus, particularly in Melbourne, so some of the investors will see paper losses. But many will count that paper loss as the price of a visa. A large number of those involved are taking money out of China because they fear corruption inquiries.
Another big chunk has origins in Malaysia where the rise in Islamic fundamentalism is causing concern among non-Muslims and even moderate Muslims.
Longer term, Infrastructure Australia says the population surges coming to both Sydney and Melbourne will take up the oversupply and shortages will resume, along with increased pressure on dwelling prices.
Australian banks have been nervous about funding projects where the majority of apartment sales have been made to overseas investors who have paid a 10 per cent deposit. The banks are frightened that those paying a 10 per cent deposit may walk away if they see prices fall or their circumstances at home change.
But the overseas investors have had a very good record of completing transactions, although the recent falls in the Chinese stock market is a cause for concern. There is little doubt that some overseas apartment buyers did not get their investments signed up by June 30 because of the shortage of local bank finance. However, in many cases, Chinese banks were able to fill the void left by the locals.
Meanwhile, for Tony Abbott the construction boom that will follow this rush to invest will keep unemployment low this year and well into next year. A November 2016 election might cut it fine.
Assuming the government rectifies its blatant breach of promise to the small business community, the pressure to call a poll early in 2016 will build, particularly as at the end of 2016 there will be a wave of major shut downs across the auto industry.
Source: The Australian, Robert Gottliebsen, July 2nd 2015
