We recently visited three Malaysian developers (ECOWLD, SPSETIA, UEMS) which have exposure in Australia, and two Australian companies, namely Ansell and Sydney Airport. According to the Economist Intelligence Unit Ltd (EIU) 2016 outlook for 2017-21, the Australian government aims to return its budget deficit to a surplus by 2020/21 although EIU believes that while deficits will narrow, it will unlikely become a budget surplus. On 1 Nov 2016, The Reserve Bank of Australia (RBA) has decided to keep policy rates (cash rate) unchanged at 1.5% although there are expectations of rate cuts in the future given the slower global economic growth. EIU expects real GDP to grow at an average of 2.7% over 2017-21, which will be buoyed by mining production and loose monetary policy. There are concerns that weak global growth may taper export earnings for Australia.

In terms of the Australian property market, 2Q16 house prices have risen by 2% QoQ, following a decline of 0.2% in the previous quarter according to the Australian Bureau of Statistics (ABS). This was led by Sydney’s housing market, followed by Melbourne and Brisbane. Sydney and Melbourne have achieved 9.6% and 8.5% YoY growth in 3Q16, which are deemed below the peak growth cycle while there are expectations that the housing market will continue to strengthen. ABS cites that the total number of private sector dwelling units completed rose to 192,721 in 2015 from 149,096 in 2013 and will likely exceed 200,000 by end 2016. There are expectations of higher rate of completions in 2017-18 in Melbourne. Thus, the rental market has felt the effect as Sydney’s weekly rents fell by 1.2% QoQ while Melbourne rose marginally by 0.1% QoQ. The effect is largely driven by foreign investors buying new properties. The general view is that there is an oversupply of high-rise residential in Melbourne CBD. However, some believe if there are corrections in prices for the high-rise apartments in Melbourne’s CBD, it will largely be contained to that segment as there is a shortage of family homes (particularly in Sydney).

As a result, the big four banks in Australia - Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (Westpac), National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ) – have implemented measures to limit loans to foreign buyers. Foreign buyers are only allowed to buy new properties. Note that developers in Australia can only collect a deposit for new properties sold (but not yet completed) and the remaining is settled upon completion; this is where cash payments and/or loans are required for the remaining property payment. Deposits for property ranges between 5%-20% (Malaysian developers typically require deposits of 10%-20% and if one pays 20% deposit, the Lender’s Mortgage Insurance (LMI) can be avoided). Buyers tend to take up the loan about 6 months before the property is completed. While there are concerns that buyers may pull out from acquisitions, especially as the big four banks have tightened up on lending, it appears that foreigners are still buying properties, particularly those from China and South East Asia. It is noteworthy that the major banks are still lending to foreigners but at a lower margin of finance (50%-60%) which would explain the liquidity tightening effect felt by these buyers. Note that foreigners have to pay an additional 4% stamp duty on top of the average stamp duty (5%) that locals pay.

Overall, the Malaysian developers we visited in Australia have fared well in terms of take-up rates as most of these projects were launched over the last few years. They are also aggressively looking for landbanks particularly in Sydney and Melbourne as they believe that favourable population dynamics, including tourisms (7.85m international visitors for 2016 with hotel occupancy rates which are close to 90%), migrations and foreign investors. In fact, cities like Melbourne are strong education hubs with Melbourne/Victoria seeing 112,944 international students making up 32.8% of the student population in the area.

Source: Kenanga Research - 2 Dec 2016