How the RBA and WeWork drove real estate in 2019
The fall in mortgage rates kicked off the nascent housing recovery. And the fall in the bond rate delivered a bumper year for many in commercial real estate, particularly for those holding office towers, logistics facilities and pubs.
In fact, the past 12 months have provided another masterclass in just how important interest rates, and the availability of money, are in the life of real estate.
But real estate is not all about interest rates. It also responds to structural changes and in 2019 that was the force of disruption. More of that later.
Sydney, Melbourne lead the way
The most remarkable turnaround for the year came in Sydney and Melbourne house prices, which started the year with dire warnings of further collapse and ended with the strongest month of growth in decades.
Three interest rate cuts by the RBA helped. So did aggressive discounting, which has delivered headline rates of under 3 per cent on some variable home loan products. And so did a relaxation of lending criteria by the Australian Prudential Regulation Authority.
The re-election of the Morrison government, and the retention of the existing negative gearing and capital gains tax regimes – at least while the Coalition remains in power – put an end to a market downer than many observers underestimated.
And don’t forget that the market was beginning to stabilise ahead of the federal election. The monthly price falls were becoming smaller and real estate agency Ray White had noticed increased attendance at auctions.
The initial rebound was based on a small number of sales, and low lending volumes, but those metrics are starting to increase. Housing approvals and starts are yet to improve, which points to future shortages.
Commercial property, direct and indirect, also benefited as the price of money dropped away. The 10-year bond rate, which started the year at around 2.3 per cent, fell to just 0.87 per cent in late August, cutting the price of debt and boosting the value of equity.
Australia a ‘go-to destination’
UBS head of real estate Australasia Tim Church says the fall in the bond rate was the key driver of real estate investment trust prices during the year, but he also points to the demand from yield-starved investors, the re-election of the Morrison government and the global challenges – trade, Brexit and Hong Kong – that made Australia a “go-to destination for investment capital, particularly into securely leased real estate”.
The Charter Hall Group harnessed that global demand. Its funds achieved record inflows in the 2019 financial year to deliver a 25 per cent increase in operating earnings per security and a total return for the year to date of 55 per cent. One of those funds, the Charter Hall Long WALE REIT, raised over $1 billion in new equity during the year and still managed a 37 per cent increase in total return.
In all, more than $7.7 billion has been raised in new REIT equity this year, the highest level since the rescue raisings of 2010.
The excitement spilled into the demand for office towers and logistics facilities, even as rental growth began to wane. Savills Australia head of research Phil Montgomerie says: “The market underestimated the yield compression that would happen, and continues to happen, as the cost of debt and equity falls.”
Big half year for Dexus
This month, the county’s largest office landlord, Dexus, booked a 4 per cent, $656 million valuation gain for the half year and chief executive Darren Steinberg foreshadowed more to come, given the interest from local and offshore investors.
The enthusiasm was not shared by those who hold shopping centres dependent on discretionary retail. Caught by the growth in online retailingand with rents that reflect a bygone boom, they have struggled to maintain income and values. In October, the Lowy family ended its 60-year involvement in Australian malls with the sale of its $815 million stake in Scentre Group.
A reassessment is under way after an increase in retail property sales in the second half. “Retail in not necessarily dead,” says Montgomerie. “There is plenty of evidence of people trying to buy good retail underpinned by demographic growth, densification and non-discretionary spending.’
Nevertheless, the relative performance of Scentre Group, with a total return of 4 per cent year to date, and the e-commerce logistics focused Goodman Group, 31 per cent, underlines the second key trend of 2019: technological disruption.
Dror Poleg, the US writer on the intersection of real estate and technology, and author of the just released Rethinking Real Estate: A Roadmap to Technology’s Impact on the World’s Largest Asset Class says one real estate story, the rise and fall of co-working giant WeWork, a cautionary tale that ensnared a number of Australia’s leading landlords, captures all that is good and bad in the global economy of 2019.
“More capital than ever is available to fund creative ideas”.
— US author Dror Poleg
“More capital than ever is available to fund creative ideas, but traditional jobs are becoming less stable,” he says. “Many of the old ways of doing business are obsolete, but the new ways cannot yet be delivered profitably.”
Taronga Ventures managing partner Jonathan Hannam says the year has seen a “tremendous surge in the level of global interest in real estate technology” and that many leading sovereign wealth funds, real estate developers, corporates and insurers have started to invest in “realtech”.
“Our Real Tech Ventures Fund is on track to complete 12 to 14 transactions by year end and many of these are companies out of the US, Asia or Israel, that are keen to use Australia as a launch pad into the region,” he says.
The scorecard for 2019, should also be about the progress, or lack of progress, on the big challenges for the sector, like affordability, and sustainability.
One initiative stands out. Quietly the COAG Energy Council has supported a formal pathway to more energy-efficient buildings in what Australian Sustainable Built Environment Council executive director Suzanne Toumbourou applauds as a working together of government, industry and the community.
Thanks for your emails and encouragement over the year. All the best for the new decade.
Interests associated with Robert Harley hold stakes in Scentre Group and Goodman Group.