Brisbane Apartments are Ground Zero
We’ve been harping on about it for some time (and generating quite a stir among some of you!) but a comment here at the blog today from an individual in the industry is worth highlighting.
“To add to the debate. Particular for Brisbane. I’m in management rights and know a number of others that are too. My developer is currently renting (trying to rent) all vacant apartments and selling (trying to sell) with a tenant in place. Associate’s developer is offering free storage spaces/cages and free extra car parks to get his last 4 over the line. Rents are dropping, low open attendances and applications falling over (current rentals making offers to keep tenants from leaving).
“From where I sit all the signs were increasing in severity from late last year. I backed my gut feel of ‘get out’ and sold out of 2/3 of my business. [Like your comment above] I might be early, but someone will be left holding the ‘hot potato’, same as in 2008. It just won’t be me.”
Hearing it from the horses mouth is often useful.
With implications for the following sectors: Retailers, Banks, Hardware, Mortgage Insurers, Shopping Centre Owners, Property Developers, Real Estate Agents and Building Material Suppliers.
Some examples of companies whose exposure should be investigated include: Abacus Property, Adairs, Adelaide Brighton, Aventus Retail Property Fund, AV Jennings, Boral, Breville Group, BWP Trust, Carrindale Property Trust, Cedar Woods Properties, CharterHall Retail REIT, CSR, Devine, Finbar, Folkstone, Godfreys, GPT Group, GWA Group, Harvey Norman, James Hardie, JB Hi-Fi, Joyce Corporation, Kresta Holdings, Lendlease, McGrath, Mirvac, Nick Scali, Oldfields Holdings, Reece, Silver Chef, Shopping Centres Australasia Property Group, Stockland, Tamawood, Villaworld, Wesfarmers and Watpac.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Anthony
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This is not a forecast its just my anecdotal two cents worth as someone who is continually hearing that the Brisbane property market is crashing, crashing and its being used as why its the start of something bigger. Personally I can’t see it. Call in six months… when I’m in debtors prison.
Anthony
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Roger, yes I am involved in the great Australian dream ‘property investment’ I am a young family man with 2 investment properties in Brisbane. I also live in a reasonable property that offers a great lifestyle for my family in a lovely Brisbane suburb. By the way if someone can’t afford a reasonable house in Brisbane, in a nice blue chip suburb with interest rates this low then they probably have problems which aren’t going to be solved by falling property prices. ”Smart money” probably not Kevin Young, I did qualify that ‘crazy investors’ personally I hope that there isn’t that many property investors who follow this sort of advice, and for their sake they are not too invested in Brisbane apartments. Reminds me of dodgy schemes like Dick Smiths and his buy Australian scheme my parents fell for!! These sorts of investors are likely going to lose. The smart money personally I see are investors who are seeking out opportunities in terms of falling apartment prices where yields are attractive, who understand developers are simply unable to deliver apartments to market at the price at which they are being sold… Developers who are positioning themselves or currently positioning themselves on delivering new stock to a market which will have no new stock from 2019/20, personally I think the lag effect from record completions will be a little longer. I still see that properties are renting in Brisbane albeit at close to the same price they were 5 years ago and less in inner city areas understandably. I hope unit prices keep falling in my opinion (I’m not really observing much blood yet) Brisbane apartments are still overvalued in some pockets despite the supply response! This also needs to be balanced in the context of an improving jobs outlook (cue Brisbane house prices!) and reasonable serviceability. I would say in general the Brisbane property market is pretty close to fair value if not a little undervalued in pockets. On units anecdotally I hear its particularly Sydney and Melbourne investors who are getting credit crunched and suffering from record completions. To take a more bearish view of this would involve betting against the local and national economy. I do get annoyed at investment bankers in particular continually rubbishing Australian property without seeming to have an understanding of the market, my Buffet quote was a cautionary tale directed at these people!
Anthony
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That’s great except that in the Brisbane market there is still a bit of spare capacity left for people to make repayments, It is still relatively affordable, and it has a relatively positive outlook for jobs. Both these factors tend to suggest the market itself is fair value, with a surge in apartment completions, this should continue for a little while to put downwards pressure on prices and rents which to my mind were overpriced in any case. Blind Freddy could tell you that, the fact the prices aren’t crashing as badly as everyone suggest should also tell you something. Smart money is currently seeking opportunities in the Brisbane market. The GFC property scare mongering is just that, the evidence is that people have simply switched there home loans to P&I and not interest only, the regulator has for most people simply reduced the negative gearing benefits. In fact analysis showed that the people holding interest only loans were the ones most able to make their loan repayments (with the notable anecdotal exception of a few crazy investors). They held interest only loans because they derive the most value from negative gearing, in other words the Government has also benefited by increasing tax takes by getting people to switch to P&I. How is this anything but scare mongering, to my mind the lack of analysis provided thus fat by Montogomery (whose analysis I usually enjoy) continually proves the adage, ‘Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.’
Roger Montgomery
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G’day Anthony,
Appreciate the feedback. I’m guessing you have some links to the property industry or are a renovator/property investor yourself. The AFR’s Larry Schlesinger today reports the founder of a property investment club with 20,000 members, Kevin Young, says his members cannot afford their mortgage repayments after the banks shifted them from interest-only loans to P&I earlier than expected. See page 32 of today’s AFR. That aside, I am always fascinated by references to the “smart money”. You say the “smart money” is currently seeking opportunities in the Brisbane market. Could you be more specific about who is actually seeking opportunities in the Brisbane market?
jimbo james
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More evidence to back your claim Roger.
http://www.afr.com/real-estate/residential/sizzling-hot-deals-brisbane-apartments-offered-at-39pc-discount-in-fire-sale-20170328-gv8q9k
Tobias
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I just noticed the similarity we have with the US style adjustable rate mortgage
“The interest-only adjustable-rate mortgage (ARM), allowed the homeowner to pay only the interest (not principal) of the mortgage during an initial “teaser” period.”
While these tended to also adjust the rate higher at the end of the intro period, we will essentially have the same effect here when people reach the end of the 5 year interest only period. The payment required after switching to principal and interest goes up by circa 25%. So with incomes stagnant and lending criteria being tightened it is plausible that people wont be able to refinance and will be forced to switch to principal and interest which could very well put them under severe financial stress.
This is also true of investment property as rents are barely rising after five years of interest only people may be forced to start paying back the principal, even though capital values have gone up the serviceability of the loan may have gone backwards as rents haven’t gone up and lending criteria has been tightened.
Laurent
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Nice example. I remember in 2007 reading many pieces from the IMF or hedge fund managers warning of the coming real estate collapse. In 2007 I remember Jim Rogers coming out publicly saying he was short investment banks. For a couple of years (2006-2008 and before – Robert Schiller Nobel Prize winner warned in 2003) there were many warnings and pieces in the media yet when it happened in 2008 it was a Black Swan event and no one saw it coming.
Reminds me so much of today. Maybe it’s now 2006 or maybe it’s 2007 equivalent, a lot depends on how fast the US Dollar, global rates and China change imho, but we must be at least reasonably close. Better to be early – absolutely!