Property lessons from abroad

Daniel Gradwell

Associate Director - Property, ANZ

The downturn in Australian property prices has been an unusual state of affairs for the many accustomed to property prices only heading in one direction: up. But the Australian property market is in many respects unique, something particularly evident in comparison with a market like China.

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A key insight from a recent visit to China by ANZ’s Property team was the time frame over which property investments are judged in China. In short, it’s much longer than Australia.

The ability of China-based businesses and individuals to focus on the long-term is perhaps something we could do with more of in Australia. In China it is also coupled with a willingness to take on new opportunities and embrace diversification which helps hedge the risk of the longer term view.

Track records

The enthusiasm of Chinese investors for projects outside their traditional domain is likely encouraged by China’s underlying appreciation of diversification. The majority of clients or businesses visited by the ANZ delegation had large diversification plays, either through a combination of horizontal and vertical integration, or investment into other diverse areas.

"The ability of China-based businesses and individuals to focus on the long-term is perhaps something we could do with more of in Australia.”

This partly reflects China’s incredible economic growth over the past 40 years, where plenty of opportunities existed, and many investors were able to find success across many different industries.

This is quite different to the Australian model where firms are more likely to value specialisation and focus their efforts on being the best operator within their market.

This difference in perspective does present some challenges when it comes to the ability of banks to lend to such diverse businesses. Normally lenders want to see an established track record to give comfort with the investment or development. This can be difficult when the client is moving into a new area.

For example, when lending for a new property development the financer would typically want evidence of several comparable developments from both the sponsor and the builder, as proof that they have the experience required to succeed.

A residential developer moving into their first hotel development is a significant change in Australia but does not seem to be viewed as such a large step in China.

Patience required

The other noticeable difference between Chinese and Australian attitudes is Chinese customers are far more likely to adopt a long-term view.

When speaking to a broad audience from different backgrounds, there were very few questions on the outlook for short-term movements in the Australian market. This was a refreshing change from discussions in Australia, where there tends to be greater concern over the immediate future.

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Pic: ForceOne Property Group’s Arcadia development which includes 12,000 apartments and luxury town home design, education, aged care, sporting facilities and recreational.

This demonstrates fundamentally different points of view around patience and a willingness to ride through cycles.

While conversations with China-based developers and investors were less focused on regulatory changes and monthly price movements, they were full of longer-term strategic thinking around population growth and demographic changes, the evolving structure of Australia’s industry composition, the way Australia’s cities are expanding, and how people are living in them.

Again, this likely reflects how these businesses have formed over many years. Plenty of Chinese clients have sent their children to Australia to study and now these young professionals are managing their own portfolio of property projects in Australia. The multi-generational dynamic appears to be reflected in the patience required for long-term growth.

This is an interesting feature to keep in mind when dealing with China-based entities. Because they are less prone to stress over short-term cycles, they may prove to be ideal clients through slow periods like the Australian property market is currently experiencing.

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Pic: Property development in Lanzhou, China

Policy response

This ability to focus on the long term is also perhaps a side effect of the more stable political environment in China. In the time since China’s current President, Xi Jinping, assumed the role in 2013, Australia has had five different Prime Ministers.

That said, while it has been easy in recent years to poke fun at the state of Australian politics, at least sudden changes in policy are relatively infrequent. Although Labor’s proposed changes to negative gearing and capital gains taxes were ultimately voted down at the recent election, the policies had been clearly communicated for a number of years.

In China, policymakers have also been grappling with rapid housing price growth for some time. Their policy response has included a variety of measures, including restrictions on property purchases. But not all have had the intended effect on the market.

Many of these policies have been on a regional basis, which is necessary given the sheer size of the economy and population. This does not necessarily apply in Australia, where nearly 60 per cent of the population live in just three cities.

ANZ Asia

In a recent visit to China, ANZ Chief Economist Richard Yetsenga noted “sentiment was the most cautious [he has] found it on 30-odd visits”. This makes sense given China is facing a number of concerns, both externally and domestically.

Trade tensions with the US are still elevated, China’s changing demographics continue to pose challenges and elevated debt levels mean that China cannot rely solely on credit growth to support the economy.

Notwithstanding concerns around their economy, the Chinese have an optimistic outlook on Australia. They view it as a high-income country with strong population growth that will support the economy and demand for property over the long term.

ANZ’s Agribusiness team also recently returned from a China delegation, now armed with a better understanding of how to differentiate Australian products in a competitive market, including the significance of a backstory and product origin details.

ANZ’s own presence in Asia has been refocused in recent years to concentrate on the traditional corporate and institutional markets it is long serviced. ANZ’s Group Executive International Farhan Faruqui recently noted: “If you think of who are the biggest multinationals in Asia, we pretty much deal with all of them”.

Daniel Gradwell is an Associate Director, Property at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.