At TierONE Capital we are constantly scanning the horizon to understand the changing credit risk environment. In the past few weeks, Australia has finally shifted to thinking about life after lockdown, albeit with various States re-emerging with different ongoing restrictions. The relevant impacts of this for us include:
- increased economic activity, especially in retail, hospitality, travel and tourism;
- greater certainty for the construction industry and hence project timelines and loan terms; and
- re-commencement of inbound travel.
What we have observed in the past 18 months is somewhat of a two-speed trajectory in the residential property market. Residential housing has enjoyed significant growth, and this has continued to the point that regulatory intervention in residential property lending market is being considered to remove some of the “heat”. Underlying market conditions, especially lack of supply, continue to underpin price growth. In the apartment market we have also seen a combination of the withdrawal of the individual “negatively geared” apartment investor, a contraction of offshore buyers and a deceleration of demand from the traditional steady inflow of ongoing immigration.
As a result of the absence of these traditional drivers of apartment housing stock, we have seen realign behind the build-to-rent residential model which has somewhat kickstarted in local markets. Whilst there are still challenges (tax treatment to name but one), Australia seems to be catching on to a model already widely adopted in other markets worldwide.
The apartment trend is not universal, however it is always risky to make broad brush statements about the somewhat loosely used “property market” term. Lifestyle choices have, for example, generated significant demand for major apartment developers in the south-eastern Queensland market. Developers who had not land-banked sites in this market prior to the recent changes in demand for regional property are now looking at the next property cycle before securing future development sites. And so, the “property cycle” continues!
Overall, the advent of the return of students, skilled and unskilled workers will likely drive more demand into the apartment market. As a result, we will re-consider our credit approach, which to date has largely been to ensure that there is liquidity in the primary residential market to absorb completed stock in the more niche owner-occupied house, townhouse and boutique apartment development space.
Commercial assets (excluding the office sector) continue to appeal, and we consider these on a case-by-case basis assessing certainty around takeout of the completed assets, be they childcare centres, hotels or storage operators.
A further trend has been the rise in concern about security of supply for key products for such items as pharmaceuticals and medicines. Hence, there has been a somewhat unexpected resurgence in local manufacturing, and we will continue to monitor the impact of this on commercial property assets.
Finally, there has been much discussion about the displacement of the traditional work environment and the flight to the coast and the country. Ultimately, when assessing credit, we need to consider the ability of people to earn a living in these locations. Some of this is based on employment opportunities in regional centres of activity, working remotely or the abovementioned opportunities for local manufacturing.
There is still much water to flow under the bridge but, irrespective of where we are at right now, understanding these trends is core to TierONE Capital continually adapting to an ever-changing market.
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