Contributed by FundPlaces Pte Ltd COO & Co-founder Tan Kok Keong
Australia was the only country in The Organisation for Economic Co-operation and Development (OECD) to have avoided the economic recession for the past 25 years even as one financial crisis after another shook the world's economies.
This fantastic feat could be due to the Australians’ laid-back style and good weather. But more rationally, Australia’s economy benefited from successful structural reforms and the incessant global demand for resources.
The luckiest state in the country was Western Australia (WA), the resource capital of Australia, primarily driven by exports of iron-ore, gold, liquefied petroleum gas, other related produce and agriculture.
Its economy grew by an average of 4% per annum from 2008 to 2017, according to the Australian Bureau of Statistics (ABS). The economic boom resulted in a population boom as immigration accelerated. From 2007 to 2011, WA had the second fastest growing number of multi-millionaires (as defined by having assets of over US$30mil) by WealthInsights.
The impact on its real estate market was apparent. Home prices accelerated by an annual average of 5.8% from 2011 to 2014. But after reaching dizzying heights, the party came to an end around 2016-17 when WA’s economy contracted for the first time in almost three decades.
The sun sets in the West
While the relatively better economic prospect and secure foreign investment interest propelled the property prices in Sydney, Melbourne and even Brisbane to new heights, Perth's residential property market has declined since 2014. The divergent path has resulted in a widening gap between the median price of homes in Sydney, Melbourne and Brisbane as compared to Perth.
However, property prices in Sydney and Brisbane have started to cool off in late 2017, whereas the residential property market in Perth is starting to gain traction. In fact, Perth Residential Property Price Index inched up 1% quarter-on-quarter (q-o-q) in the fourth quarter of last year after 13 consecutive quarters of decline (See Figure 1).
Figure 1: Residential Property Price Index, a divergent Perth Residential Property Market
Source: ABS
So, does the sun rise from the West?
We have been advocating that investors relook at WA since the beginning of last year. The following are key reasons why the state could turn out to be a viable investment destination for the next few years.
- Economic recovery progressing
WA’s economy is still underperforming compared to the other states, but it has shown signs of a turnaround. As at March of this year, online job advertising is growing at its fastest rate in two and a half years with a 14.8% surge in ads over the past 12 months. The numbers showed that the corporate profits are improving.
Based on KPMG’s report published in November last year, corporate profits are improving. The auditing firm's energy and natural resources partner Ted Surette said, “The earnings of the major miners reflects price stability and improvements in key commodities as well a significant reduction in impairment charges. The miners' continued focus on cost containment is reflected in the 70% improvement in year-on-year operating cash flows.”
The report also noted that company profits are up for most sectors, with revenue increasing for 31 of the top 50 companies and up by 3.8% overall.
- Clear improvement in business sentiments
In the latest Chamber of Commerce and Industry Survey (published in December last year), short-term (three months) business confidence is at its highest level in four years (see CCI Survey Dec 2017).
The same index of confidence grew by 15 index points over the last quarter, while the job advertisements grew by 15% year-on-year (y-o-y). The Profitability Index for businesses increased by 5.2 index points from last quarter with more than half of the mining industry businesses expect an increase in capital investment over the next quarter.
The February publication by CCIWA showed a much brighter outlook for Western Australia. Every economic activity measured is expected to grow in 2018-2019 (See Chart below). In particular, the expectation is for real estate investments to increase by 2% in 2018-2019 and 5% in 2019-2020. These will have a significant positive impact on housing demand.
Source: Outlook Feb 2018 by CCIWA
- One of the most liveable cities, about to get better
While not sharing the same limelight as Melbourne, Perth has been amongst one of the most liveable cities in the world. It was ranked by the Economic Intelligence Unit as the 7th most liveable city in the world with an overall rating of 95.9 in its Global Liveability Report 2017.
As of today, Perth Station, Busport and transportation infrastructure had been completed and is fully functional. The 15,500 seats Perth Arena was opened in 2012 and is Western Australia’s home of live entertainment, music and sport.
Inaugurated in January, Optus Stadium now boasts one of the most modern sports and concert facility in Australia.
It has already hosted performances by Ed Sheeran and Bruno Mars. The rejuvenation of the Scarborough area is well advanced with the Scarborough Beach Pool opened in January of this year.
- The transformation of Perth CBD is expected to continue
The first four buildings of the Kings Square precinct were completed in 2015 with HBF (Western Australia’s largest health insurer) and Shell being the tenants. It is expected that more are expected to follow suit in the future.
The flagship public space of the project, Yagan Square was newly opened on March of this year with eight sites remaining yet to be developed. According to previous reports, Far East Consortium plans to invest in five out of the eight sites available. Once fully completed, Perth City Link will have 1,650 apartments and 244,000 square metres (sqm) of commercial space, providing 13,500 job opportunities.
The Perth waterfront is being revived through the massive Elizabeth Quay precinct which envisaged the creation of a world-class business and living destination. Meanwhile, DoubleTree by Hilton, Ritz-Carlton Hotel and The Towers apartments by Far East Consortium are all under construction.
All the other sites are sold and under the planning stage now. It is reported that Brookfield will commit AU$1.1bil to develop its site at Elizabeth Quay and construct one of the tallest buildings in Perth.
Another major redevelopment project, Perth City Link is taking shape very nicely, reconnecting the Perth city centre and Northbridge entertainment precinct for the first time in more than a century.
- Extended term improvement in transportation and cultural elements
Not far away from the Perth City Link project, the government will invest AU$428.3mil in developing the New Museum for WA. Once completed, it will be almost four times bigger than the existing museum, featuring nearly 7,000 sqm of galleries, including a 1,000 sqm space to stage the large-scale temporary exhibition. The completion of the New Museum will enrich the cultural experience in Perth.
Besides creating exciting places for people to visit, the government also aims to improve the connectivity and transportation networks around the city.
One of the most exciting infrastructure development would be the Perth Airport – Forrestfield Link project. It provides a rail solution that improves transport connectivity to and from Perth Airport, the eastern suburbs and regional centres.
- People are expected to go West
As progress continues and employment opportunities re-emerge, WA will become a more attractive destination to work, visit and play. Its real estate market is expected to benefit positively from the influx of visitors.
According to the latest releases by ABS, 2.02mil people called Greater Perth home in 2016. Its population grew by an average of 2.5% per annum over the ten years from 2007 to 2016, a higher growth rate than the national average and that of cities such as Sydney, Melbourne, and Brisbane.
ABS forecast Perth’s population to grow by 3.1% per annum from 2017 to 2019. The growth is expected to have a positive impact on housing demand.
Figure 3: Perth has the fastest growing population
Source: ABS
Visitor arrivals are expected to increase with the launch of direct London-Perth flights by Qantas in March. Within the next two years, Qantas is planning to launch direct flights to Tokyo and Shanghai. These will have a significant positive impact on the tourism and investments.
- Potential under-supply of homes
On the real estate sector, weak market conditions over the past few years have resulted in the bankruptcy of several builders and developers as well as a slowdown in approvals. Building approvals declined by 34% from 2014 to 2017 for apartments and 43% over the same period for houses (see Figure 4) suggesting that completion of homes will decline over the next few years while demand seems to be picking up.
Figure 4: Building Approvals of House and Apartments in Perth
Source: ABS
- Visible signs of demand
Projects launched over the past one and a half years showed resilient demand. This is especially so for the higher end apartments, mainly the larger apartments in the right neighbourhoods.
In June 2017, Blackburne sold 62% of its 143-unit Essence at Claremont in one weekend. As of today, they have sold 91% with only 13 units remaining. In late last year, Edge Visionary Living launched Botanical in the Western Suburbs. 75% of the units were sold as Mar 2018.
The most recent launch of another high-end apartment in Floreat, Eden, also received strong sales. The developer sold 45 out of 98 units launched for sale as of March.
Cirque Apartment, a high-end project by Stirling Capital, saw the sale of 97% of 132-unit of Phase 1. Generally, the common observation is that downsizers form a large part of the demand for these projects. Also, with signs of improvement in its economy and employment prospects, industry participants are expecting the housing market to tighten over the next two to three years.
Time to go west
We believe that the market is ripe for investors to reconsider, either as a developer or to purchase uncompleted homes. While the market is seen to be recovering, not every project or location is a viable investment. Purchasers should look at areas where there are infrastructure improvements or rejuvenation projects, understand the local demand and be more diligent to conduct the ground checks of the developer.
About the Contributor
Tan Kok Keong, COO & Co-founder of FundPlaces Pte Ltd, a platform aiming to democratise real estate. Email me at kk.tan@fundplaces.com.
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