China’s rapid development over recent decades has resulted in a burgeoning middle-upper class ready to see the world and Australia is one of the top destinations. The volume of short term visitors from China has skyrocketed post GFC, roughly tripling over the 2009-2016 period to 1.18 million per annum. As a comparison, short term visitors from the rest of the world lifted only 30% over the same timeframe.
While office construction remains weak for the whole of Australia, this national figure does not paint the whole picture. By breaking down office construction by states, a more compelling story emerges.
The story is one of a two-speed office market. Reflective of their economic performance, Sydney and Melbourne are the standout performers with Perth and Brisbane feeling the pain as the mining boom wanes.
As the apartment market weakens, there is increasing concern that apartments will increasingly fail to settle, putting projects, and the market, at risk.
Can it happen? Has it happened before?
The short answers are yes and yes.
Settlement risk rises when values are falling. The purchaser is required to provide a further equity contribution if the property is valued lower than the purchase price and/or the loan-to-value ratio is lowered. If the purchaser does not have the money, then they will be unable to settle. Moreover, if settlements fail on a large enough scale, the developer also will not be to meet its own finance commitments, resulting in the financier placing the apartments back onto the market at “fire sale” prices to recover debt—further dampening values and increasing settlement risk further.
This time last year the Chinese economy was in turmoil and under siege from all angles.
The stock market was plummeting, real activity indicators across the board were slowing and capital outflows were mounting. Negative stories out of China dominated global news flow and the authorities, once revered as sages and saviours of the world economy, found themselves under intense scrutiny over missteps ranging from the heavy-handed intervention in the stock market to the surprise devaluation of the yuan.
The latest ABS building activity release for March quarter 2016 saw the total number of new dwellings commenced increase 5.7% (in seasonally adjusted terms) following a fall in December quarter 2015 of 1.3%. Private detached house commencements remained flat (+0.3% s.a.), with private attached dwellings posting another strong growth result (+10.6% s.a.) off a relatively modest December quarter. The release included significant upwards revisions to the December quarter 2015, with an additional 2,277 dwelling starts or 4.1% added to the result.