As Australia battles the coronavirus, property investors should go west

The combination of a China-fuelled recovery, relatively strong fundamentals and attractive pricing bodes well for Perth’s office sector
The city’s residential market has also been more resilient than Sydney’s and Melbourne’s

Nicholas Spiro

Published: 4:30pm, 12 Oct, 2020

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The late Herbert Stein, an economic adviser to former US presidents Richard Nixon and Gerald Ford, famously remarked that “if something cannot go on forever, it will stop”. For nearly three decades, Australia put Stein’s law to the test, enjoying the longest-running growth streak in the developed world.

Yet, on September 2, the “lucky country” finally ran out of luck as the Australian Bureau of Statistics announced that output shrank 7 per cent year on year in the second quarter, plunging the country into recession for the first time since 1991. The coronavirus-induced shock has been exacerbated by a resurgence of infections in Melbourne – which led to renewed lockdowns in the state of Victoria – and draconian internal border closures and international travel restrictions.

However, the recession is not as severe as in Europe and the United States. China’s brisk industrial demand-led recovery is helping shore up Australia’s economy, proving a boon for the resource-rich state of Western Australia, which accounts for 43 per cent of the nation’s exports. With a 33 per cent share of global iron ore output, the state is benefiting hugely from the surge in Chinese demand for the key steelmaking ingredient.

Despite the sharp deterioration in diplomatic relations between Canberra and Beijing, the price of iron ore has shot up by 50 per cent since early May, partly due to supply disruptions in Brazil and South Africa, which Australia’s producers have deftly exploited.

The Australian dollar, which historically has proved highly sensitive to commodity prices and economic developments in China, has risen 26 per cent against its US peer since late March, underpinned by Australia’s trade surplus.

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In the real estate sector, Perth, Western Australia’s capital, has long been a proxy for Chinese growth, in particular the performance of China’s manufacturing and infrastructure sectors. Although a much smaller and significantly less liquid market than Sydney and Melbourne – Australia’s two biggest cities account for around 80 per cent of the country’s investible stock of office assets – Perth is better placed to weather the virus-induced shock.

For starters, Western Australia has been more successful at containing the spread of Covid-19. In Perth, there has been no community transmission of the disease for the last six months. This has allowed the state government to lift restrictions and reopen the economy much faster than other states, particularly Victoria, which is only beginning to emerge from a punitive lockdown.

Western Australia’s economy is bouncing back, enjoying the strongest monthly rise in employment on record in August, helping the state recover more than 70 per cent of the jobs lost between February and May. The government forecasts growth of 1.2 per cent for the next year, fuelled by growth in the mining sector.

A water tanker sprays water as trucks are loaded with iron ore at the Fortescue Metals Group Christmas Creek iron ore mine located south of Port Hedland in the Pilbara region of Western Australia, in November 17, 2015. The Western Australia government forecasts growth of 1.2 per cent in 2021, fuelled by growth in the mining sector. Photo: Reuters

Second, Perth’s residential market is more resilient. While median house prices dropped 1 per cent quarter-on-quarter last quarter, they fell 3.5 per cent in Melbourne.

Moreover, unlike in Australia’s two largest cities, where home values have soared since 2013, Perth has already suffered several years of declines, making the market relatively affordable and limiting the scope for further falls.

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Third, Perth’s office market, while comparatively illiquid and not immune to the virus-driven slowdown in leasing activity, is better positioned to weather the downturn. With the mining and professional services sectors accounting for 45 per cent of the occupied stock of the city’s central business district, according to data from CBRE, demand is more insulated than in other office markets in Australia.

Perth’s resilience also stems from the dearth of new supply. The city is still dealing with the legacy of an office-building spree during the mining boom in the first half of the previous decade. The subsequent bust caused the vacancy rate to surge to more than 20 per cent, only slightly above today’s level. The hangover from the building frenzy continues to keep supply in check, in stark contrast to Melbourne, which faces the sharpest increase in new supply since 1991.

A woman exercises at Albert Park in Melbourne, Victoria, on October 8. The city is seeing the sharpest increase in new office supply since 1991. Photo: EPA-EFE

Investors in Perth also benefit from significantly higher rental yields for prime office assets. Although yields are falling due to the weight of capital targeting a limited number of available properties, they remain above 6 per cent, compared with 4.5-5 per cent in Sydney and Melbourne.

The combination of a China-fuelled recovery, relatively strong fundamentals and attractive pricing bodes well for Perth’s office sector.

Still, a lot hinges on the strength and durability of China’s industrial rebound, which, in turn, is a function of the state of the global economy. Being bullish on Perth’s property market means being bullish on the outlook for commodities. “If that’s not firing, we’re not,” notes Nicholas Volk, senior research analyst at CBRE in Perth.

Yet, at a time when Australia’s own economy is suffering its first recession in almost 30 years, Perth’s resilience is all the more significant.

Nicholas Spiro is a partner at Lauressa Advisory

This article appeared in the South China Morning Post print edition as: The best is in the west

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