Property insiders expect the correction to continue

From the AFR:

The owners of Australia’s $117 billion listed real estate sector are expecting the market to ‘correct’ and have kept their gearing to historically low ranges in anticipation of this according to feedback received by S&P Global Ratings.

At event in Sydney on Tuesday where the impact of tighter credit on property prices was discussed, S&P’s REITs analyst Craig Parker highlighted how groups such as Dexus and GPT had gearing levels below their stated policy ranges as a defensive measure against a reversal in asset prices.

Most of the REITs had gearing levels in the mid-20 per cent range compared with the low-40 per cent range they had before the financial crisis wrecked the sector forcing major asset sales and recapitalisations.

My own experience has been that after launching the Nucleus / MB fund a year ago with a firmly anti-property bias in the stock selection, I have been surprised by the number of property insiders who signed up as clients.

For a minority of these property insiders, it has been simply a diversification strategy. For the majority though it has been about trying to:

  1. get their money out of the property sector
  2. protect the profits they have made over the last ten years

Here is what ASX listed property companies have been doing on the debt front:

ASX Property Net Debt

Source: Factset

And I don’t know of any that are using the current declines in property prices to gear up and buy the dip.

Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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Comments

  1. reusachtigeMEMBER

    What ever happened to Dr Andrew Wilson? We need him on the frontline fighting for the cause!

  2. I’ve been wondering when the big drop will happen for at least 15 years – gave up waiting and brought a house around 5 years back. Is this it, is our house market finally heading back to norm? I guess it all depends on how many try to exit and how quickly.

    • Damien KlassenMEMBER

      It is difficult to get a man to understand something, when his salary depends upon his not understanding it…

  3. 1) Central banks control the economy
    2)Next year there is a Federal election, no later than May19.
    As prices contine on current projectory , RBA to cut rates and LNP to offer plently of incentives to stop the rot.

    • Renters outnumber property owners, and the millenials who’ve been waiting a long time for a chance to get in near their workplace would certainly be hearing the clock ticking now. The oldest millenials are approaching their 40s. Its now or never for having kids, and any policy that tries to continue the status quo could very well backfire.

      • +1 I’m in that cohort of Millennial’s getting closer to 40 than I am 35 :). Born 82.
        I absolutely want to see house prices smashed.

    • mikef179MEMBER

      1) Central banks control the economy

      Actually they don’t. They manipulate it sure, but 2008 was evidence that they lack control.


    • 2)Next year there is a Federal election, no later than May19.

      If that’s the deadline for turning around the ship (i.e. resuscitating Sydney and Melbourne property) it’s probably already too late. We’re actually getting close to the point where pretending it isn’t happening, and hoping nobody calls you on it is a rational strategy for the incumbent governing party.

      All they can do now is try to delay implementation of any recommendations from the RC and hope for the best and/or bring forward the election before the losses get too much greater.

      EDIT: Note also that there is only one more RBA board meeting before the spring ‘auction season’ commences off the back of the worst sentiment for the housing market in a decade. That’s the last opportunity between now and the election.

      • “All they can do now is try to delay implementation of any recommendations from the RC”

        I’m pretty sure that’s exactly what they will do and simultaneously (by stealth) loosen lending standards. They’ll treat the recommendations just like they did with all those anti-money laundering recommendations that never saw the light of day…crickets.

        “resuscitating Sydney and Melbourne property”
        That almost read like reusacitating Sydney and Melbourne – so yes, they will release reus with cheap’n’nasty easy credit along with all his relations onto Syd and Melb once again!


      • I’m pretty sure that’s exactly what they will do and simultaneously (by stealth) loosen lending standards

        They’ll have to be very stealthy, as they have to avoid acknowledging the problem or its scale to avoid scaring the horses. If the Australian government appears to say ‘there’s a property correction’, the downward trajectory will accelerate further.

  4. ” I don’t know of any that are using the current declines in property prices to gear up and buy the dip.” Which is another worry? Those missing buyers are the short-sellers that will be needed as things get going…..

    • I must admit Short selling Residential RE into a falling market is an intriguing idea, it’s just the implementation that seems a tad difficult.
      Logically the short-selling banks seems like a reasonable proxy but it’s not really the same thing, short selling REIT’s would maybe work but it’d be nowhere near as much fun as shorting individual houses of apartments.
      Stand alone houses would seem impossible to short, however the same cannot be said for all these newly created dog-boxes. Think about it: what would happen if just 10% of the apartments in a new constructed building were sold at 25% below list price? How many Chinese “investors” would honor their contractual obligations to buy Aussie apartments and how many would simply say F’that and disappear like a fart in the breeze?
      Hmmm so maybe it isn’t impossible to short residential RE, maybe you just need to stay focused and pick your target wisely.

  5. Given what prices have done in SydMelb over last 10 years, surely the banks will be untroubled by a 30-40% fall?

    In fact you could say they are engineering such a fall right now through cutting of loan sizes.

      • mikef179MEMBER

        If APRAwere to come out and say that the banks were at risk, that in itself, would cause a lack of confidence. And the last things the Oz housing market needs is for people to lose confidence in the narrative. Australia is different.


    • In fact you could say they are engineering such a fall right now through cutting of loan sizes.

      And indeed they are cutting loan sizes because the possibility of 30% falls is very troubling to them.
      Their profit statements and balance sheets won’t be untroubled if unemployment rises a few per cent, the newly unemployed stop making house payments while at the same time the houses are unsaleable for anything more than the mortgage balance minus 10-20%.

  6. u see these signs on the highway
    Steep descent
    USE LOW Gear
    let me tell you this descent for housing will be so steep that parachutes will be required
    any investment fund which still has holdings of property is a fool
    but they know, if they sell, the cascade will commence, and
    their jobs will go
    and,
    their investments will be decimated.
    just like the 1890, 1930’s.

    • You’ll need parachutes because the gravel emergency stops will be chock-full.
      .
      .
      .
      And then – there are those gravel emergency stops which are painted on a solid wall, or on a retaining wall over a cliff… Whoops! Surprise!

  7. This show is just getting started. I don’t believe for second that we have seen it play out yet. This is the warm up lap…
    Wait for those interest only loans to start rolling over to P&I for the select few who do get approval. For the rest who do not get approval… fuel and fire come to mind.

  8. Sid and Mel will revert towards prices in other capitals. Other capitals, if they rise, will do so only modestly. The last 5 to 7 years have been anomalous.

  9. Wouldn’t these gearing levels be based on asset valuations of the properties they hold? So in the last few years the assets have increased in value which would reduce gearing levels. So as the market falls, the assets will also fall in value but the debt held won’t change, so gearing levels on the new valuations will increase as property falls deepen.

    • Your second conclusion is undoubtedly true. Your first may not be because as asset values rose people drew on the equity for consumer spending. So their gearing stayed as high as ever.