Interview with Michael Wecke, Managing Director, Real I.S. Australia Pty. Ltd.
What is the general mood on Australia’s real estate market at the moment compared with Europe or Germany?
Michael Wecke: Basically, you can say that sentiment in Australia is generally much more optimistic than in Europe as a whole. In my opinion, this has to do with the fact that Europe is closer to Ukraine and concerns about higher gas and energy prices have a dampening effect. There is virtually no evidence of this in Australia at all. After "Australia Day," the national holiday on January 26, many people are back from vacation and are very confident. Everyone knows that there will be a few more interest rate hikes and they are all in wait-and-see mode. However, interest rates are expected to decline again at the end of 2023, which will bring movement back into the market.
Why are interest rate cuts anticipated? The Reserve Bank of Australia recently raised key rates for the ninth time since May 2022 and has announced further rate hikes.
Michael Wecke: The ownership rate in Australia is significantly higher than in Germany, for example. Families have their own houses or apartments and generally financing facilities of around one million Australian dollars on average. Higher interest rates also mean higher financing costs, especially since the fixed interest rate in Australia is usually over a period of one to two years only, and financing is completely variable in many cases. The Reserve Bank is also mindful of the heavy burden on private owners and will also (have to) roll back interest rates once inflation has been brought under control.
Are prices on the real estate market falling in Australia as well?
Michael Wecke: Only very slightly. Price declines such as have already been seen in Europe have not yet occurred in Australia. Prices are still high. True to tenet of "sit tight and wait" people are trying to sit it out. If people don’t have to sell – and this is still often the case – then they just don’t at the moment. Properties are simply taken off the market again if the target price is not reached. People are less willing to compromise. Most of them are assuming that the market will start to move again in the foreseeable future.
When do you think the situation will reverse?
Michael Wecke: As soon as there is the certainty about no further interest rate hikes beyond the expected level, the market will move. This can be priced in accordingly, and the uncertainty is banished. That will be the case in the third or fourth quarter of 2023 at the latest. It's also a big issue when you're pricing refinancing. And generally when we talk about long-term financing in Australia, it's usually only two or three years – not ten. It's quite simply a completely different financing environment compared with Europe.
Is the Australian market at all interesting for foreign investors at present?
Michael Wecke: Australia certainly offers attractive opportunities for real estate investments. Despite global trouble spots, the Australian economy is stable and there is no talk of a recession. Quite the contrary: According to IMF forecasts, Australia's economy is expected to grow by 3.8 percent in 2022. Record levels of investment by the Australian government are also playing a major role. Over the next 15 years, investments of 120 billion Australian dollars are planned in transport infrastructure and urban development. The labor market is also stable, with unemployment at its lowest level in almost 50 years. This is having a positive effect on demand for housing and high-quality office space. For investors, this scenario creates very promising diversification opportunities beyond Europe. Now and today. Naturally, you also need to sound out the market carefully in Australia.
And having a local presence certainly pays off ...
Michael Wecke: This is actually invaluable for getting a feel for the Australian market and the trends and, of course, for having a resilient network in the country. Not every region and usage type are worthwhile; a precise knowledge of the market is essential for a successful investment. Real I.S. has been present in Australia for a good ten years with its own subsidiary in Sydney. Despite the difficult market situation in 2022, this enabled us to conclude the largest office transaction in Canberra's history with the sale of Geoscience Australia headquarters. Another great success in Australia in 2022 was the Australian government renewing its lease for another ten years in our office building on Bourke Street, Melbourne, in the heart of the central business district. Here, too, active asset management on site paid off - for the growth of a successful partnership and the development of a suitable concept for contemporary space. Of course, the location is also very important.
What market trends are you currently experiencing in Australia?
Michael Wecke: We are seeing a focus placed increasingly on high-quality office properties – so flight to quality. However, properties do not necessarily have to be in the centers of the large metropolises where prices have risen exorbitantly. Urban mixed-use districts near the city center, so-called city fringes, are particularly attractive. These are areas where a young, creative section of the population lives and young, successful companies are settling. Large companies, however, are also starting to offer their employees coworking workplaces in these neighborhoods and thus close to their homes. This is a change in the market that investors should keep an eye on. We are also actively pursuing this in our acquisition strategy, examples being our "Surry Hills House" office building in Sydney and "11 Wilson Street" in the South Yarra district of the city of Melbourne. We aim to take advantage of this trend in the future as well and are looking at other suitable properties in these submarkets that are currently starting to develop. Having a local team is therefore all the more important. We are also keeping a close eye on other asset classes as well – the "senior living" segment is interesting, for example. This investment market is also attracting growing attention in Australia as the need is becoming greater due to an aging population.
What is the trend in the residential real estate market?
Michael Wecke: Prices for residential real estate have risen sharply in Australia in recent years. Of course, this makes it more difficult to buy while, at the same time, boosting the rental market. Demand in this segment is high. This has to do with the fact that the borders were closed for two years due to COVID-19 restrictions. Now students and professionals are able to return and are driving demand for housing. There is currently a housing shortage, which is translating into rapidly rising rents.
Are foreign investors therefore already more heavily invested in the residential sector?
Michael Wecke: No, not yet. There is still no tax incentive for foreign investors as the residential asset class cannot yet be acquired in a so-called MIT regime. Investors' profits are therefore still taxed at the full rate of around 30 percent instead of at half the rate of around 15 percent. In the office segment, for instance, the tax rate is 15 percent because acquiring this asset class is permitted under an MIT structure. In addition, foreign investors have so far been blocked from acquiring existing housing; investments in project developments are permitted but are strictly regulated by the Foreign Investment Review Board (FIRB). The build-to-rent asset class will certainly be interesting in the future as the rental rate is also increasing in Australia and the demand is quite simply there and constantly growing. To cope with the strong demand, Australia needs foreign investment. This cannot be achieved with domestic funds alone. But Australia is right at the start of this process. There is no conventional rental housing construction (yet) as there is in Germany because the market has so far consisted only of build-to-sell projects. But this is definitely a segment that we are also monitoring closely.
Thank you very much for the interview, Mr. Wecke.