GT Industry Intelligence Unit - Real Estate & Constructions 2012 Australia


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GT Industry Intelligence Unit - Real Estate & Constructions 2012 Australia

  1. 1. Regular research papers and articles providing sectorspecific insights and issues analysis – Real Estate andConstruction sector.July edition 2012 – Real Estate and ConstructionIndustryIntelligence UnitGrant Thornton’s Industry Intelligence Unit (IIU) This edition includes:blends the latest information and analysis of specific • A synopsis of the nationalindustries drawn from publicly available sources with residential property market, updated from the previous realpragmatic, commercial and practical initiatives to estate and construction IIUimprove stakeholder value. • A discussion of the current state of the residential property market withWelcome to our latest edition of the Real an emphasis on the capital citiesEstate and Construction IIU. Grant • Case studies:Thornton has increased its focus on the – Realisation of farmlandreal estate and construction industry and properties – Water Accessit is apparent from the available data that Licencesthe real estate and construction market – Selling industrial property –continues to be significantly adversely Limiting discounts applied foraffected by the flow-on effects of the contaminationGlobal Financial Crisis (GFC). – Registration of easements on title – Electricity sub-stations – Sales strategies for property assets – In-one-line at a discount vs. orderly sell down
  2. 2. IIU Real Estate and Construction July 2012Residential property updateIn the period directly after the worst interest rate policies employed by the The most common view appearsof the Global Financial Crisis, the banks, prospects for capital growth in to be that the growth in housing pricesAustralian residential property market the property market remain low for the will recover after a period of negativeexperienced significant capital growth foreseeable future. adjustment and price correction duringcompared to other international It may come as a surprise to, particularly the European and many that average Australian capitalUS property markets. Since late 2010, city residential property values have Latest statisticsthe Australian property market has depreciated by 4.5% during the period Borrowing for housing remained slowencourntered a widespread negative March 2011 to March 2012 – a greater during 2011 and early 2012. This hascapital growth as a consequence of decline than the 2.6% fall at the height of been associated with weakness in themounting negative economic sentiment the GFC in 2008, and 6% off their peak housing market and was reflected inas well as multiple natural disasters over of early 2011. the overall decline in debt to incomethe past 18 months. Whilst residential property has ratio since the highs of 2010. Much of Taking into consideration recent experienced a period of adjustment, the the effect of the RBA rate cuts has beendevelopments such as these natural decline year on year and subsequent mitigated by the banks’ decision to begindisasters and the Eurozone debt crisis, increase in value during the March 2012 moving their lending rates independentlythe Australian property market has still quarter across the cities has not been to the RBA target cash rate. As seenproven itself to be fairly robust when homogenous. Between March 2011 to in the ‘Household Indebtednesscompared to other asset classes and, in March 2012, Brisbane experienced a and Interest Payments’ chart below,particular, to property markets in other 4.1% decrease in residential property payments are now down from 12% indeveloped nations. values, whilst the Hobart market saw the September 2011 quarter to 11.7%. Due to current global economic declines of 0.7% during the same period. While household debt servicing is belowconditions, a lack of confidence in the The following is a summary of the its historical high it is still significantlyEurozone economies, difficulty in current major drivers and restraints on above the 1985 to 2000 average.finding credit lines and changes in the growth in the residential property market. Housing prices in the capital cities fell modestly for the year ended March 2012 by an average of 2.7% across the country. Drivers Restraints However, this downward trend slowed in • Shortage of housing • Changes to bank lending-rate policies to move the March 2012 quarter, with the median • Reserve Bank of Australia (RBA) cuts to the independently to the Reserve Bank of Australia underlying cash rate • Concerns over the Carbon Tax house price increasing by 0.9%. This • Strong disposable income growth • Eurozone debt crisis represents the first positive quarterly • Continuing low unemployment rate • Decrease in first home owners assistance result since June 2010. In comparing the • Population growth • Removal of fiscal stimulus • First home owners grants and stamp duty • Rising consumer debt growth in values of residential properties concessions • Rising consumer default rates across the major capital cities, Brisbane, • Record low rental vacancy rates • Continuating softening of commodity prices Adelaide and Melbourne have declined (NT, QLD, SA) • Decrease in building approvals most notably, while Perth and Canberra • Planning constraints have shown slower contraction, and • Shortage of finance for developers and home Sydney has remained relatively flat as owners (see the charts below). Industry Intelligence Unit 2
  3. 3. Household indebtedness and interest payments The following chart highlights recent movements in the RBA’s target cash rate. Source: ABS; RBA 200 Debt-to-income Interest payments 16 Effective Change in New cash Date cash rate rate targetPercent of household disposable income* Total Percentage Percent 150 12 points Owner-occupier 6 June 2012 -0.25 3.50 housing 2 May 2012 -0.50 3.75 100 8 7 Dec 2011 -0.25 4.25 2 Nov 2011 -0.25 4.50 3 Nov 2010 +0.25 4.75 Investor housing 5 May 2010 +0.25 4.50 50 4 7 Apr 2010 +0.25 4.25 3 Mar 2010 +0.25 4.00 Personal 2 Dec 2009 +0.25 3.75 0 0 4 Nov 2009 +0.25 3.50 1990 1997 2004 2011 1997 2004 2011 Source: RBA *Household disposable income excludes unincorporated enterprises and is before interest payments; debt-to-income uses annual income. Even though the RBA made two consecutive rate cuts at the end of 2011, the major banks have claimed that Average housing prices* external funding pressures have not Source: RBA, RP Data-Rismark allowed them to pass on these cuts in full to borrowers. Consequently, the 700 spread between the RBA cash rate and Sydney Canberra the average rate on new and outstanding 600 variable loans increased by 0.05% in real Perth terms over these two rate cuts. Australia 500 The most recent rate cut (June 2012) $’000 Brisbane has seen a continuation of the major 400 Adelaide banks’ interest rate strategy. Recent Melbourne moves by a number of major banks 300 have shaved up to 0.15% off the RBA’s Regional* decision. The RBA has stipulated that the rationale behind the 0.50% cut in May, 200 2006 2009 2012 2006 2009 2012 over and above the historical 0.25%, was to counteract any independent *Excluding apartments; measured as areas outside of capital cities in mainland states. adjustments and consequent negative effects on consumer and business sentiment by the big four banks. Value of housing loan approvals* This discrepancy is likely to continue, with the banks indicating in February Source: ABS, RBA 2012 that any further cut may not be 1.4 4 passed on in full following the RBA decision. This stance has also manifestedPercent of housing credit outstanding Non-FHB owner-occupiers in recent bank decisions to shift lending 1.2 3 rates outside of official RBA decisions. Total With this increase in rates in real 0.8 2 terms over and above the RBA cash rate, Investors along with the expiration of government incentive schemes, over the course of 0.4 1 2011, the total number of housing loan approvals stabilised following dramatic First home buyers falls in 2010. Since the expiration of the 0 0 first home owners stamp duty concession 2004 2008 2012 2004 2008 2012 scheme in December 2011 demand for *Net of refinancing. housing loans has eased. Industry Intelligence Unit 3
  4. 4. IIU Real Estate and Construction July 2012Around Australia –Capital city snapshot Capital City Summary Residential property markets in the Adelaide • Median house price - $437,085 capital cities of Australia are generally • Since March 2011, Adelaide has been one of the weakest performing capital cities experiencing similar trends. However, with a decrease in growth of 3.9% the increase in the values of residential • In the three months to March 2012, dwelling value growth has decreased by 0.3% properties across the capital cities has Brisbane • Median house price - $433,244 not been homogeneous, with some • Since March 2011, house prices have decreased by 4.1%, well underperforming the other capital cities experiencing particularly strong growth • In the three months to March 2012, dwelling value growth has fallen by 0.3% over the March 2012 Quarter whilst Canberra • Median house price - $561,782 others have experienced weak growth • Since March 2011, house prices have decreased by 3.1% and in some cases modest declines. This • In the three months to March 2012, dwelling value growth has risen by 0.9%. is especially true of Darwin, which Darwin • Median house price - $628,552 achieved 6.0% growth during the most • Since March 2011, house prices have decreased by 1.5% • In the three months to March 2012, dwelling value growth has risen by 6.0%, recent quarter far outperforming all making Darwin the best performing city for the quarter other cities. Overall the national average Hobart • Median house price - $325,282 growth was 0.9%, representing the first • Since March 2011, house prices have decreased by 0.7% making Hobart the best quarterly rise since June 2010. performing of all capital cities The latest statistics suggest that • In the three months to March 2012, dwelling value growth has increased by 1.0% the period of decline in median house Melbourne • Median house price - $529,077 • Since March 2011, house prices have decreased by 3.6% prices in capital cities during 2011 • In the three months to March 2012, dwelling value growth has risen by 1.6% is near its end and prices will now Perth • Median house price - $531,065 stabilise across 2012 and a period of • Perth’s residential market has not performed up to the level of its boom between improvement is expected into 2013. 2005 and 2007. In fact, for the period from December 2010 to December 2011, Sydney and Canberra are expected to Perth’s decrease in growth of 3.1% was the third lowest (only underperformed by Brisbane and Darwin) see growth in a range of 4-6% and 2-4% • In the three months to March 2012, dwelling value growth has risen by 0.1% respectively. Marginal levels of growth Sydney • Median house price - $641,037 are expected for Brisbane and Perth, with • Since March 2011, house prices have decreased by 0.9% Melbourne expected to remain stable and • In the three months to March 2012, dwelling value growth has risen by 1.4% consolidation occurring in Adelaide withSource: RP Data, APM contraction slowing. Industry Intelligence Unit 4
  5. 5. Softening demand for housing stock Residential approvals, March 2012 – State/Territory comparisonshas had a corresponding knock-on Changeeffect on private building approvals State/Territory Number (a) Monthly (a) Annual (b)which, since March 2011, have fallen New South Wales 2,682 2.3% -6.6%by 14.8%, closely following the trend Victoria 3,571 -1.5% -21.1%seen during the 2010 period of a 16% Queensland 2,282 1.7% -9.6%decline. Overall, approvals are close to South Australia 746 1.3% -22.2%their 20 year lows. Year on year, all statesexperienced a decline in the number Western Australia 1,611 1.6% -10.3%of approvals with NSW and QLD the Tasmania 176 2.1% -23.8%only states with single digit declines. A North Territory 52 -13.6% -24.1%moderate recovery in housing starts is ACT 176 -18.6% -17.5%expected within the next year, however Australia 11,298 0.3% -14.8%this is partially contingent on furtherrate cuts by the RBA. The table belowoutlines residential building approvalsand private apartment approvals on astate by state basis. In summary, it seems that the declinein housing prices since late 2010 is slowlycoming to an end. Prices have recentlyshown signs of stabilising, yet in generalthe housing market continues to beeasing. The most common view is thatafter a period of negative adjustment andprice correction during 2012, the marketwill recover in the latter part of the yearand into 2013.Residential building approvals, monthlySource: ABS, RBA 18 Total 15 12 Private houses 2012/13 Federal Budget Key points:$’000 9 Scrapped $1 billion tax breaks for green buildings program Private The bad news for the real estate and construction industry in the 2012/13 Federal Budget started 6 apartments with the scrapping of the promised 1% reduction to the company tax rate which was to provide some tax relief to small businesses from 1 July 2012, with larger taxpayers to follow. The Government 3 advised these funds would be redirected to fund the loss carry back provisions. Public housing The managed investment trust withholding tax rate will double from 7.5% to 15% from 1 0 July 2012 2000 2004 2008 2012 The Federal Budget has stipulated an increase in the managed investment trust withholding tax rate *Smoothed line is a 13-period Henderson trend. from 7.5% to 15% from 1 July 2012. This tax rate applies specifically to foreign investors. The net effect of this development is a doubling of the tax rate for multiple classes of trusts including Real Estate Investment Trusts. This is likely to dampen foreign investment and create a negative follow on effect to demand within the real estate and construction industry. The government has scrapped Capital Gains Tax (CGT) discount for non-residents. The CGT discount for non-residents has been removed. Whereas previously the discount was 50%, this change effectively increases the CGT payable upon disposal by 100%. Foreign investors are taxed almost exclusively on investment in real property, so this will have a direct and immediate impact on real estate investment within Australia. In addition to discouraging new investment in the property market, foreign investors will be reluctant to divest of their assets and realise an increased tax liability within the new regulatory environment. The increase in the tax rate is therefore likely to reduce the supply of available housing. Industry Intelligence Unit 5
  6. 6. IIU Real Estate and Construction July 2012Case studiesThe Australian economy is often referred Realisation of Farm Land Properties – Water Access Licences (WALs)to as a two speed economy, where the Partners of Grant Thornton were recently involved in theproperty and construction sectors operate realisation of a number of farms in the Northern Tablelands ofindependently to the mining sector which New South Wales on behalf of a major secured creditor.has seen an ongoing boom in recent Following the appointment as Receivers, it was determined that a number of these rural properties possessed approvedtimes. During the course of 2011/2012, water access licences in respect of groundwater, artesian boresthere has been a significant increase in and rivers running through the properties. It was found thatthe number of high profile property and there was an amendment to the legislation in 2004 with regardconstruction companies reported in the to the registration of a secured creditor’s interest over the watermedia experiencing cash flow problems entitlements on a property, whereby the entitlements are now viewed as a separately identifiable asset to the land. Prior to thisor solvency issues in respect of work–in- time, water access licences automatically travelled with the landprogress. Of note is Reed Constructions in a similar manner to development applications which normallywhich is currently under review from the travel with the property to which they are attached. UponNSW Government due to its involvement in appointment, the Receivers were required to perfect the secured creditor’s interests over the water access licences as well as run aa number of public roads and infrastructure successful marketing and advertising campaign. The WALs canprojects which have not been completed. have a significant impact on the saleability of the property.Recent speculation in the media has indicated The interesting lesson learned was that upon appointment,that a significant number of sub-contractors it is imperative to ensure that the secured creditor has registered their interest over any water access licences attached to the ruralwill experience a flow-on effect as a result property so that when the property is offered for sale, they canof many large building and construction be included as part of the marketing information memorandacompanies experiencing cash flow difficulties and sale contract.or lack of work flow and new projects. In the past year, Grant Thornton has been Selling Industrial Property – discounts applied for contaminationinvolved in a number of complex property Partners of Grant Thornton were appointed as Voluntarymatters which have highlighted some Administrators over a number of industrial properties aroundimportant issues to be aware of in certain the Newcastle area in New South Wales. A number of thesecircumstances. properties were contaminated as a consequence of historical industrial usage. The properties were taken to the market seeking expressions of interest from potential purchasers. It was determined that, in most instances, purchasers required a significant amount of time to complete due diligence of the property to ascertain the level of contamination and the estimated remediation costs. Industry Intelligence Unit 6
  7. 7. Quite often the scope of works which an environmentalsurveyor is engaged to include will affect the final outcome inrespect of the environmental report. For example, the numberof bore hole samples taken will in some instances directlyimpact on the number of adverse findings on the property.While it is not possible to predetermine the level of testingthat an environmental consultant will adopt in respect of eachproperty, a close review of the manner and type of sampling canoften have a significant effect on the outcome. In some instances, where a site is “capped” (encapsulatedor sealed with concrete), it is not necessary for bore holecore samples to be taken through concrete slab penetrations,hard stand areas, or concrete areas in respect of the industrialworkshop or shed areas when testing to determine any belowground contamination. It has also been determined via severalrecent appointments that where the subject property is nearwaterways or groundwater, contamination might not necessarilydirectly relate to the subject property to which we have beenappointed but may emanate from groundwater leeching ofcontaminants from an adjoining property some distance away. In essence, being pro-active and providing contaminationreports on industrial properties being offered for sale includingan estimate of the remediation costs has been an effective toolwhen realising industrial property for secured creditors. Thiscan place a “ceiling” on the discount factor that can be appliedby a potential purchaser in respect of the contamination.Registration of Easements on Title - Electricity sub-stationsPartners of Grant Thornton were recently engaged as Receiversto realise vacant industrial sub-divided lots in Northern Sydneyin New South Wales on behalf of a secured lender. Subsequent to their appointment, it was determinedthat the lots over which we had been appointed formed partof a number of other lots in an approved sub-division. Inconsenting to the sub-division, Council noted there was arequirement for the installation of an electricity sub-station topower the industrial lots. This required the registration of aneasement by the electricity supplier on the property over whichwe were appointed. By closely liaising with the respective electricity serviceprovider, the Receivers were able to complete all worksrequired for the installation of the sub-station in a timelymanner as well as ensure that the easement registered on titleby the electricity company in such a manner that the propertywas not adversely affected (i.e. the easement ran alongsidethe boundary of the property subject to our appointment asopposed to directly traversing the property). The Receiverswere also able to ensure that the property was marketedwith electricity available as opposed to vacant land, whichsignificantly increased the value of the property and offers fromparties expressing an interest. Upon completion of the sub-station and electrification(connection to the existing power grid), the Receiverssuccessfully sold the property to a purchaser who requiredpower for their industrial warehousing site at a price far inexcess of the valuation. Industry Intelligence Unit 7
  8. 8. Sales Strategies for Property Assets - In-one-line at discount vs. orderly sell down Partners of Grant Thornton were recently appointed as Receivers over a commercial strata unit complex in New South Wales. At the time of appointment, approximately 22 out of the original 44 commercial units were still available for sale. The tenancy mixture of the available-for-sale units comprised approximately 50% tenanted and 50% vacant units. The Receivers commenced the marketing and advertising campaign shortly after their appointment and found that the agents were struggling to attract expressions of interest for the units. After approximately six months, only three of the 22 units were realised. The Receivers believed it was necessary to revise the strategy in collaboration with the secured creditor in order to determine the costs and benefits of realising the remaining commercial units in-one-line, as opposed to an orderly sale of the units which was likely to take over 40 months. It was determined that by applying a discount and realising the assets in-one-line would significantly reduce the loss likely to be incurred by the secured creditor in comparison to holding the assets and selling them on an individual basis over an extended period of time. We have found that in many instances, a discount factor of 20% to 30% is usually applied to commercial properties by potential purchasers where there are a number of complete strata commercial shared sites for sale in-one-line. In some instances, applying a discount will still yield a better result than attempting to sell the properties in an orderly fashion over an extended period of time after taking into consideration interest and holding costs.Our National Real Estate and Adelaide Melbourne Sydney Dale Ryan Andrew Hewitt Peter BergConstruction Team Partner – Privately Held Business Partner – Recovery & Partner – TaxGrant Thornton is a national full service T +61 8 8372 6535 Reorganisation T +61 2 8297 2509accounting and business advisory E T +61 3 8663 6003 E that specialises in working with E Brisbane Trevor Pogroskeproperty and construction businesses Sian Sinclair Perth Partner – Recovery &of all makes and types, big and small. National Industry Leader – Craig Simon ReorganisationWe closely work with our property and Real Estate & Construction Partner – Privately Held Business T +61 2 8297 2601 Partner – Tax T +61 8 9480 2030 E clients, so we understand T +61 7 3222 0330 E complex and diverse market well. E John O’DonnellIf you would like to discuss any aspect Partner – Privately Held Businessof the above, please do not hesitate T +61 2 9286 5448to contact one of our industry experts E below. Peter Grealish Senior Manager – Recovery & Reorganisation T +61 2 8297 2610 E Industry Intelligence Unit 8
  9. 9. IIU Real Estate and Construction July 2012Industry Intelligence UnitAbout Grant Thornton Australia DisclaimerGrant Thornton is one of the world’s leading organisations of independent assurance, Material contained in this document is a summary onlytax and advisory firms. We help dynamic organisations unlock their potential for growth and is based on information believed to be reliable andby providing specialist services, business advice and growth solutions. In Australia, we received from sources within the market. It is not the intention of Grant Thornton that this document be usedhave more than 1,300 staff across eight offices in Adelaide, Brisbane, Melbourne, Perth as the primary source of readers’ information but as anand Sydney. We combine service breadth, depth of expertise and industry insight with an adjunct to their own resources and training.approachable “client first” mindset and a broad commercial perspective. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or We are a member of Grant Thornton International which comprises firms completeness of any information or recommendationoperating in more than 100 countries worldwide. Through this membership, we contained in this publication and Grant Thornton will not be held liable to the reader in contract or tort (includingaccess global resources and methodologies that enable us to deliver consistently high negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such informationquality outcomes for owners and key executives in our clients. or recommendation (except in so far as any statutory liability cannot be excluded).What is the Industry Intelligence Unit? This presentation has been prepared for generalThe IIU is unique in its objective of providing stakeholders with information, information and not having regard to any particular person’s investment objectives, financial situation or needs.understanding and analysis of the issues faced within specific industries and sub- Accordingly, no recommendations (express or implied) orindustries. The IIU also seeks to provide pragmatic, commercial, practical measures other information should be acted upon without obtainingand initiatives to improve stakeholder value. specific advice from an authorised representative. Please note past performance may not be indicative of future performance.Industry focusThe IIU utilises the industry experience and expertise of Grant Thornton partners andstaff across Australia. The IIU is predominantly focused on the following industriesand their related sub industries:• Aged Care • Healthcare • Professional Services• Automotive • Hospitality • Public Sector Dealerships • Life Sciences • Real Estate &• Energy & Resources • Manufacturing & Construction• Financial Services Automotive • Retail• Food & Beverage • Not for Profit • TechnologyIf you want to know more, please contact us...Adelaide Brisbane Melbourne Perth SydneyDale Ryan Graham Killer Simon Trivett Matthew Donnelly Paul BillinghamT 08 8372 6666 Michael McCann Matthew Byrnes T 08 9480 2000 Gayle DickersonF 08 8372 6677 Shaun McKinnon Andrew Hewitt F 08 9322 7787 Said JahaniE Chris Watson Greg Keith E Trevor Pogroske T 07 3222 0200 Nick Mellos T 02 8297 2400 F 07 3222 0444 T 03 8663 6000 F 02 9299 4533 E F 03 8663 6333 E E Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the memberfirms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers itsservices independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation.