China’s release of a formal list of ‘banned’, ‘restricted’ or ‘encouraged’ overseas investments is a game changer for Australia’s investment industry.
Overseas property (commercial, residential developments, hotels, theme parks) is now restricted (though not banned) as are equity investment funds. Agriculture-linked investment is encouraged as is tech, mining, trade, & culture linked investments. Banned are casinos and other gambling related investments.
Chinese investors can expect tougher government assessments that their deals are not ‘irrational’ and are within their ‘core’ business.
The result is increased uncertainty for some asset classes and bigger opportunities for others, with the following consequences:
- Demand/supply balance for deals in ‘restricted’ investments now favours a reduced buyer pool. Buyers will ‘wait and see’ to flush out distressed sales and/or negotiate harder, particularly in the property development sector.
- Assets currently earmarked to be ‘flipped’ by speculative owners will become distressed sales if owners have limited funding sources/holding capacity.
- Plans by Chinese owners to roll their assets into listed entities (eg real estate investment trusts, hotel investment funds etc – another form of ‘flipping’?) for sale to other Chinese investors will want clarity on whether ‘equity investment funds’ now identified on the ‘restricted list’ will be a problem.
- But Chinese/Australian investors here for the long-term will benefit as speculative asset buyers exit from restricted investments, leading to more sustainable asset values.
- Agri, tech, mining and trade-related interest already exists but I expect a bigger rise in niche agri-sectors. Culture-linked investments (ie films) plays into my Aus-China Film investment conference, 4 Sept, Sydney
However Chinese overseas individual investors into Australia are also facing headwinds. They include:
- 17% in combined transaction, interest rate and levy costs (on a $1m deal – a break-down of this 17% will be released ahead of my 20 Nov property event) acting as a major deterrent for new offshore buyers.
- Difficulty in getting Australian bank financing for settlement, but a number of non-bank lenders have stepped into this market in recent months. Mirvac and Lendlease recently announced settlement failures are still under 2%…but one should ask them how many settlements have been delayed past 30 June 2017. AV Jennings reported 5% of settlements were delayed.
- Upwards of 10% AUD/CNY unrealised currency ‘loss’ or ‘gain’ depending on the exchange rate used and time period.
What’s next is how these offshore investors view the long-term environment.
- Market sentiment, (animal spirits, momentum trading styles) is a major factor for prospective and yet-to-settle Chinese buyers. This sentiment can currently be described as ‘wary’ given the above points and widespread commentary about the Australian property ‘bubble’
- The long term investment horizon for investors (those who ignore short term valuation and currency fluctuations) generally remains positive. Australia is still an attractive destination notwithstanding ‘relative value’ assessments on property alternatives in China and the rest of world
- Housing supply is still tight, reflected by vacancy rates hovering around 2% (in Sydney and Melbourne) which will support apartment prices (population growth is still strong which will become an even more politically and socially charged topic in the months ahead as housing unaffordability, high debt levels, empty apartments and reduced employment from reduced construction starts to bite. State government infrastructure spending, particularly NSW spending all their property stamp duty revenues, will offset some employment loss.)
We will discuss these and more insights at my annual Aus-China property developers’ event (a sit-down lunch with corporate and individually ticketed tables) on Monday 20 November at Doltone House, Hyde Park Sydney. (please save the date…and email me if you want to get involved as a sponsor or speaker)
Word War 3
Meanwhile, volatility in the financial markets roared then retreated as the ‘Word War 3’ broke out last week then went into a stalemate.
A useful analogy for the stalemate is a hostage situation with North Korea holding 25 million hostages in Seoul.
But there are wider themes surrounding this, including a more likely trade war between China and the US with NK as the catalyst, the Belt and Road and China retail consumption strategy as China’s counterbalance to a trade war, and the likely rise of inflation globally due to a trade war triggering higher interest rates. (details in my next newsletter)
With so much armchair and expert commentary in the media, my volatility in the markets lunch-time seminar this Friday (25 August) in Sydney has been created to cut through the commentary by applying maths and physics! Find out more from our panel of rocket scientist fund managers. The volatility event is sponsored by Pitcher Partners and One Investment Group.
Soul searching in China
Finally, for deeper insights into the soul-searching underway in China given the momentous societal changes, (from famine to feast but with inequality and uncertainty along the way– see my China psyche article), find out more at my Aus-China film investment conference 4 September Sydney, sponsored by HLB Mann Judd.
This Chinese hunger for more meaning in life & society is hinted by;
- the success of heart-warming films such as Dangal (named “Lets wrestle Dad” in China) and Paths of the Soul (about a Tibetan pilgrimage which one would have thought was a politically sensitive ‘no-no’ in China – being a film about religion and about Tibet)
- significant Chinese social media commentary about the lack of compassion in Chinese society (especially after several high profile cases of pedestrians being hit by vehicles with passers-by not helping)
- significant angst about a lack of business ethics which has resulted in food, financial and pollution scandals
- the success of patriotic movies such as Wolf Warrior (with a risk that movies in this genre can lead to more jingoistic, rather than patriotic, sentiments)
- and the significant revival of religion in China. (see http://www.ian-johnson.com/books/the-souls-of-china)
This soul-searching plays into Australia’s cultural and creative strengths, especially for the Australian film industry.