We’re joined by Les Koltai who’s Head of the Real Estate Group in Australia at DLA Piper, Les welcome to BRR Media.
Yeah thanks, pleasure to be here.
Well Les despite continued global turmoil, a real estate investment in the Asia-Pacific remains resilient, what do you see as the major reasons for this?
Look I probably see six key factors that are being considered by foreign investors, which has helped to underpin the resilience of the Asia-Pac market. I think firstly at the macro level certainly the Asia-Pac economies have continued to be seen as a positive growth story for foreign investors, so the positive outlook which translates into the real estate fundamentals being seen as sound certainly have contributed to that. I think at the micro level the real estate sector certainly in Australia has entered this period with no oversupply in most sectors and so for the Australian real estate market you know with a few exceptions generally there was no massive over supply, and if you take the office sector, historically - you know we’re now seeing historically low vacancy rates. So for Asia-Pac generally countries such as China, are deep, deep real estate markets offering investors a wealth of well-priced opportunities as well, so you know there’s sort of those two key factors at the micro level. I guess thirdly, in Australia again the absence of competition for investment great assets for you know from domestic capital sources and with most A-REITS trading at a discount to NTA and unable to invest and with superannuation funds continuing to remain on the side lines, this has opened up the market for foreign investors. So this lack of you know competition for assets has certainly contributed to an easing of yields. So pricing remains attractive and in some sectors yields for assets remain higher than the 10 year average, so those factors are all good positive stories. So you know the down side for Australia however it is a relatively small market, so investors seek out Australia as a hedge for their Asia-Pac investment strategies, so their other strategies around the region would normally include China, Japan, Singapore and Hong Kong.
And Les if I move on to looking at investment, what do you see as the key factors being considered in the current market?
Well look there’s a number there that are important for foreign investors I think I mentioned obviously pricing is important. I think at a local level Australia’s reputation as a highly transparent real estate market you know underpinned by a sophisticated legal system and relatively speaking a stable political environment, all feeds into the perception that Australia is a well regulated market, an easy place to do business in. I think what has assisted particularly Australia in this time is the introduction in 2008 of the Managed Investment Trust Regime, which offers qualifying foreign investors a concessionary rate of withholding tax, and that reduced the rate from 30% eventually down to a rate of 7½%, and that proved to be highly successful in attracting new foreign capital. In 2011 you know the proof was in the pudding in that foreign investors were the dominate source of real estate capital in the Australian markets, so clearly a more favourable tax regime has proven to be a draw card. But I should note that the recent doubling of the withholding tax rate now to 15% has had a negative impact. Probably lastly you know and another thing that feeds positively into the psyche of foreign investors is a stable of capitalised banking sector in Australia, so you know that certainly features highly on the list of factors why Australia in particular is experiencing an unprecedented low capital from foreign real estate investors.
Well Les you mentioned that Australia’s highly transparent with a fairly stable political system, do you think this puts us in relatively good stead as an investment opportunity compared to other areas in the Asia Pacific region?
Oh look absolutely, you know, as we see real estate capital becoming increasingly global, global and regional investors with a strategy for investment in Asia-Pac invariably focus on China, Australia, Japan and Singapore. But Australia in particular is popular for the reasons I mentioned, it represents an easy entry into the Asian real estate market, and with the transparency and importantly favourable returns looking at it on a risk adjusted basis. You know Australia is really considered the Diet Coke of Asia, and – and right now Australia is particularly popular amongst foreign investors as I said because pricing remains soft while the real estate fundamentals remain particularly strong.
And Les just finally I’d like to look at trends and potential risks for the sector over the medium term.
Look the likely trends just mentioned I think will continue with global real estate capital you know attracted to the Asia-Pac story. The expected prolonged downturn in Europe, in particular will continue to feed that. The risks however I see really as follows, and I think looking at it globally certainly the continued crisis in Europe tends to startle for some global capital in the sense that the investors are paralysed from decision making on future investments, so that tends to be a bit of a block of the capital coming out here, and again globally capital will start chasing those bargains in Europe and the US, so this is inevitable and this will draw capital away from the Asia-Pac region as investors eye the well-priced opportunities that are now appearing in Europe and the US. I think for the region, you know, the major fear of a China housing bubble plays into the decisions investors are making. The better view I would say is that you know if there is a correction in China it’s likely to be a soft landing rather than a sudden correction, and a contraction. You know I think looking domestically you know what would be the risks for us, I think political instability and the high Australian dollar will I think for the short term militate against an increased flow of new foreign capital, but I think most notably and recently the doubling now of the withholding tax rate to 15% as of 1 July 2012 has had sort of I would see three major impacts. And firstly you know those investors who’d already entered the market here assuming the 7½% rate of withholding tax have had to adjust their return expectations to accommodate that rate increase, so that’s created certainly some negativity around the Australian scene. Secondly I guess investors currently in the midst of their transactions who struck deals and model their investments on a 7½% withholding tax rate have had to remodel their investments and in some cases the pricing to accommodate this change, and that’s actually placed at risk a number of transactions that had already been entrained, and I think probably, finally and most significantly the way the change in the tax rate has been brought about, which was sudden and unanticipated has created a high degree of uncertainty and really severely dented the confidence of those existing and potential new foreign investors who previously viewed Australia as a safe haven, and I guess that’s damaged Australia’s reputation in the short term as a stable transparent market. It’s too soon to tell the precise impact although it’s clear that some new entrants have pulled back for now, and they have chosen instead to deploy the capital that was other ear marked for Australia to other Asian markets, such as Singapore, China and Japan. And look I think this may have led to an easing in the short term, but I don’t think this will continue. The Australian market in the medium term I think will continue to be well priced and will be a highly attractive destination when looking at all those factors on a risk adjusted basis, so you know; I think the story is still very positive certainly for Australia and more broadly for the Asia Pac region.
Good to hear and hopefully the effects are only short term as you say. Les thank you so much for joining us today.
No you’re welcome and thanks for having me.
That was Les Koltai, who heads up the Real Estate Group in Australia at DLA Piper. Now listeners if you have any questions for Les of course you can send them either using the panel that appears on your screen or via email to email@example.com.