Commercial Property: The Impact of China

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LAST week, The Australian newspaper invited three Commercial property experts to respond to the following question:

If China’s growth story begins to peter out, what will be the impact on Australia’s commercial property market?

China's Impact on Australian Commercial PropertyThose experts included … Greg Marr (MD of DTZ), Tony Crabb (Research Head of Savills), together with me (as CEO of Properly Edge Australia).

And you can read all three responses, which appeared in Saturday’s Weekend Australian [Commercial Property 3]. What I’ve included here below is my contribution to that analysis …

DON’T be misled by the doom-and-gloom merchants peddling a story along the following lines.

“The European crisis is causing sluggish recovery for the US. And together, they are adversely affecting China — as is shown by its annual growth declining from 12.5% per annum in 2008, to its current level of around 9% per annum.

“As Australia depends heavily on China … our economy and therefore Commercial property market are at risk. Furthermore, banks are likely to be a squeezed for funds to lend.”

Australia’s only faint connection with the North Atlantic problems is one of mindset — being when stock markets fall, we generally feel far less optimistic. But you actually need to look a little deeper than that.

China’s declining Growth rate

This has been deliberately orchestrated to regain control of inflation.

In 2008, China’s 12.5% per annum growth contained 3% to 4% of exports to Western countries. Today, its still healthy growth of 9% pa is being driven by its latest 5-year plan — focusing upon internal infrastructure, and increased domestic demand for its own output.

Fortunately for Australia, China still requires our natural resources in abundance — to underpin its massive domestic expansion plans, over the next decade.

Therefore, the likely impact of the current north Atlantic problems on China will be minimal — likewise for the Australian economy and Commercial property.

The potential squeeze on Lending

Australian banks’ wholesale (offshore) funding needs are determined by the amount they lend and the deposits they can arise from the domestic market.

Since 2008, the banks have reduced their dependence upon offshore funding by a third — now providing only 20% of their funding needs. In turn, they have raised (from 40% to 50%) their contribution from domestic deposits.

Therefore, with lower credit growth and increased domestic deposits, banks will need to draw far less upon offshore funding over the next 12 months.

Australia’s Commercial property market

Whenever people are confused, they tend to do nothing. But don’t allow yourself to be distracted by short-term thinking.

Australia’s underlying fundamentals for commercial property and the economy are strong. Supply of office and industrial space is quickly falling through strong demand.

And now is the time to you set yourself up for the next 5 to 6 years of stable growth.

 

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