Is This the Spark to Send Australian Property Crashing?

If you want to make a splash in the Australian market, just do one thing – talk about property.

We found that out to our cost when we tried to explain to Australians that housing isn’t a magic investment…that as someone with experience in the stock market, we know that asset prices don’t always go up…

Sometimes they go down too. Take for instance the folks in Queensland who built a house for $21.5 million, which the bank seized when the owners defaulted, and has just sold for…$5 million.

Of course, one terrible property investment doesn’t make a crash. In fact, seven years after property prices began to crash in the US and Europe, Australian house prices are almost back to the 2010 peak.

What does this mean? Did Australia miss the housing crash? Or is it simply waiting in the wings…?

According to Property Observer:

Melbourne was the strongest performing capital city housing market over the June quarter with house prices rising 5% to $553,447 to sit just 1.4% below their previous peak recorded in June 2010, according to figures compiled by Australian Property Monitors (APM).

A buoyant market goes towards backing controversial economist Phillip J Anderson’s view that Aussie housing is on the verge of a 14-year bull market.

Anderson says the Australian housing market follows the US housing market and the Dow Jones Industrial Average. But his analysis isn’t just from a few years of stock market returns.

He uses numbers going back 300 years. It’s all part of his super-cycle theory. And at the moment it’s hard to argue with it…

Biggest Housing Bubble Grows Bigger?

You only have to look at the cold hard numbers.

The US housing market bottomed out in 2011 and has started to rebound. The US stock market has (after a few bumps) recovered all the ground it lost during the 2008 crash…and added some.

And even the slowcoach Australian stock market has piled on good gains, especially during the past year.

Yet quietly, almost without notice it seems Australian house prices have mounted a comeback too. As APM says, Melbourne house prices – the market most feared to be in a price bubble – are within 1.4% of the 2010 all-time high.

So, what do we make of it?

Well, the fact remains that asset prices never go up forever. That’s one thing proved time and again despite the best efforts of bubble deniers.

But this move has us stumped. Is it really possible that Phil Anderson is right? Is the Australian market really at the beginning of a 14-year bull market run?

Not so fast, says our old pal, editor of The Denning Report, Dan Denning…

This is a Retail Story Not a Property Story

Yesterday morning Dan showed us an article in the Australian:

First it was the supermarket owners, then the Lowys. Now the Commonwealth Bank of Australia is seemingly distancing itself from the local property market, with a proposal to sell the management rights of its $20 billion real estate investment trusts and some wholesale assets to boot.

Dan has a reputation for picking a trend early. The prime example was the shale gas craze, which Dan has followed since 2005. That was a good six years ahead of mainstream Aussie analysts, who only started following the industry in 2011.

So, does this spell trouble for Australian property? Maybe. But there’s more to this story than meets the eye.

For a start, CBA’s flogging-off of property assets has nothing to do with the residential real estate market. It’s a commercial property deal.

But as Dan notes, this isn’t just about property. The bigger picture is the broader Australian economy – to be precise, the retail sector.

That’s the thing, CBA’s move is just as much about lack of confidence in retailing as it is about property. The reason for that is tenants in shopping malls have to pay the landlord a percentage of sales turnover on top of a fixed rent.

But with retail sales hitting the skids, clearly the real estate trusts aren’t getting the same cash flows they used to get. You can see why. The Australian Bureau of Statistics reported May consumer spending only climbed 0.1%. That was below analyst estimates.

The only other option is to raise rents. But if the sales aren’t there, that risks tenants moving elsewhere or just plain shutting up shop for good.

A Unique Retail REIT Play

There’s no doubt real estate investment trusts (REITs) are risky right now. Actually, that’s not true. In June 2011 we backed an Aussie REIT in Australian Small-Cap Investigator that used a different model.

We said it was one of the only (perhaps the only) retail REIT on the Aussie market that was a pure property play.

You see, unlike other retail REITs, it doesn’t charge tenants a percentage of turnover. It simply charges a fair market rent based on rents for similar properties in the area.

And that’s it.

Sure, this pure property play doesn’t get the cream when the retail sector booms. But that means it doesn’t lose a revenue stream when the retail sector isn’t booming…like now.

But that’s OK, because it still gets to collect the rent. Add to this the fact that its chief tenant is a blue-chip Aussie brand name  and it’s hard to see how things can go wrong.

That said, this pure property play is unique (as far as we’re aware) in the Aussie market. That’s why we’re not bothered what happens to the Australian property market or the retail sector.

But if you own other commercial REITs all we can say is beware. Dan smells trouble in the sector, and based on CBA’s decision to downsize its REIT exposure it looks as though he’s on to something.


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