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The Varna Report

Top 5 Financial Predictions in APAC and How to use it to Your Advantage

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No need to worry, the millennials haven’t ruined everything yet. The Asia-Pacific real estate market will experience moderate growth in 2018. Any of the top financial predictions in APAC can provide opportunities for property developers and owners.  

Still, anyone who has watched CNN can see that the political events of last year is still making ripples through 2018. While you don’t have to worry about major interest rate hikes and volatile exchange rates, geopolitical tension is always the horizon. Nowadays when China sneezes, everybody else catches a cold.

No need to fret, you can use any of these top five financial prediction APAC has in store for 2018 to help you better navigate the year of the dog.

Shifts in the regional business landscape pave the way for overseas opportunities.  

The demand for office space will remain stable in 2018. New Grade A office supply is forecast to rise in India and China, where most new projects are located outside central business districts. With lower occupancy costs, this could encourage occupiers to relocate from expensive areas. The shortage is more severe in Australia CBD – demolition of office buildings are made to make way for residential development, which in turn will also increase the demand for relocation.

Rental growth on the other hand, is concentrated in Singapore and Australia. India also present an upbeat market, with occupiers willing to pay premium for locations with good infrastructure.  

Property developers can take advantage of these trends through an offshore finance solution.

The rise of Unicorn companies.

 

More than 30% of top 100 companies in 2017 are start-up. These companies are funded by venture capital instead of revenue. Market leaders – Asian corporations who are expected to dominate in 2018 – are here to stay, but the rise of smaller players will increase competition.  

Because of this, accounting firms with start-up clients who wants to expand can recommend alternative funding structures. They can look into a flexible finance solution to stay afloat in competitive tech-driven industries.

Talent shortage continues to change the nature of the workplace.

 

The rise of unicorn companies, combined with ageing population and low birth rate, continue to fuel the shortage of talent. Employers now look for buildings that will attract and retain talent. Office spaces that have smart-building features and employee amenities are in demand. The millennial workers of today are not necessarily looking for a glass tower occupied by a multinational company.  They prefer non-traditional office spaces with features that can facilitate collaboration and mobile work.

Property developers and owners need to have a mix of owned or leased and co-working or shared spaces to adapt in a rapidly changing work environment.  They should seek a firm who can provide a finance solution that can maximize the development performance of their mixed-use site.   

Technology continues to drive innovations in retail.

 

Consumers are changing too, as tech adoption is expected to increase in the retail industry.

Back in the day, e-commerce was seen as a competitor to brick-and-mortar businesses. Now, retailers are combining both online and offline sales to facilitate a seamless shopping experience. Stores incorporate experiential elements where customers can test, learn, and experience products instead of being a usual place for transactions.

This kind of strategy will continue to evolve, resulting to an increase in pop-up stores offering specific products and promotions on a limited timeframe. This is very useful for retailers in gaining publicity and testing new products and locations.

Property owners can take advantage of this by incorporating shareable and bookable private spaces for retailers. Find a firm that can assess the most attractive return on investment as part of its finance solution.    

Structural changes lead to new investment opportunities.

 

Office spaces are not the only ones that are changing. Home ownership is out of reach for many people and with the growing pool of millennial renters, there is a lot of opportunities in rental housing.

Mixed-use hubs, which blends residential and commercial properties, are a great way – and opportunity – to address this need of a mobile workforce.

Investors need to be more agile to adopt with the changing needs of businesses and consumers. Instead of just funding, they should partner with a firm that can provide a finance solution for long-term rewards.

Challenging the consensus on Trumpeconomics

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Image courtesy trumpenomics.com.

Challenging the consensus on Trumpenomics

More than a half a year has passed since financial markets were shocked at Donald Trump’s US election victory, but some recent trends have developed that challenge some of the earlier opinions formed by financial market commentators about potential implications of Trump’s election.

Some of these earlier thoughts were repeated so often that we could easily mistakenly believe the level of supposed certainty surrounding the future course of ‘Trumpenomics.’ Investors may be better served by focusing on the uncertainty, which at times has been downplayed by markets. This sounds like a negative stance, but with uncertainty comes opportunities, and they may not always appear in the likely destinations and sectors you read about.

What were the popular financial predictions from Trump’s victory?

Some popular predictions for 2017 that emanated from Trump’s victory included:

  • The reflation trade will continue to see US stocks outperform, accompanied with a trend of higher treasury yields amidst plenty of volatility.
  • Emerging markets were also widely tipped to underperform on the back of concerns over the global trade implications from the Trump presidency.

Yet over the first four months of 2017, the opposite has occurred.

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Emerging market equities have been significant out-performers this year despite plenty of publicity surrounding the positive trend of the US share market. Most emerging markets came from a starting point this year of significantly cheaper valuations, treasury yields have been remarkably stable thus far in 2017, and four months in were lower than where they began the year.

The VIX index, a popular measure of volatility of the US share market, has also surprised nearly every pundit, hitting record lows and signalling a calm state of markets.

What signals is the financial market giving us?

Whilst financial markets can often give us false signals, it is worth at least investigating what they may be telling us and why perhaps the initial thinking on the Trump effects may not be so certain. The expectations were instantly high that Trump can cut taxes and free up regulations. With how much success this can be achieved is still debatable, but what is perhaps less debatable is that markets have set a high pass mark for what they are hoping for.

Rather than hoping for success here, are we seeing signs that investors are searching for other investment destinations that perhaps already exhibit a lower tax environment and less red tape? Are investors now questioning the consensus that any instability in global trade policies is a major negative for emerging markets, and pondering who is really the biggest loser under any potential trade war?

If we place faith in Trump delivering on the plan to cut corporate taxes, can we be sure this is the panacea some supporters would have us believe? Whilst on the surface US corporate taxes may appear high, corporations have shown they are quite capable of getting their effective corporate tax rate paid down to lower levels. It is also questionable as to whether the economy as a whole stands to benefit. During the 1950s and 60s, the US enjoyed relatively prosperous times amid much higher effective corporate tax rates. Tax cuts may place pressure on budget deficits, and a subsequent boost in economic growth is by no means assured. The US is already experiencing growing wealth inequality and there is still much guesswork over where the future tax landscape settles.

US bond yields as a positive sign

One shining light from this backdrop is the relatively benign environment this year for US bond yields. This is such a crucial market for funding levels globally, and ironically it could be that mild disappointments with Trump being able to administer his policies could prolong relatively easier monetary conditions going forward. This may be an environment that favours yield sensitive sectors such as commercial property, and better still if one can seek out relative value in other cheaper global markets with solid growth prospects.

Proposed infrastructure spending

Another dimension associated with the Trump reflation trade was the perceived kicker that could stem from significant boosts to proposed infrastructure spending. This also seems to be a case of investors fixated on Trumpenomics and perhaps not challenging the consensus and considering other opportunities. Whilst the infrastructure plan may sound impressive in numbers, if one looks at what China propose over the next few years, it suddenly becomes at best quite underwhelming. At the same time, on many various accepted valuation measures we find the US share market is priced extremely high when compared to the Chinese market.

If we keep accepting the various consensus predictions surrounding what the Trump win means for investors, we may find ourselves neglecting other opportunities.

Even with many sceptics regarding the Trump administration, funding markets are still operating smoothly for those business opportunities that are based on sound prospects. Varna Capital is certainly prepared to broaden its thinking beyond the consensus, and this has led to extensive experience in commercial finance across a wide range of sectors on a global scale.

Varna Capital provides developers and commercial property investors with market leading access to a broad range of financing options. We utilise strong capital partner relationships that include bank and non-bank alternatives from Australia and across the globe.

Get in touch with Varna Capital here.

What do APRA’s interventions mean for borrowers?

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What do APRA’s interventions mean for borrowers?

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Rarely a day goes by in the Australian media without an article published about the sensitive topic of housing affordability. Such a polarising topic is very inviting for politicians and regulators to try and intervene with appropriate solutions, which can invariably lead to some unintended consequences. A surge in investor lending in the property market over a few years leading into 2014 prompted the Australian Prudential Regulator Authority (APRA) of the Australian financial services industry to take a closer look at the potential risks that may follow. Given the fact that mortgage lending has become a substantially greater part of the major banks’ businesses over time, APRA felt the need to apply some pressure which has since tightened lending criteria in many ways.

So what do APRA’s interventions mean for borrowers in the market?

What measures has APRA undertaken?

Various measures from APRA since late 2014 have been designed to curtail the growth in investor lending in the residential property market.

  • Whilst not an absolute hard limit was imposed, APRA cautioned the banks to try and limit the growth rate in the investor lending segment to under 10%.
  • They emphasised that more work was needed with stress testing in general.
  • Sensitivity analysis on vulnerability to a 2% rise in mortgage rates, and a rate level of 7% was encouraged because current rates were quite low.
  • Less specific warnings were given about other riskier lending standards such as high LVRs and interest only loans, which has seen the banks behave much more selectively in approving investor loans. Some are quite conservative and will even apply a discount to some of the expected rental income, and disregard the benefits of negative gearing.

Inaction of the Government and RBA

The burden of monitoring the risks of this area of the economy has increasingly fallen on the shoulders of APRA due to the relative inaction from the Government and RBA. Despite so much talk of potential tax changes that could help slow down investor lending, the recent Federal Budget was heavy on politics but light on potential impact with regards to housing affordability.

Numerous initiatives were announced, yet most economists remain very sceptical that they can address the issue. APRA on the other hand continues to get involved, recently announcing a crackdown on interest only lending by limiting this to 30% of new loans. The RBA however, still has the cash rate at record lows because other areas of the economy remain subdued, and this may well remain the case going forward.

As a result, we have certain rate markets set by the major banks that are a function of market intervention from APRA. This may contrast with the free market’s assessment of underlying risks that certain lending involves, and can lead to market inefficiencies that borrowers and investors should be aware of.

What does this mean for property development?

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Property development is another area being affected by this trend. It has been well documented in the media that there are risks associated with an oversupply of inner CBD apartments in Melbourne and Brisbane. The banks wish to demonstrate their prudence and have thus been very cautious when it comes to lending to property developers. Lending now is far more restrictive, with lower LVRs required and a much higher requirement for the level of pre-sales needed for banks to go ahead and lend. There is some debate surrounding whether the major banks have been overly cautious in this sector, given that the recent population stats are showing solid growth and falling vacancy rates this year.

Despite the intervention from APRA, the free markets have a habit of responding to opportunities even when they have to some extent been sought to be repressed. On one hand, we are reading about the major banks tightening lending standards, yet on the other we are hearing about very buoyant times for non-bank lenders. The latter do not offer deposit accounts and are therefore not regulated by APRA. They can be left to set a rate of lending that is not influenced by the pressures of the regulator as described above. Operating free from the shackles of APRA, many non-bank lenders have swiftly filled the void that was created in lending to large property developers. The flexibility of their business models also enables many of them to cater for offshore demand.

Major bank operating model

The model the major banks are operating under has seen pressure from multiple sources. Recent rate hikes have been made from the banks independent of the RBA cycle. In part, pressure from regulators has been sighted for the blame. Aside from that, the Federal Budget has just imposed a bank levy on the large banks that will have a significant effect. If the banks are being supressed by APRA and the government, we should be asking ourselves whether the current rates being offered by the banks to property investors and developers are being appropriately priced? Are they reflective of the free market determining the underlying risk of the loan, or are they perhaps being priced at prohibitive levels due to market inference?

The answer to these questions may be in the response by non-bank lenders in these market segments, and thus far they are seizing the opportunity. In many cases, they may have the desire and capacity to grow their business and loan book. Contrast this with some of the banks who may not want to grow their lending in certain areas that APRA are targeting.

So for those looking to obtain finance in the property sector, consider the question of who really wants your business, the banks or non-bank lenders?

Varna Capital provides developers and commercial property investors with market leading access to a broad range of financing options. We utilise strong capital partner relationships that include bank and non-bank alternatives from Australia and across the globe.

Get in touch with Varna Capital here.

Capitalising on Chinese tourism

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Capitalising on Chinese tourism

Whilst the rate of growth of inbound travel numbers is subject to the usual ebbs and flows one may expect, Chinese tourism in Australia is proving to be an exciting secular growth story that can be capitalised on.  But rather than simply invest in the tourism sector and hope that this broad trend brings success, a better understanding of the key drivers of this trend is far more likely to produce positive results.

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Most are aware that China has a growing middle-class population that are reaching a level of wealth where overseas travel is possible and common. The businesses that take the time to appreciate the desires and demands of these potential travellers will stand the greatest chance of success.

Chinese tourists have a reputation for travelling on stringently organised larger tour groups. This type of travelling is still likely to be very popular in the future, particularly with those holidaying abroad for the very first time as well as with the elderly. However with technological advancements, younger generations are more likely to research their holidays and complete various bookings independently. Therefore companies that succeed in catering to the demands of each demographic can offer huge rewards for investors. No doubt there will be some great opportunities in this space that haven’t yet been thought of. It wasn’t long ago that home-sharing and ride-sharing apps first gained traction, and now cater to the needs of millions of travellers worldwide.

The Chinese are also usually confined more to certain key holiday periods in the year where they prioritise travel. For this reason, destinations that improve the convenience of access for the Chinese will offer better potential. It is worth regularly monitoring the news to see which global cities may be opening new airports or catering for more direct routes to and from the major airports in China, to make their cities more accessible for the Chinese. Likewise, one should keep any eye out for countries that are relaxing some of their visa rules with a goal to attract tourists from China.

In 2015, China spent around $10 billion on outbound medical tourism. This figure is set to continue to rise as factors including China’s growing number of High Net Worth Individuals (HNWIs), its increasing ageing population and growing emphasis on health and fitness. Combined with low government health spending in China, these factors are compelling Chinese to invest in healthcare internationally already, making medical tourism another sub-trend that has the potential for rapid growth from Chinese demand.

Infrastructure spend could be a flow-on effect from a healthy tourism sector whereby the weight of numbers may persuade governments to boost their spending on infrastructure to ensure they don’t fall behind as an attractive tourist destination. Last year the growth in China’s outbound tourism numbers did see some signs of slowing, which may be more of a trend in the short-term. During this time, we have seen some elevated levels of travel warnings in some counties, and the weakening of the Chinese Yuan may have curbed some demand. This may act as merely a blip in the longer-term secular growth story. For an investor examining how to capitalise on this longer-term trend, a slight slowdown in growth could lead to negative sentiment that offers more attractive buying opportunities.

WHERE DOES AUSTRALIA FIT IN?

Australia has already benefited significantly from this trend. There are certainly some boxes ticked for the Chinese tourist in terms of air quality, natural spacious beauty, good food and shopping, great beaches and interesting wildlife. Tourism Australia has also recently launched the China Australia Year of Tourism 2017. Businesses will be able to participate by co-branding their product with the Year of Tourism logo. There will be several events held during the year as part of the program which aims to provide a variety of benefits including bringing businesses from China and Australia together and developing partnerships to co-operate so both can benefit from the growing Chinese outbound tourism sector.

Property beyond the headlines

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Property beyond the headlines

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US investor Howard Marks has helped build Oaktree Capital into one of the most successful alternative investment management firms out there today. Those who are familiar with him are privy to his concepts of first and second-level thinking, which he discusses in his regular memos to clients. In one such memo in September 2015 Marks states, “First-level thinkers see what’s on the surface, react to it simplistically, and buy or sell on the basis of their reactions.” In essence, first-level thinkers are easily swayed.

The media is notorious for highlighting extreme negative scenarios that are more likely to receive a larger number of clicks and therefore generate more advertising revenue. However if we let ourselves get swept away in this, we can very easily surrender to first-level thinking.

A quick look at some of the points we typically come across in the mainstream media surrounding the NSW property market is one such area where first-level thinking may be evident;

  • Rate cuts are coming to an end and the consumer is highly indebted, making housing severely unaffordable.
  • The increase in supply of apartments is a major risk that could lead to severe declines in property prices.
  • The crackdown on corruption and money laundering in China is making it more difficult for the Chinese to transfer money abroad, meaning the Chinese bid for Australian property going forward could be hit hard.

Re-visiting the concepts of Howard Marks and his thoughts on second-level thinking instead encourages investors to delve deeper prior to making any decisions. “On the other hand, second-level thinkers double-think (and triple-think) every angle of every situation.”

It may not provide great “clickbait”, but perhaps some areas that could lead to an upside surprise to economic growth forecasts in NSW should be examined if one wants to be a second-level thinker. A positive story that has recently received a surge in publicity is the potential boost to the NSW economy that infrastructure spending could provide. For many years, economists frustratingly pointed to this as an opportunity, yet the idea has been slow to gain traction. While the coalition formerly emphasised infrastructure as a priority through Mike Baird, the newly appointed premier Gladys Berejiklian vowing to ”go harder” with infrastructure shows some true signs of change.

Even before many projects get underway, NSW is currently the pick of the states in terms of economic growth. The numerous articles highlighting poor housing affordability typically discuss the future directions of house prices and interest rates. Less thought is given to real wages growth, probably because for many years this has been somewhat disappointing. If the NSW economy can continue its good form, is an improving real wages environment an example of second-level thinking that some investors may be ignoring? Potential for higher inflation and interest rates seem to be low for the time being. Whilst credit rating agencies have highlighted some concerns over NSW, borrowing spreads over government bonds are behaving themselves and suddenly an infrastructure led growth spurt looks quite plausible.

It becomes increasingly hard to argue against the warnings that there are risks in the property market due to an increasing supply of apartments. Yet is this getting too much publicity? Should we also extend beyond first-level thinking and consider the component of stand-alone dwellings which are yet to see the same trend of a large supply response?

It won’t take anyone long to find a plethora of articles connecting the risks for China’s crackdown on corruption and money laundering flowing through to a reduced demand for Australian property. What may take a little longer to find however are articles with in-depth discussions surrounding some of the reasons behind this crackdown. Are we then paying enough attention to the potential that a successful crackdown could result in longer-term benefits of a more efficient government in China, increased confidence, and an improving economy there?

This is not to suggest to run out tomorrow and gear yourselves up to the eyeballs on NSW property. The point is that whether we intend to or not, we often get caught up in first-level thinking. We should also be just as alert to look beyond very commonly expressed rosier forecasts on various asset markets. Negative themes that are currently lurking quietly in the background could develop into front-page news stories in the future, and should therefore also occupy some of our thoughts. Investors should examine all possible angles equally, not simply pay all of their attention to one scenario because it occupies more space in the media.