Asians buying apartments in Sydney as a safe haven investment, research report suggests

Asian property investors are continuing to regard the Sydney property market as a safe haven for their cash with the Chinese in particular looking to buy new apartments, it is claimed.

Although the decline in Sydney property prices recorded in 2011 and early 2012 have largely stabilised, demand for new apartments remains relatively robust, albeit predominately in specific price brackets, according to a research report from Knight Frank.

Most of the demand is concentrated in the AU$450,000 to AU$650,000 range for first home buyers and AU$650,000 to AU$850,000 for upgraders with significant demand stemming from Asian purchasers.
‘Demand for new apartments has been steady in line with the generally cautious mood amongst households, albeit with some inconsistencies between locations and product type,’ said Matt Whitby, Knight Frank’s head of research and consulting for Australia.

At the lower end of this scale, first home buyers are particularly quick to absorb any sub AU$550,000 product, especially given the government initiatives targeting new apartments at the affordable end of the market. Specifically, this has included increasing the grant for new dwellings to $15,000 in addition to some transfer duty concessions.

He reckons that the improved affordability following the moderation in median dwelling prices, lower interest rates and higher rents will also encourage some renters into ownership.

According to the report, local Asian buyers, particularly Chinese, are currently accounting for around 50% of demand. Asian investors continue to view Sydney as a safe haven that is well supported by a strong rental market.

In what will add to demand from offshore, the Hong Kong Government has recently placed a 15% buyers’ tax on offshore purchasers to assist in cooling the Hong Kong market. Consequently, Knight Frank expects there to be a large increase in buyer activity in the Australian residential market with buyers coming from China, Singapore, Malaysia, Indonesia and India.

FIRB laws also mean that offshore Asian buyers in an investment capacity are excluded from the established market, therefore directing demand to new product.

The report states that while the level of investor demand is yet to show a material response to lower interest rates, particularly following the expiry of the NSW Home Builders Bonus at the end of June 2012 that took some urgency out of the market, it is investors that continue to underpin the bulk of new apartment demand in Sydney.

Agents currently report more than half of active enquiry is sourced from the investor segment of the market. However there is scope for this part of the market to become more active in the coming year.

The differential between gross apartment yields and mortgage rates has closed over 2012 and will close further if the cash rate continues to decrease.

In addition, the lower cash rate is reducing the appeal of cash as an investment class, which will increase the tendency for investors to start rotating out of cash. The growing awareness of people to use Self Managed Super Funds is also a growing source of demand from investors.