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Chinese buyers ‘will avert property cataclysm’
The Australian 12:00am January 12, 2019
Luke Griffiths
Ongoing Asian investment in Australian property, particularly from Chinese buyers, is the only thing saving the local market from a “cataclysmic” wipe-out, property developer Michael Drapac says.
The founder and chairman of Drapac Capital Partners has long predicted a significant fall in property prices, particularly in Sydney and Melbourne, and while interest from Asia would avert a “horrific” outcome, an overall correction of 30 per cent should still be expected.
His comments come as figures this week from the Australian Bureau of Statistics show the number of apartment approvals in November fell to a five-year low, driven mostly by a 26 per cent fall in Victoria and a 15 per cent fall in NSW.
The NSW Property Council also reported a 22 per cent fall in industry confidence over the past 12 months.
Drapac, 63, says the local market has been on “borrowed time” for at least two years and that a significant correction is inevitable.
Tighter lending standards by the banks and record household debt only add to the problem, he says.
“Our market was so ridiculously overpriced that finally the mood and behaviour has started to change,” Drapac tells The Weekend Australian.
“The market has corrected a little bit, but I think it has a long, long, long way to go. We’re completely out of whack, ridiculously overpriced and any number of metrics will tell you that.
“If you add on top of that what happened in 2018 and what’s going to happen this year, and the fact there won’t be any growth for, say, four or five years, I think we’ll see an overall correction of about 30 per cent from where things were at the start of last year.”
Sydney property prices fell nearly 9 per cent last year. Melbourne’s fell 7 per cent.
Similar falls are expected this year, yet Drapac says they would be far greater if not for Chinese investment, despite its slowing significantly following a clampdown by the communist government on how much money could leave the country.
Research by Juwai, a Chinese property portal focused on overseas properties, estimated a 27 per fall in Chinese investment in Australia’s property market in 2017.
Of the $US17.4 billion invested by the Chinese in 2017, $US14.1bn was in residential property.
Juwai found Australia ranked second in terms of the number of inquiries, behind only the US.
“If we didn’t have the Chinese supporting our market the impact would be horrific, but I think the Chinese and Asians will continue to come to Australia and make the correction less painful than it would be,” Drapac says.
“If the Chinese government introduced a policy that made it impossible for them to bring their money to Australia, our market would be incinerated.”
Drapac says many industry figures are in denial about the state of the market, unwilling to concede they have “bought a lemon”.
“Everyone who is invested in any boom doesn’t want to face the reality,” he says.
“It starts with the developers, who you’ll increasingly hear are in trouble, and they’re going to be in a lot of trouble because development properties are subject to massive leverage, and that’s in addition to borrowing leverage.
“All the pseudo experts are saying the market will go back to some commercially sustainable level. No. It never has, never will.
“Markets that have been overvalued, or undervalued, when they correct they never just go back to this, what I would call, sober, rationally explainable market. They always overcorrect.
“I think where all the experts are getting it terribly wrong is that if they think it’s just going to go back to some rationally intelligent value, they are dreaming.”
The Australian reported last week that a large number of east coast property development sites were set to hit the market as Chinese developers were forced to sell because of a lack of finance.
Andrew Antonas, one of the largest sellers of residential development sites in NSW, has at least 12 large-scale sites already on the market.
Many Chinese developers have already sold out.
Drapac, a keen student of historical trends, has made millions buying up unwanted assets at the lowest point of the property cycle.
He defied prevailing opinion and made several investments in the US following the global financial crisis and now has more than $600m of assets there, centred on Denver, Chicago, Atlanta and Philadelphia.
Drapac, who divides his time between Melbourne and his US base in Atlanta, says he plans to develop some sites and estimates a sales pipeline in excess of $3 billion over the next six years.
He sold out of the Australian market in 2011 because he viewed it as too risky and says he has no intention of buying back in anytime soon.
“The signs to enter a market are very easy to work out … it’s when you start to see very little development,” he says. “I tend to get in before anyone else and get out before anyone else.”