Perth market buzzing, but investors still largely missing in action

The Perth property market is hot, rising 10 per cent over 10 months, so where are the investors?

This question underpinned a recent Property Council event, as data shows investors are still shying away from ‘the most isolated city in the world’.

According to the most recent ABS data, investors represented $452 million of new loan commitments in April, well below the $1.139 billion high at the height of the market in 2006.

Investor lending had been falling since it last hit more than $1 billion in September 2014, reaching an all-time low in May 2020 of just $162 million of investor finance, but the rate is now in recovery.

In WA, investors now represent around 16 per cent of all new housing finance commitments, below the 10-year average of 26 per cent.

“Investors are starting to come back, just not in the numbers you’d normally expect,” REIWA president Damian Collins said.

“The past few times we had a vacancy rate of under one per cent, investor finance was about a billion dollars a month. 2018/19 was horrible, it was about $200 to $250 million a month, now it’s come back to $462 million in March 2021 – so it’s getting better.”

Mr Collins said Perth’s up-and-down market was turning investors away but he believes we will start to see more investors, though they wouldn’t be “back in absolutely massive numbers”.

URBIS director David Cresp said confidence in the Perth investor market is lacking.

“We have seen a decline over a number of years, I’m not sure an uptick in the market is enough to totally turn that around,” he said. “These days there is a lot of other competition.

“One of the things Western Australia does really badly is telling everyone how great Western Australia is.”

However results from a survey by WA-based Momentum Wealth did find local investors were bullish on the market.

Seventy eight per cent of WA-based residents felt Perth was the location with the most upside, but nationally the sentiment is less impressive.

In the Property Investment Professionals of Australia’s annual sentiment survey at the end of 2020, just six per cent of investors said Perth offered the best prospects for the year ahead, slightly up from the previous survey.

Off-the-plan market still impacted by foreign buyers surcharge

At the start of 2019, the state government introduced a foreign buyer surcharge that pegged foreign buyers with an extra seven per cent of the value of the property.

It is a move that has been widely panned by industry bodies, with Mr Cresp attributing the surcharge to a decline in off-the-plan apartment sales.

“We killed off foreign buyers totally when we decided to bring in a foreign tax,” he said.

Mr Cresp said developers would traditionally sell somewhere around 10 to 20 per cent of apartments to foreign buyers. He added that his amount wasn’t crowding out the local market.

He also noted that foreign buyers were more eager to purchase off-the-plan apartments than local buyers, and were instrumental in getting projects off the ground.

However the surcharge on foreign buyers caused sales numbers to ‘plummet overnight’.

“It meant foreign buyers went from that traditional 10-20 per cent every quarter down to sitting around five per cent,” he said.

“There has been some relief and the [stamp duty] exemption on off-the-plan did apply to foreign buyers.”

Mr Cresp said the WA government had an opportunity to differentiate itself in Australian the marketplace as the world transitioned to a post-COVID society.

“I think it’s a huge opportunity for the Western Australian market to actually have a point of difference to say, ‘hey, we don’t have foreign buyer tax, we want foreign investment here’,” he said.

Despite the drop in foreign buyers, Mr Collins, who is also the managing director of developer Momentum Wealth, said the off-the-plan market was ‘moving in an orderly fashion’.

He said most pre-sales were owner-occupier driven, with investors slowly coming back into the fold.

“I certainly think the investors will be really important to get the off-the-plan market really humming,” he said.

“I’m certainly hoping to see more investors because it will get more projects off the ground and more construction jobs, which we all want to see.”

However Mr Cresp said it was still a tough market for developers, with apartment prices just starting to move in an upward direction.

“It is still a competitive market which is good for affordability but what we are starting to see, and every developer is panicking at the moment, is the costs really starting to ramp up,” he said.

According to URBIS data, Perth’s apartment market had the highest quarter of sales since 2016 in the last quarter of 2020.

“There are thousands of apartments out there that investors could be buying,” Mr Cresp said. “There are probably opportunities for the government to try and provide some incentivisation for investors to get into that market so we can bring some stock into the rental market.

“In 12 months’ time, we are not going to have a lot of completed apartment stock on the market.”

One asset class that might be a green shoot for investment in the local apartment market is the burgeoning build-to-rent (BTR) sector.

Mr Cresp said the BTR market could be a significant asset class in five to 10 years, and despite most of the majors looking to Sydney and Melbourne, Perth offered an attractive alternative with affordable prices and good returns.

Affordability a potential issue going forward

While WA is one of the more affordable places in the country, Mr Cresp said it might be a potential issue in the future when the borders opened up.

He said Western Australia could lose its competitive advantage as the most affordable place in the nation if there was population growth without an increase in supply.

DevelopmentWA manager metro north Anna Ladyman said one of the flipsides of increasing prices was the pressure on affordability.

Ms Ladyman predicted a strong market going forward, but explained that supply might be an issue as demand continued to come through into the year ahead.

A worry at the moment in regards to affordability is what could happen when interest rates go back up again, according to Mr Cresp.

“There is a huge amount of FOMO driving the market at the moment and houses are going incredibly quickly when they are coming to the market,” he said.

“We have a rental vacancy crisis out there, we haven’t got enough investor stock, we urgently need to find ways to bring more investors into the market.

“What we don’t want is it to get too far out of kilter, and the answer to that is that we continue to bring supply on readily.”