Australia rate cut good for foreign builders, buyers

Singapore

AUSTRALIA's 25-basis-point rate cut to a record low of 2.25 per cent last week is expected to benefit developers with property assets and building projects Down Under, as well as those eyeing acquisitions.

It will also be a boon for homebuyers, and an even bigger one for overseas investors drawn by the correspondingly weaker Australian dollar (AUD).

But for foreign firms with investment properties in Australia, they could suffer translational losses and declines in net asset values if they have not taken currency hedges.

The Australian dollar has slumped 16 per cent against the US dollar from US$0.9369 last September to US$0.7834 last Friday. Against the Singapore dollar, it has fallen 10 per cent from S$1.1753 last August to S$1.0544 last Friday.

The Reserve Bank of Australia had hoped that the easing measure would stimulate the economy and counter the country's weak growth, disinflation, sliding commodity prices and worsening trade deficit.

The good news in this for developers that are currently paying off construction loans for Australian projects is that it would obviously translate into savings - albeit slight - in interest payments.

Singapore developers tend to take onshore AUD-denominated loans to manage currency risks. Ho Bee Land and Far East Organization are two such examples.

Most onshore banks have passed the cut in full to consumers, with Westpac even exceeding the rate cut in its mortgage rate reduction, said Dominic Brown, head of Australia and New Zealand Research at DTZ. After the cut, the standard variable mortgage rates offered by most Australian banks average about 5.7 per cent.

Retail buyers, on the other hand, prefer offshore funding from Singapore banks. For them, the benefit that will come with the rate cut remains to be seen, as it is not yet clear if Singapore banks offering AUD loans will follow suit.

Lim Beng Hua, head of secured loans at UOB, said: "It is still too early to tell if we will be adjusting interest rates for our AUD-denominated loans. However, we work towards offering competitive rates which are pegged to the market rate."

Another positive for institutional investors is that they would be able to raise their risk profile when buying properties. "The concurrent fall in government bond yields further reduces the hurdle rate for investment, which makes property more attractive on a relative value basis," said DTZ's Mr Brown.

"In essence, institutional buyers searching for higher yielding assets are prepared to move up the risk curve and seek longer duration assets," he added.

Higher demand for properties from retail buyers of course also bodes well for developers, said Darien Bradshaw, executive director, international project marketing at CBRE.

"If you're a developer deciding to buy a residential site, and you know you're in a period where the Aussie dollar is falling in value and you think that a big portion of your end-buyers might be offshore, and you know your costs will be less because the value of the currency is going down, it will probably give you renewed confidence to go and purchase the land," he said.

On the flip side, developers and real estate investment trusts (Reits) with investment properties there could suffer translational losses and lower net asset values, given that both items have to be converted to SGD when they report their earnings, said DMG & Partners Research analyst Ong Kian Lin. He cited Ascendas Hospitality Trust, Ascott Residence Trust, Frasers Commercial Trust, CDL Hospitality Trust, Suntec Reit, Starhill Global Reit and Keppel Reit as some of the Reits which own Australian assets.

On the retail investors front, some Australian commentators are worried that the lowered interest rates might draw hordes of foreign investors into the market, among them possibly some less financially secure borrowers.

But DTZ's Mr Brown believes that there won't be "a flood of easy money" because Australian banks will continue to be strict in their lending practices.

A property asset bubble where strong demand pushes prices up to unsustainable levels is also not likely, CBRE's Mr Bradshaw added. "If you're in an acquirement where your borrowing costs are down, surely that means your ability to serve your mortgage will improve," he said.

To also be sure, most agree that there isn't an impending oversupply situation, plus borrowing rates in Australia are still higher than many other jurisdictions.

Gavin Sung, head of International Property Sales at Savills (Asia Pacific), said: "One of the biggest hurdles we had with Australia is that their interest rates are significantly higher than many other countries. The UK's base rate is only 0.5 per cent, for example.

"It's only recently that we've seen a huge decrease in Australia's interest rates, and a significant fall in its currency over the course of the last year."

He added that even if interest rates were to be adjusted another step down to 2 per cent - and some are saying this is likely in the first half of 2015 - they would remain much higher than many other mature economies. "Australia has got a long way to go before people think that borrowing money here is cheap," he said.

Yet others advise against playing the interest rate game. UOB's Mr Lim cautioned that financing a property is a long-term commitment. "Buyers of overseas properties must have the holding power to ride through economic and interest rate cycles," he said.

Another developer, preferring not to be named, said that short-term currency and interest rate fluctuations are not a major concern as its investment in Australia is for the long haul.

Additional reporting by Prisca Ang prisang@sph.com.sg