Australian investment opportunities spark demand for capital

The ‘Land Down Under’ is bouncing back with market expectations of 3.5% growth this year, according to a poll from Reuters.[1] The benchmark ASX 200 index of share prices has staged a dramatic recovery since its decline alongside other stock markets as Covid-19 went global last March. A parallel rebound in real estate prices is making global headlines with the Australia housing market recording its biggest monthly increase in 17 years in February.[2]

Housing prices, stocks surge

Last year, the rally in property prices was largely driven by purchases in regional towns and popular coastal resorts as buyers looked for alternatives to the big cities amid the pandemic.[3] In February, though, prices increased in every capital city and region of the country, according to data from property research firm CoreLogic. Sydney and Melbourne were the biggest gainers in February, with prices rising by 2.5% and 2.1% respectively.[4]

In the public equity markets, information technology and materials, or mining and minerals, were the best performing sectors in 2020.[5] As 2021 begins, some Australian companies are well positioned with structural shifts in the global economy that have been accelerated by the pandemic. For example, the share prices of Australia’s lithium producers have climbed in tandem with the metal’s spot price due to its importance in manufacturing batteries for electric vehicles – a priority for countries seeking to decarbonise transportation.

Outlook is bright for Australian real estate

Concerns about the emergence of asset bubbles are not confined to Australia. Yet there are few signs at present that the Reserve Bank of Australia will act to cool the country’s asset markets in the early stages of the recovery. As with other central banks around the world, the RBA has said it will maintain easy monetary conditions for the foreseeable future.

“From our offices in Sydney, Melbourne and Perth, we are seeing a growing trend with investors across the country seeking innovative financing avenues to reinvest in Australian assets,” says Mitchell Hopwood, Managing Director of Australia EquitiesFirst. “There is confidence about the future and the direction of stock and property prices. Many of the investors we work with are looking to add to their positions in the companies they’re involved with, or the sectors they like, and they’re increasingly active buyers in the real estate market.”

Credit constraints

“High net-worth individuals in Australia tend to have a large proportion of their wealth tied-up in securities, real estate and other assets,” adds Hopwood. “Few investors would want to sell assets to fund new purchases in market conditions like these, which means that many are asking how they can finance the expansion of their portfolios.”

In parallel, banks are generally reticent to lend against holdings of anything other than the largest and most liquid stocks, Hopwood points out. On the property side, mortgage financing can be slow to arrange. Almost all bank loans in Australia also require full recourse to all the borrower’s assets.

Innovative financing

Facing constraints in traditional credit markets, more investors are exploring innovative financing solutions. These include loans with a range of different structures from non-bank lenders such as funds, family offices and other independent credit specialists.  – EquitiesFirst’s particular expertise is in providing equity financing against long-term equity holdings.

The global law firm Baker Mackenzie expects the Australian private credit market to expand as traditional banks withdraw liquidity in the face of higher funding costs, increased regulatory scrutiny and the recent Royal Commission into financial services misconduct. “This bank lending decline created a financing gap, which is being increasingly filled by Private Credit providers and it is expected that Private Credit will play a key role in the recovery of the Australian economy,” observed the law firm in a report last year.[6]

“Investors are understandably looking for more progressive, flexible sources of capital,” says Hopwood at EquitiesFirst. “Traditional lines of credit or mortgages aren’t necessarily the answer for investors who want to capitalise on these conditions. Investors with meaningful portfolios of listed equities have another option for financing new investments while minimizing the opportunity cost of liquidating their existing holdings.”

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[1] https://www.reuters.com/article/us-australia-economy-poll-idUSKBN29Q07B

[2] https://www.bloomberg.com/news/articles/2021-02-28/housing-booms-in-australia-as-prices-surge-most-in-17-years

[3] https://www.domain.com.au/news/the-top-30-suburbs-in-australia-for-property-sales-in-2020-1014107/

[4] https://www.9news.com.au/national/australias-property-prices-rise-at-17-year-highs-as-fomo-bites-buyers/534341a8-93f0-49e9-bde4-8aa1d0160bb1

[5] https://switzer.com.au/the-experts/paul-rickard/will-2020s-best-performing-stock-market-sectors-do-best-again-in-2021/

[6] https://www.bakermckenzie.com/-/media/files/insight/guides/2020/asia-pacific-guide-to-private-creditv2.pdf