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Australian trophy homes are back in demand

19 February 2020

Investment

 

 

 

Luxury homes are now leading the recovery in Australian house prices after two years of falling values, and those on the hunt may have a small window before values could overtake their pre-slump highs.

When reports surfaced late last year on the purchase of a $140 million mega-penthouse atop Lendlease’s yet-to-be-built Tower 1 development at Sydney’s Barangaroo South, the message to prospective buyers was clear: Trophy properties in Australia’s biggest cities are back in demand.

On the back of a two-year market slump where high-end homes in Sydney and Melbourne lost more of their value than the broader market, luxury homes are now leading the recovery. Experts say low interest rates, rising global numbers of ultra-high-net-worth individuals and Australia’s strong appeal as a destination are factors likely to drive home prices to new highs over the course of 2020.

“The cycle in high end property prices has been more exaggerated in recent times,” says ANZ Senior Economist Felicity Emmett. “They rose more strongly than overall prices in the period up to mid-2017, they fell more sharply, and they have recovered more quickly.”

Despite prices in the top quartile of Sydney’s housing market falling by 17% between mid-2017 and mid-2019, and Melbourne’s top quartile falling by 16% over the same period, top quartile prices in Sydney and Melbourne have now recovered by 12% and 13% respectively, Emmett says.

And prices are likely to continue to rise this year Emmett says, with the broader Australian housing market forecast to rise a further 8% in 2020, and the broader Melbourne and Sydney markets steaming ahead by another 12% and 10% respectively.

“Interest rates are set to remain low for some time and property is likely to be a beneficiary as investors search for returns and owner-occupiers can fund larger mortgages,” Emmett says.

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Wealthy on the rise

Driving interest in luxury investments is an ongoing increase in the global population of Ultra-High-Net-Worth-Individuals, which global property firm Knight Frank defines as people with US$30 million or more in net wealth.

The global UHNWI population is forecast to grow by 22% in the five years between 2019 and the end of 2023, Knight Frank predicts in its Knight Frank Wealth Report 2019, swelling by 42,711 people to a global total of almost 250,000. This is an acceleration compared to the previous five years which saw the UHNWI population rise by 18%.

Australia’s relative appeal to wealthy investors, its stability in an uncertain global environment, and its strong population and employment growth, have helped Sydney and Melbourne prime home prices climb more steeply than many other markets.

The Knight Frank Prime Global Cities Index, which tracks the movement in prime prices across 45 cities worldwide, found the average annual rate of growth in the year to Q3 2019 was 1.1%, which was the slowest rate in a decade.

But amidst this downcast global environment, Sydney and Melbourne were predicted to outperform. Sydney tied third place with Geneva in Knight Frank’s Global Forecast 2020, with Knight Frank predicting 4% growth in prime housing prices this year. Sydney’s strong investment in transport infrastructure was hailed as a major factor in Sydney’s appeal.

Melbourne tied fourth with Madrid and Singapore at a predicted 3% growth.

“Our world-class education facilities, lifestyle, ownership title and relatively stable political environment continues to attract offshore interest in Australia not only for this generation, but investing for their generations to come,” says Michelle Ciesielski, partner and head of residential research at Knight Frank Australia.

High-end property valuation and advisory firm Pontons found a similar trend in its own analysis of the resale market for high-end homes in Sydney. Pontons found there was a surge in high-end sales in Sydney in the last three months of 2019, with 31 homes that were valued at more than $10 million exchanging hands.

While the total sales volume of high-end homes was 43% lower in 2019 than the previous year, there had not been a decline in selling prices, Pontons found.

Attributes most in demand

Despite the strong appeal of Sydney and Melbourne to international investors, investment restrictions for non-residents along with limited capital outbound from China and India have caused the highest proportion of prime property sales to go to local and expat buyers, Ciesielski says.

Australian UHNWIs own three homes on average, Knight Frank research shows. Most are purchased as first and second homes rather than purely as investments, typically involving a city pad or family home in a prime suburb, and a lifestyle retreat held for the weekends.

In Sydney, the biggest factor driving interest from the wealthy is a waterfront position, Ciesielski says, while in Melbourne close proximity to prestigious school’s influences buying decisions. Privacy and security are also major priorities, with buyers often prepared to pay top dollar for apartments spanning entire floorplates, with direct lift access from a secured carpark.

Both cities are likely to see particularly strong demand for low-maintenance homes with high-level amenity, typically luxury apartments or boutique townhouses, Ciesielski says. And this demand is coming not just from empty-nesters, but also from an increasing number of families and entrepreneurs who want this kind of lifestyle without reducing their living space.

“This has caused a strain on the supply of three bedroom apartments and townhouses across many prime suburbs of Sydney and Melbourne,” Ciesielski says.

Continuing demand

Knight Frank’s Wealth Report predicts the largest five-year increase in UHNWIs will be in Europe, with a 24% increase in the 70,627 UHNWIs living there in 2018. North America is predicted to come in second with an 18% increase to its 51,912 UNHWIs, and Asia is predicted to come in third with a 23% increase to its 48,245 UHNWIs.

The report found UHNWIs are becoming increasingly mobile, with 36% holding a second passport in 2019 compared to 34% the previous year, and 26% planning to emigrate permanently, up from 21% the previous year.

China’s tightening grip on capital outflows continues to cast a shadow over outbound investment, Knight Frank found. But Chinese buyers are still looking at familiar global markets, particularly London, Sydney, Melbourne and Hong Kong.

The biggest risks to prime property prices are the stock market losing momentum, business conditions weakening suddenly or a currency shift deterring international and expat buyers, Ciesielski says.

“In saying this, we feel there is a low likelihood of Sydney and Melbourne prime prices falling,” Ciesielski says. “Should we experience a significant fall in stock market performance, this may lead to only short-term weaker prime property price growth, as this tends to encourage investment back into prime property.”

 

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