Australia property market less attractive

High taxes, rapid asset price recovery to blame, says LaSalle CIO

High taxes and a rapid asset price recovery have made the Australia property market less compelling for funds seeking high returns, with more attractive options in Japan and Singapore, according to a top executive of LaSalle Investment Management.

Ian Mackie, LaSalle’s chief investment officer for Asia-Pacific, told Reuters in an interview that the Australian government’s plan to cut withholding tax for foreign investors is a much-needed step to bring it into line with other regional countries.

‘The tax situation puts, in my opinion, Australia at somewhat disadvantage when comparing with other countries in the region,’ Mr Mackie said, ‘because the after-tax result of the investment is penalised harder in Australia than it is in Japan, Korea, Hong Kong or Singapore.’

The Australian government plans to cut the tax next July to 7.5 per cent from 30 per cent. Elsewhere in Asia, the tax rates range from 5 to 10 per cent.

Mr Mackie said that the speed of the recovery in Australian property prices compared to those in other countries meant limited opportunities for high-return investors, while a strong Australian dollar is also an obstacle because it has boosted hedging costs.

‘We still see opportunities here but the pricings recovered so much faster. They didn’t go down as much as another countries did and recovered much faster,’ he said. ‘Maybe for us in Australia, the window is closing faster.’

Prices for Australian office buildings were less than 20 per cent lower than a year ago in the second quarter, while those in Singapore and Tokyo were still down more than 30 per cent. Office vacancies in Australia are also stabilising.

LaSalle Investment Management, the investment arm of real estate services firm Jones Lang LaSalle, has US$3 billion available to invest in Asia after raising an opportunity fund last year, and Mr Mackie said that most of the funds have not been deployed yet.

Jones Lang’s chief financial officer, Lauralee Martin, told Reuters in an interview last week that its Asian business will drive growth next year as the region powers a global economic recovery.

Mr Mackie said that he sees some opportunities in suburban retail assets in Singapore and in the logistic sector in Japan. In particular, Japan offers handsome spreads between low borrowing costs and yields on buildings. ‘You’ve got 300 basis points of difference, which substantially leverage up the returns.’

He said that Singapore, as well as Thailand and Hong Kong, has seen sharper declines in property values, creating better chances to outperform Australian properties.

Source: Business Times, 19 Nov 2009