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Winston’s Weekly: The US Fed and the Aussie residential market

This transcript has been AI generated:

Manny Anton: Good morning and welcome to this week’s edition of Winston’s Weekly, covering all things property. I’m Manny Anton, your host for today’s property chat. Winston, welcome back.

Winston Sammut: Thank you.

Manny Anton: Nice shirt today.

Winston Sammut: Thank you.

Manny Anton: Any history behind that one or -?

Winston Sammut: No no – it’s just floral Friday.

Manny Anton: Okay. All right. Well, Winston, let’s start with an update on this week’s property news. The interest rate space has been pretty busy this week, so the US Fed made markets pretty happy this week by signaling a move away from a from a tightening bias and going as far as to reiterate their guidance that they’re looking at potentially three rate cuts this year. So what are your thoughts on this, and what are the implications for the property sector, from your perspective?

Winston Sammut: Yeah, well, I guess what the Fed is, is waiting on is more evidence that inflation is under control. We know that. And we know that there’s going to be rate cuts. It’s just a matter of when is it going to happen. And markets have actually been happy to wait until then over to see what happens over the next couple of months. And markets are pretty confident that those rate cuts will come. It’s just a matter of when we need to see the first one to make everybody happy.

Manny Anton: Yeah. Do you think it is the consensus that they will actually follow through with those three rate cuts?

Winston Sammut: No, consensus is that they will follow through with those three rate cuts? But again, it’s an issue of timing and size of the cuts. And that is the question at the moment.

Manny Anton: Alright. Let’s move on to more domestic matters. Residential. So residential housing is this week has been front and center in terms of the press. There’s a lot of discussion going on at the moment about rising prices, falling supply. You know, they seem to be the headlines on a daily basis. What’s your take on the residential housing situation and what’s what’s your view on the outlook?

Winston Sammut: Look, the outlook for residential is basically – will we will see price rises going ahead over the course of this year. They won’t be as high or as dramatic as we’ve seen over the last couple of years. But we will see price rises and that’s primarily because of an issue of supply and demand. We’re getting more migration in. We’ve got people who are looking to buy and haven’t made the decision to buy yet, primarily because of concerns about where interest rates are at present. Remembering, 2 to 3 years ago you could get a mortgage fixed for 2 to 3 years at 1.9%, and now it’s 6.5. Historically, the six and a half is not a huge number because I can recall back in my earlier days, you know, we had mortgage rates of 16, 17, 18%.

Manny Anton: Sadly, I can also I can also remember those times, Winston.

Winston Sammut: It’s relative. And the issue is that those people that borrowed it at that low rate of 1.9 fixed rate have got a very big jump to having to pay now at 6.5 as those loans are rolling out. But the reality in terms of residential in general is really is about supply and demand. What we have seen over the last 20 to 30 years is the Australian dream of owning a house on a quarter acre block is no longer there because what’s been happening is the size of of blocks have actually diminished and the prices have increased and we’ve seen that continuing over time.

So people are getting less and paying more for that and they’re having to borrow more for that. But what’s driving it is the demand. The problems with with the residential industry, the building industry at the moment is from a cost factor because costs have gone up dramatically. A number of builders have actually gone broke in that period where they had fixed price contracts and they had to buy the material at higher prices so they couldn’t make any money out of it.

So the urban sprawl is being changed to a situation where now we’re looking at infill developments because there’s an additional cost to residential sprawl and that is you need the services: you need transport, you need schools, all those things added on. But if you do it in an infill area, in other words, in in the inner city, in existing suburbs, all those services are already there.

So it makes it easier. And now I think the the western suburbs here in Sydney, they’re talking about allowing developments of up to six floors, which is not huge developments, but still. So you can get more people and more families in the same areas space that you would get before. And I think that’s the way things are going to go going forward.

Manny Anton: I mean, the Europeans have been going that way for a long, long time. So they tend to rather than go out, they go up. So that’s really what’s what’s happening here.

Winston Sammut: Correct. And also, there’s been a bit of a focus on ‘build to rent’, where people are looking to invest money in entities that are looking to build apartments purely for rent as opposed to getting people to buy them.

But in reality, when you look at property over the long term, you don’t really make a lot of money from your rental income particularly. And that’s why negative gearing is there because it sort of offsets some of some of the costs where you make your money is in appreciation of the asset you own. So at the moment there’s the “have’s” – those people that have a house, some with mortgages (quite a few with mortgages), and those that “don’t have” and they’re trying to get into the market.

And that’s the issue at the moment. And I suspect as we will see rate cuts here in Australia as well, but probably later on in the year at the earliest, in my opinion, maybe even next year, people will be able to sort of budget accordingly, can be able to afford to get back into the residential market.

Manny Anton: All right. But just on that point, so at some point rates will come down. We don’t know when that’s going to be, but I suspect that you’re right. I think there’s question marks over whether it’ll happen in 2024. Personally, I think it’s more likely to happen in ’25. But what you’ve just described, once the RBA starts moving to that easing policy, doesn’t that supercharge property prices?

Winston Sammut: Well, property prices are already supercharged at the moment because of the demand. But what it will do, it will enable additional supply to come on board because costs will be lower, hopefully. And just on the issue of interest rates, we had employment numbers out here in Australia which sort of indicate employment is very strong, unemployment’s falling, it’s now back below 4% at 3.7%.

So the prospect of an early rate cut here in Australia is sort of being pushed out further. And you’ve got to remember that cash rate in Australia is already 1% below where, where they are in Europe and, and in the US. So we are at a lower level anyway.

Manny Anton: Yeah. I think, I think you’re right there. Now we’d be remiss if I didn’t check in with you on the latest status of the BWP Newmark takeover. What’s the latest on that front?

Winston Sammut: Well, the latest is that yesterday, Thursday, BWP came out and announced that the bid was unconditional. Before it was conditional on getting 50.1% – there over 40%, so it’s unconditional now. From Euree’s perspectives and clients perspective, we’ve actually sold out and we got better prices than we originally were looking for, and it is a situation that where these paper bids, you don’t get a choice as to the paper you get, whereas it’s better to get the cash and then you decide what you want to buy, rather than get paper in another entity.

Manny Anton: All right. So you expect you expect this to now to progress and be finalised at some point.

Winston Sammut: Correct, whether they get to to the 90% and then compulsory acquisitions, I don’t know that as to when that will be, but they’ll certainly get to the 50% in the next few days in my opinion.

And then there’s the other takeover situation of Eureka and Aspen and with Filetron now announcing that they’ve got 19.3, 9% of Eureka. I doubt that they’ll actually go much higher, but we have to wait and see as to what’s proposed in that situation. The Aspen bid, which is 0.26 of an Aspen security for every Eureka share at the current price of around $1.76 – sort of values the bid at around 45/46 cents which is well below what’s being paid in the market, is trading at 53 and a half as we speak.

Manny Anton: All right, great. You did touch on on Euree’s position. How is Euree Asset Management progressing? How’s the performance looking?

Winston Sammut: Performance is going well, particularly over the last couple of months. The sector is up again, the A-REIT sector is up 4.8% for the month to date, which follows on from 4.7% from the previous month. So they’re pretty good months. But that primarily is being driven by Goodman Group, which makes up 36% of the index. If you actually have a look at a chart of the index and Goodman’s they’re very similar. Goodman’s is driving that at the moment and some of the other stocks are now getting caught up in the rally because what happens is when something gets a bit too expensive, people start looking at, you know, the next level and where hopefully they can pick up a bargain. Euree is going well – at the low point back in October, the unit prices was around $0.92. It’s now dollar ready. So we’re pretty happy with the way it’s performing.

Manny Anton: Okay, fantastic. Alright, well look to wrap it up, looking forward to next week. Is there anything on the property front you’re expecting? Anything we need to be looking out for, or ss it pretty quiet?

Winston Sammut: Well, on the property front, what happens is distributions will be announced for the March quarter. So a lot of the REIT’s will be not all of them. Those that pay quarterly will be announcing their distributions. So that’ll be a positive sign. I don’t expect people to sell stock in the meantime too that they’d rather get the distribution going forward. And then we’re into April and we’ll see what happens in April. But it’s looking reasonably good at this stage.

Manny Anton: Winston, as always, thank you for your time and insights today, they were great. And we will be back with another edition of Winston’s Weekly after Easter. Until then, have a great day and a great weekend.

Disclaimer: Sequoia Financial Group (ASX:SEQ), the parent company of Finance News Network, owns a 20 per cent interest in Euree Asset Management.

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