Insight into Melbourne’s South East Property Market

By admin - November 20, 2018

A summary of Pitcher Partners’ South East Property Breakfast.

The residential market may have cooled in Melbourne, but an undersupply of dwellings and strong growth in the industrial property market present solid opportunities for property investors, land owners, developers and builders in Melbourne’s South East region.

That was the key message at Pitcher Partners’ flagship South East region event, held at Bunjil Place on Friday 16 November. The South East Property Breakfast brought together builders, land and property developers, sales and real estate agents, Members of Local Council and Government bodies, bankers, construction companies and property valuers and lawyers.

Guest speakers included Glenn Lampard from Charter Keck Cramer, Sue McMillan from Invest Victoria, and Pitcher Partners’ Julian Cheng. It was hosted by David Knowles, Partner-in-charge, South East region. They explored the potential for residential and industrial growth in the South East region, and the impact of tax changes on the property sector.

The breakfast was opened by Brendan Britten who acknowledged Pitcher Partners’ commitment to one of Victoria’s most economically productive regions, with an extension of our lease at 80 Monash.

Read highlights from the event on our collated twitter feed or explore our event insights below.

 

Event Insights

Glenn Lampard, Director Valuations – Strategic Research, Charter Keck Cramer

Glenn works in direct support of the Valuations team and the greater Charter business and has over 20 years of primarily commercial property research experience.

  • Download the full presentation here

Key takeaways:

Although the residential property market has cooled, the fundamentals of the residential market are strong. Strong migration to Melbourne is being driven by job availability, which in turn drives both residential and office development. Melbourne needs more residential development and greenfield sites. There is a strong demand for new industrial development in the South East region, but office space will continue to be centred around the CBD.

Opportunities in the South East Region:

  • Foreign capital: Plenty of foreign capital interested in us at the moment. 6 – 7% return likely to sell. Most things selling on 5%.

  • Residential: Medium density townhouses. 30% of residential property bought in Melbourne is in the South East region. Plan Melbourne target: deliver 45000 per dwellings per year – 20000 should be apartments. We haven’t reached that level.

  • Greenfields: We need to deliver more land through greenfield sites

  • Industrial Market: In Melbourne: 26000 hectares industrially zoned land – 37% of it is in the South East. Retail is strong and logistics and e-retail are driving demand for space in the South East. Industrial land price going up and land banking has started again.

Risks and Challenges:

  • Eastlink has been slow to deliver the new office precinct we may have expected to see emerge in the South East region, due to the GFC. We will not see a lot of office development in the South East as this is centred in the CBD.

  • Immigration decline (potential policy change) – English and Indian immigration in the South East has influenced the type of residential stock.

  • Trump providing uncertainty: fluctuating stock market, nervousness around potential trade war.

  • Difficult finance environment.

  • Government needs to step in and take a realistic look at vacancy rates, as well as incentives for commercial zoning.

 

Sue McMillan, Invest Victoria; Victorian Government, Department of Economic Development, Jobs, Transport and Resources

Key takeaways:

Invest Victoria aims to grow Victoria’s economy, and actively promotes Victoria as an excellent destination to invest or establish a national headquarters. They connect overseas investors with local partners, and advise on specific industries, infrastructure, migration issues and regulation. Invest Victoria can also support Victorian business in getting a foothold in the international market.

  • Download the full presentation here

Opportunities:

  • Developers and landowners – alert Invest Victoria to the location of your land so they can direct international investors to you, and support you in conversations with them.

  • In the last six months the Victorian government invested 300 million of capex – creating 1600 jobs in this region.

  • Beyond grants, a significant part of this assistance is engagement with council and regulatory bodies and utilities companies, to help businesses navigate their way through the often complicated regulatory process.

  • Priority areas for investment in the South East: airport at Koo Wee Rup is only a matter of time given the export demands for the significant food bowl in this area.

 

Julian Cheng, Tax Consulting Partner, Pitcher Partners

Julian has over 20 years’ experience in providing tax consulting and advisory services.

Key takeaways:

A change in government following the next election could see Labor implementing a number of tax proposals which could impact the property market.  If the Liberal party is re-elected, we expect it to be ‘business as usual’ except for further cuts to the corporate tax rate for companies with turnover below a certain turnover threshold.

The ATO has also released draft guidance on tax issues affecting the property and construction industry.  There are some controversial views expressed by the ATO in its draft guidance.

  • Download the full presentation here

Key Liberal and Labor tax policies:

A Liberal Government

The Liberal Government’s key tax policy has been cuts to the corporate tax rate.  These were announced in 2015 federal budget but, since the, have been through a number of iterations and changes. Key points to note are:

  • A company’s “aggregated turnover” must fall below a certain threshold ($25m for 2017/18, $50m for 2018/19 and future income years).  This takes into account turnover of certain related entities.

  • The other condition is that the company’s “base rate entity passive income” (e.g. rental income, certain dividends, net capital gains) must not exceed 80% of the company’s assessable income.

Broader-based cuts to eventually apply to all companies regardless of turnover have been blocked in the Senate.  However, the target rate of 25% originally scheduled to apply from 1 July 2026 will now apply from 1 July 2021.

A company that is eligible for the reduced corporate tax rate may also be required to frank dividends at the reduced rate.  This may result in wastage of franking credits where franked dividends are paid out of profits that were previously subject to tax at a higher corporate rate of tax.  Careful planning around timing of dividends may mitigate this potential risk.

Key takeaways are:

  • Companies should carefully analyse their “aggregated turnover” to determine if they fall below the $50m threshold for 2018/19 and future income years.  They also need to consider whether they fall below the 80% passive income threshold;
  • Planning is required in relation to the payment of franked dividends to mitigate any risk of wastage of franking credits.

A Labor Government

Labor has announced it will attempt to tackle housing affordability through:

  • Removal of negative gearing;
  • Reduction of the CGT discount.

Based on Labor’s announcements, these measures, if introduced, will not apply to investments made before their application dates (expected to be after next year’s federal election);

Other measures proposed by Labor include:

  • A minimum tax on trust distributions;
  • No refunds of franking credits.

The key takeaway is, at this stage, we do not have the detail of these proposed measures and whether Labor will be able to secure sufficient support to pass any relevant legislation through Parliament (if they win government next year).

ATO paper

The ATO has issued draft guidance on various tax issues relevant to the property and construction industry.  These include how to determine if gains or losses are capital or revenue in nature, and the characterisation of development agreements, for example, as partnerships or agency arrangements.

The capital vs revenue distinction is important when determining the tax treatment of gains or losses on the disposal of property.  If a gain is revenue in nature (usually the case where land is acquired for development and sale), the CGT discount is not available.  Furthermore, if the land was acquired pre-CGT, a revenue gain may still be subject to tax.  The ATO’s draft guidance contains some examples on the characterisation of gains and losses, which we have some concerns with.  Pitcher Partners has lodged a submission with the ATO setting out our concerns with the draft guidance in its current form.

The key takeaway is that businesses in the property and construction industry should be mindful of the ATO draft guidance and whether they are potentially affected by any of the ATO’s views.  Care should also be taken in the structuring of property developments and development agreements in light of the views expressed in the draft guidance.

 

To discover how Pitcher Partners can support your work in the South East property industry, download our Property Capability Statement.


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