Across the globe, Australia has developed quite the reputation as ‘the Lucky Country.’ Our nation’s prosperity has been underpinned by strong underlying economic growth, agility and resilience. And with a new government at the helm, COVID lockdowns in the rear-view mirror (hopefully), and the threat of international volatility looming, the story ‘Down Under’ is only growing more compelling. For global real estate investors seeking exposure in the Asia-Pacific (APAC) region, it is well worth asking the question, “why Australia?” and “why now?”
In the context of its APAC neighbours, Australia is an appealing performer – tied to the region’s economic performance while maintaining lower risk exposure than other Asian economies. Australia enjoys the third highest ranking in the world on JLL’s Global Real Estate Transparency index, and the highest in the Asia-Pacific region. With a flourishing middle class, rapid urbanisation, high vaccination rates of more than 96% and strengthening domestic business growth, Australia paints a picture where deep, domestic institutional capital pools offer investors security and liquidity. As of February 2021, Australia boasted the fifth-largest pension fund industry worldwide valued at US$2.3 trillion. Forecasts anticipate this will surpass US$4 trillion by the end of the decade. On all counts, a prosperous future awaits this island nation and a brief look into the past suggests it’s taken not only luck but a history of economic resilience to build it.
History of Economic Resilience
Australia has a track record of responsive macroeconomic stimulus. Prior to the pandemic, Australia experienced 30 years of economic growth – the longest sustained growth of any developed economy. This period included the 2008 global financial crisis, when Australia remained the only major economy to avoid a recession. Several factors enabled this, including responsible economic stimulus management, proximity to the growing Asian economies, an abundance of natural resources and strong migration rates. Again, in 2020, Australia’s GDP contracted minimally by 8.9% compared to the declines of 13.8% and 24.3% in the US and EU economies, respectively. Despite generous government support through both major crises, Australia still maintains the lowest debt as a percentage of GDP ratio compared with the United States, United Kingdom, Canada, Germany, Japan, Italy and France. Indeed, Australia’s economy has already rebounded strongly to pre-COVID levels, growing at 4.7% in 2021 and a further 4.2% in 2022.
Most recently, the International Monetary Fund highlighted Australia’s resilience in its January 2022 World Economic Update. They attributed the resilience to high vaccination rates, strong employment growth and high levels of consumer savings, coupled with fiscal spending that allowed for a recovery “faster than in most other advanced economies”. Further, the recovery of international tourism (as Australia’s fifth largest export pre-COVID) combined with a gradual increase in education and skilled based migration will continue to drive sustained economic growth.
Australia has a history of nurturing a strong distribution of trading partners. In the 1950s and 60s, the UK was Australian’s main destination for trade, accounting for 25.3% of exports. In the 1970s, Australia found a new major trading partner in Japan as a result of the introduction of the EU free trade agreement. By the 2000’s, Australia was able to take advantage of its geographic proximity to the booming Chinese economy, becoming Australia’s largest trading partner in 2009 at 36.7% of exports. Australia has since shifted again from this direction, decreasing China’s share of exports to 26%.
Agility to Reposition Moving Forward
Above and beyond its ability to pivot relationships to secure exposure to growing economies, Australia has also demonstrated the ability to transition the economic structure of its own export sector. Historically dependent on the traditional energy and resource sector, Australia has embarked on a calculated economic transformation, moving from a manufacturing base to a broader and deeper focus on services and exports over the past 30 years. From 1977 to 2020, the share of Australia’s GDP from the manufacturing and mining industries declined, while financial and business services rose. Continuing to navigate away from coal mining and towards future-focused minerals, Australia is uniquely positioned to benefit from a sixfold increase in demand for the material requirements needed for the transition to a Net Zero global economy. This includes its position as the leading Lithium producer globally (223% larger than the second, Chile,) and maintaining the second largest copper, nickel and cobalt reserves. Per person, Australia has renewable energy resources superior to any other developed country and far superior to its economic trading partners in Northeast Asia.
Private sector investment in environmental, social and governance (ESG) outcomes for the built environment is likely to receive increased support from the newly elected federal government, further accelerating the renewables transition and encouraging innovative initiatives in the pursuit of reduced carbon emissions.
Innovation abounds too in the embrace of new technologies by the Australian economy. As of financial year 2021, technology-driven sectors – including professional, scientific and technical services, education and IT – were worth 15% of total economic production. A 30-year CAGR of 5% now sees these industries contributing more to the economy than mining (10.6%). The unique intersection of entrepreneurialism and academia enables the country to pioneer world-class technologies largely comprised (but not limited to) three categories: FinTech companies, MedTech companies and AgTech/FoodTech companies. The Australian FinTech industry is now c.AU$4 billion in size, ranked sixth globally and continuing to attract global attention. EG’s own technology incubator, EGX, has already spun out global digital twin technology, Willow, and is brokering global partnerships with several of the additional six technology start-ups under its wing.
Resilience to Global Volatility
While the Australian story is a compelling one, we are under no isillusion that the volatile macroeconomic, geopolitical and inflationary environment poses challenges ahead. Even ‘Down Under,’ we have noticed the shift in institutional deployment of capital with traditional equities and fixed income opportunities not providing investors with adequate risk return profiles. But in the face of market uncertainty, private markets and defensive asset classes will be the best suited to produce idiosyncratic and resilient exposure to sustainable long-term returns. And the Australian market has the resilience and track record to deliver them.
Throughout the period between 1990-2019, Australia’s inflation averaged 2.49% per year, evenly positioned within the Reserve Bank of Australia’s (RBA) targeted band of 2-3%. Despite elevated forecasts in 2022, inflation substantially driven by post-COVID supply constraints, the war in Ukraine and recent adverse weather, is expected by the RBA to peak in Australia more than 100 basis points behind forecasts for the US and the EU. Essentially, base rates have moved off “emergency setting” during the pandemic and back towards a “new normal,” forecast to top out between 2.75% and 3.25%. Even now, additional budgetary intervention and policy changes are intervening at state and federal levels to alleviate temporary cost-of-living pressures.
Across real estate and real assets in 2022-2023, BlackRock continues to predict growth in demand, capital formation and capital deployment. Foreign direct investment in Australia has increased at a CAGR of 8% over the past two decades and the annual growth rate for Australia’s commercial property market is 5.6%.
The rebound in demand for office space in the region likely will be geographically fragmented, affected principally by each nations’ approach to ‘return to work’, supply chain disruption and labour market performance. Australia is well positioned for all the above. Our unemployment rate remains at the lowest it’s been in 50 years (3.4% as at August 2022) and our market is leading the way (alongside Korea) in the CBD office rental growth. Australia’s national industrial vacancy rate is the lowest in the world (as at August 2022) and rents continued to grow by 12% in 2021.
‘The lucky country’ remains well positioned to weather the volatility that may loom overhead globally in the coming years. A myriad of opportunities in last-mile logistics, build-to-rent, offices, multifamily, repositioning plays and regional non-discretionary neighbourhood malls are all top of mind for local players. Meanwhile, high yields relative to other Asian-Pacific markets and good prospects for rental growth all but secure the opportunity for international investors to share in the prosperity Australia offers.
 FinTech Australia, Australian fintech: leading the world.
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