The 1890s Victorian land boom
The 1960s building boom and the 1970s bust
Unlisted property trusts crash in 1989-90
Scams of the 2000s
AREITs and the GFC 2007-17
Chinese investment in Australia 2013-17
Property development is a cyclical industry because it is based on a mixture of short and long-run demand drivers:
• Population, demographics and household formation in the LR;
• Interest rates, GDP growth, employment and income in the SR.
The property cycle generally follows the business cycle. However the volatility of property cycles is much greater than the business cycle.
• This is particularly the case for residential building which often has a short cycle of
around five years or less.
Property cycles are often stock driven, because supply adjusts to changes in demand with lags, due to the pipeline effect of completion times for current projects.
During the expansion phase of the cycle it is not uncommon for a speculative bubble to develop in property markets.
Demand and supply are rarely in equilibrium in a stock driven cycle.
Boom and Bust
There are some key factors that sometimes lead to booms and speculative bubbles in property markets.
The most fundamental is the availability of credit, cheaply and easily, creating a ‘wall of money’ that fuels demand.
Second is a real or expected increase in demand for land or buildings, above the level needed for occupation or use.
Third is the development of a business model that is highly profitable in the early stages of the boom.
Finally, a steady increase in the number of people who participate turns a boom into a bubble.
When a bubble ends developers and investors go bust, and that often leads to failures of financial institutions.
The Land Boomers
1882-85. Adelaide land speculation and embezzlement by directors led to the collapse of both the Commercial Bank of South Australia and the Town and Country Bank in 1886.
1880-95. The Victorian land boom was based on subdividing urban fringe land into lots and these being sold and resold to speculators.
Land buyers (the ‘boomers’) sold their land while financing the original purchase with loans from a bank they controlled. When demand for subdivisions collapsed so did the speculators.
The first to go in 1889 was the Premier Building Society, which failed and its founder went to gaol. In April 1893 the Commercial Bank of Australia closed and went into bankruptcy. The boom was over.
The Banking Crash
In 1891 six Victorian banks crashed.
• Including the State Premier’s Real
Most of these were not really banks but companies formed to finance land purchases through debenture notes.
The 1891-92 collapse of the business empire of the man at the centre of the Melbourne boom, Sir Matthew Davies, involved 24 property companies and 5 banks. Public losses were over £4m.
In 1893 another 13 banks closed their doors, with 12 reopening after reconstruction of their deposits (at pennies in the pound).
“The closures were the culmination of the Melbourne property collapse which began in 1888 … there were 64 ‘banks’ in Australia in mid-1891. By mid-1883, 54 of them had closed, 34 of them forever.” (Sykes 1988: 176).
The 1970s Boom and Bust
Circular Quay East 1963
The Property Boom 1960-74
In 1960 the Sydney CBD was still mostly 4 to 5 storey warehouses and government buildings.
British insurance companies that had profited from London developments built the first dozen CBD office blocks between 1957 and 1966.
Demand for space increased with the mining boom and 2m sqm of GFA was built between 1965 and 1976.
Typically a developer would do a sale-and-leaseback deal under which the building would be sold to an institution (usually an insurance company) who would give the head lease back to the developer in return for a guaranteed 9% yield.
The developer collected the profit on the building and agreed to share any extra revenue if rents rose.
The Panic of 1974
As more buildings were completed unmet demand for office space fell and vacancies rose.
Inflation took off after oil prices doubled in 1972, interest rates began to rise sharply, employment growth stopped and the property market turned down.
Interest rates continued to rise through 1973-74, credit markets dried up and a credit squeeze began, with highly geared property developers the main victims.
The stock market sold off all property companies in panic selling that took up to 90% off their share prices.
Over 4 months in 1974 five major developers and financiers failed: Home Units Australia, Mainline, Cambridge Credit, Landall, and Keith Morris.
Home Units Australia
HUA had 40 subsidiaries and was the biggest unit builder in Sydney, owning a large amount of Darlinghurst and Woolloomooloo. With a gearing level of 83% it was vulnerable to a change in the market.
HUA operated by borrowing to buy a property, getting it immediately revalued at twice the price paid, then borrowing 75% of the increased ’value’ of the asset (so a property bought for $1m would carry $1.75m of debt).
It was taken over by its financiers in 1974, who were owed $37mn, and liquidated in 1977 with $56m of mortgage debt on its books.
The increase in debt was due to capitalisation of development and holding costs of the trading properties that were the company’s assets.
Mainline grew through the 1960s into a leading construction contractor with subsidiaries in New Zealand, Fiji, Indonesia, Malaysia, Singapore and the US.
Its first development was a joint venture in 1965 that resulted in Goldfields House at Circular Quay. The business model was based on joint ventures with major corporates, who were often the financier of the project.
In 1968 it listed on the Stock Exchange and became one of the glamour stocks of the 1970s property boom.
In Sydney Mainline built the AMP Centre, 3 finance company head offices and the old Westpac HQ in Martin Place, and in Melbourne the Collins West and the twin tower Collins Place projects.
The Problem was Debt
By 1973 Mainline’s gearing level was77%, it was increasing its land holdings, but earnings were only 1 or 2 cents in the dollar on sales. In 1973 it was hit by a shortage of materials, which caused delays, and the collapse of its industrial relations.
In the early 1970s the Builders Labourers Federation turned the industry into a war zone and the industry’s IR into guerrilla warfare, Mainline was a particular target.
From a peak of $7.26 in 1973 Mainline shares fell to 23c in the property panic of August 1974.
Receivers were appointed and Mainline was wound up with debts of $57m. Its failure was completely due to over-gearing and misjudgement of the market.
Cambridge Credit Corporation
Origins were in a Newcastle business inherited by Mort Hutcheson in 1962. He invested in land for subdivision financed by borrowing from the public through debenture issues.
In 1974 Cambridge crashed and the Corporate Affairs Commission (now ASIC) conducted an investigation that found profits had been overstated every year between 1966 and 1974 in two ways:
1. Sales of bulk land by joint ventures that Cambridge held 50% of to other joint ventures
that Cambridge held 50% of were described by the investigators as ‘front-end profits’.
• Half of these profits (the share controlled by Cambridge in the transaction) should
have been treated as unrealised profits in the accounts.
2. Secondly, Cambridge did not include losses made by any of its subsidiaries in its
A Total Loss
In 1974 a liquidity crisis hit the company, borrowers dried up and the huge stock of property in Queensland and NSW could not be finance -the interlocked network of companies folded.
Cambridge had liabilities of $196m, of which $69m was first mortgages, $84m was debenture holders and $35 to noteholders.
The CAC investigators accused the directors of manipulating the structure and accounts of Cambridge to deceive anyone who dealt with the company, but it took 10 years for the directors to be charged with fraud and the judge dismissed the case because of the delay in 1986.
After Cambridge collapsed the stock market crashed on Sept. 30, 1974 then in October a run began on building societies in SA, Vic and Qld, with queues of depositors forming on the streets outside branches.
Last Rites in the 1970s
In 1976 six Qld building societies were suspended, three later going into liquidation.
In March 1977 the major finance companies announced around $50mn in write-offs on property loans, many to Parkes Development.
Parkes Development had grown over 18yrs into one of Sydney’s biggest builders and developer, founded by Sir Paul Strasser.
Its success was due to the knack of buying fringe city land before it was rezoned, and he may have been the first developer to form a land bank.
Parkes was an immediate casualty of the credit squeeze in 1974, eventually going into liquidation in March 1977 owing $60mn.
Finally, in 1979 two big property financiers with excessive bad debts collapsed -Associated Securities Ltd. (ASL) and Finance Corp of Australia (FCA).
FCA was owned by the venerable Bank of Adelaide, which had to be merged into the ANZ after a run started on its deposits.
Inflation and Interest Rates
The 1980s Property Trusts
Managed funds boomed in the 1980s, with unlisted property trusts regularly pulling double-digit returns and attracting new investors looking for income.
They occupied a regulatory blind spot that allowed them to sell debentures and offer units without a prospectus.
Lend Lease, Hooker Corporation, Westfield and new entrants such as Brick Securities Ltd. launched new funds. The most prominent fund managers in the 1980s were Aust-Wide, Growth Equities Mutual (GEM) and Armstrong Jones.
The 1980s Australian boom was based on extremely aggressive bank lending, which led to overbuilding focused on speculative CBD office developments.
The oversupplied residential and commercial markets fell in the late-1980s and property rents and prices dropped sharply.
Commercial and industrial property prices plunged around 50 per cent and more in real terms.
Hooker Corporation been in financial trouble since 1984 and went into liquidation four years after being taken over by Melbourne real-estate mogul Georg Herscu (who was subsequently gaoled).
Newcastle based builder/developer Girvan Bros failed in 1992, taking 400 subcontractors with it, due to overgearing.
Other major contractors that got into trouble were KBH (Northpoint), Concrete Constructions (Qld hotels), and Stewart Bros.
Essington, Malcolm Edwards’ unlisted public company, had been one of the most spectacular boom companies of the 1980s and had 100% gearing from Tricontinental and Estate Mortgage, then went down with them in 1993 when it could not refinance its debt.
The failures of developers and contractors fed back into the financial system and further weakened banks and other lenders with heavy exposure to the property market.
The unlisted property sector crashed in mid 1990 as investors attempted to withdraw their funds before the fall in property prices was reflected in unit prices.
Thousands of investors lost their life savings.
Estate Mortgage advertised itself as "better than a bank", offering high-yielding securities of 17.5 per cent with an advertising blitz featuring prominent radio personalities.
The Crash of 1990
Estate Mortgage had a ‘giraffe’ TV campaign in the late 1980s promising low risk and high returns while the trusts were being exposed to an increasing number of speculative property deals.
• A run on its funds led to it collapsing in 1990.
• Three of the directors, Carl Davies, and father Reuben and son Richard Lew went
Similar runs threatened to bring down the entire unlisted property trust sector and led to a Federal Government freeze on unit redemptions in 1991. Major property industry fund Aust-Wide collapsed in 1992.
After these failures a series of mergers and takeovers subsequently restructured the property sector.
An attempt to run a redeemable listed trust market failed and within a few years most of the surviving property trusts had listed.
After the Boom
On Black Monday, Oct. 20 1987, the stock market crashed and ended the M&A boom and easy credit of the 1980s. The property market followed in 1990 as interest rates rose to 17 percent.
The State Bank of Victoria and the State Bank of South Australia were absorbed in 1992 into the CBA and NAB due to heavy losses.
The largest credit union, Teachers' Credit Union of Western Australia, and the second-largest building society, the Pyramid Building Society, both failed. Estate Mortgage, and a friendly society, the Order of the Sons of Temperance were liquidated.
The three merchant banks at the centre of the 1980s property boom were wound up -Tricontinental, Rothwell's and Spedley's.
Many businesses bought by highly geared corporate raiders like Bond, Bell, Elders, Qintex, and Adsteam were sold by receivers.
Two of the Big Four private banks incurred heavy losses on loans to raiders and developers and had to be recapitalised (Westpac and ANZ) in 1992.
Coda: The Japanese Bubble
From 1975 to 1990 Japanese banks significantly increased the share of their lending to real estate, using rising Tokyo land prices as collateral.
In the 1980s there was a Australian property boom associated with Japanese investment that targeted tourist resorts and residential property.
Japanese FDI in the 1980s rapidly increased from $10.8 billion in 1983 to $52.2 billion in 1992. Over $20 billion was invested between 1987-88 and 1989-90 (over $40 billion in today’s dollars).
The focus of this investment was resorts and golf courses in Queensland.
When the ‘bubble economy’ popped in 1991 the debt-funded developers exited, with heavy losses.
The Mezzanine Financiers
The 2000s Boom
In 2006-07 four property development companies in Australia went into receivership –Westpoint, Fincorp, Australian Capital Reserve and Bridgepoint.
An estimated 20,000 investors in these companies were owed over $1bn.
The four companies were mainly involved in providing mezzanine finance for residential property development, often to related companies.
Mezzanine mortgages rank after bank mortgages and other debt, and are therefore considered high risk investments.
The estimated returns vary from a few cents to 50 or 60 cents in the dollar, but the liquidation sales were done in a soft market.
Other failed mortgage issuers were Banksia, Hastings Capital, Asset Loans, CymbisFinance Australia, Donovan Oates Hannaford Mortgage Corporation, First Capital Securities and LKM Capital.
The practices that fuelled the boom were high-priced investment seminars, the marking of prices on contracts above what purchasers actually paid, and the use and misuse of deposit bonds.
Henry Kaye's National Investment Institute and subsidiary companies went bust in 2003 owing 3,000 investors $40m plus.
Bridgepoint Corporation was then founded by Kaye’s sister, Julia Kuykuy, and former manager, Melinda Reiter, going bust in 2007 with about $24m of investor funds .
Their business model charged from $13,000 to $55,000 for a seminar on property investment, they then sold overpriced apartments to their hyped up clients, bought in bulk from developers.
Kaye gained notoriety in the early 2000s for claims made in his investment seminars that he could turn ordinary Australians into millionaires and convincing thousands of mum and dad investors to invest in his property schemes.
In 2004, Richard Cauchi, the liquidator of a company associated with Kaye, described the 120-company Kaye empire as "a washing machine of money".
In 2005 Kaye dropped his appeal against a Federal Court finding that he had breached the Trade Practices Act in promoting his "millionaires" property seminars.
Fraud charges against Henry Kaye were dropped in 2007.
In 2010 Kaye was disqualified from managing corporations for five years by ASIC following his involvement in 26 failed companies that provided suspect investment and property education services to the public.
In the 2006 collapse of Norm Carey's mezzanine property financier Westpoint4,000 investors lost around $400m.
Westpoint occurred at a time when choice in the investment of superannuation funds was government policy, and DIY super is a highly popular way to self-fund retirement or get income.
According to the liquidator the reasons for Westpoint's failure include: "high gearing, extensive delays, inappropriate and costly financial structuring, ineffective remedial action by management and inappropriate or ineffective risk management."
The liquidator investigated actions against directors for insolvent trading, preference payments, uncommercial transactions, unreasonable director-related transactions, and misleading and deceptive conduct.
Norm Carey and chief executive controller Graeme Rundle were charged with criminal behaviour by ASIC, Rundle has been sentenced.
Westpoint Corporation and its mezzanine funds were a Ponzi Scheme, where investors' money is used to pay their interest. New money is pooled, turned around and used to service old money (see Madoff, B.)
Financial planners encouraged their clients to make such a bad investment because the promoters kicked back a commission of 10% out of the money that they raised –so every $10 invested became $9.
The money went into seven mezzanine funds run by Carey and Richard Beck.
In 2011, 5 years after the collapse, ASIC settled with Westpoint directors and auditor KPMG for $67.5m. Investors got back 43c in the dollar.
Eric Krecichwost's Fincorp Group collapsed in 2007 owing $200 million to 8,000 secured and unsecured noteholders after their money was used to buy land and fund property developments in NSW, Victoria and Queensland.
Secured noteholders received just over half their money back, unsecured noteholders got much less.
Between 2002 and 2006 the liquidator alleges $13.4m was paid in spotters fees to companies related to Krecichwost, and another $7m in fees were paid to family and friends
Directors loans and fees paid to related companies are a common feature with all these collapsed financiers.
In 2011 Krecichwost was convicted of dishonestly taking $2.8 million of investors' funds and received a 3.5 year jail sentence.
The ACR Scam
Sam Pogson and Murray Lapham were co-directors of property group Estate Constructions and developed over 2,000 apartments and homes in western Sydney.
They also raised money through another company they were co-directors of, Australian Capital Reserve (ACR).
ACR raised money from mum-and-dad investors by promising to pay 9.55% interest, in total $330m.
This money went to Estate Constructions to build apartments, and if the apartments didn't sell (despite high commissions and pressure tactics) ACR raised more money.
Money from new investors was used to pay old investors and the company's debts (a classic Ponzi scheme).
What fooled most unsophisticated investors were the dodgy valuations –e.g. an ACR prospectus had a property valued at $30m, bought the same month for $13.3m.
In 2011 they were convicted to serve a two-year intensive correction order after pleading guilty to making false statements.
In the crashes of Westpoint ($400m), Fincorp ($200m) and Australian Capital Reserve ($330m) the lenders (and losers) were unsophisticated investors in these companies.
• Plus others like Hastings Capital, $40m lost, and the $3bn collapses of Storm
Financial in 2009 and LM Investment in 2013.
The government regulates financial planning, the stock market and capital raising, but not property investment or property markets.
As a result, the unregulated finance broking and home loans industries moved into this area as the bubble inflated.
There is a strong argument for a rating system where investment products carry graded warnings.
ASIC only regulates how funds raise money, not what they do with it, and ASIC does not regulate issuers of high-yield, property-related promissory notes and debentures.
ASIC released a discussion paper with a number of proposals to address the issues raised in these collapses.
Legislation has not yet been tabled.
The GFC and AREITs
AREITs in 2007
A-REIT assets under management grew from around $80bn in 2003 to over $200bn in 2009, and are now over $120bn. Leverage was around 40 percent in 2003 and 50 percent by 2009.
Only one of 61 A-REITs earned a positive return to December 2008, 14 suspended distributions, and 90% recorded falls in the values of their properties.
The GFC forced A-REITs to raise new equity to reduce leverage levels, which in turn reduced assets under management.
Capital raisings made necessary by the GFC were used to repay debt.
• Westfield raised over $3bn before the GFC. GPT and Stockland had to raise
$2.8bn and $1.8bn respectively during 2008 and 2009.
Market Cap & NAV
12 Month Returns to March 2009
A stapled security is two or more securities bound together through one vehicle. Typically, stapled securities consist of one trust unit and one share in the funds management company that cannot be traded separately. The trust holds the portfolio of assets while the related company carries out the funds management and/or development opportunities.
AREIT 12 Month Returns to March 2009
AREIT Survivors 2012
Listed Property Trusts 2008
Over $6bn was raised through private placement to institutional investors in 2008 and 2009.
The magnitude and speed (typically one or two days) suggest A-REITs are highly regarded by the local investment community.
Source: Dimovski and O’Neill (2012). Characteristics of A-REIT private placements during the GFC, Pacific Rim Real Estate Research Journal, 18: 2, 180-91.
• The GFC was a reality check for the sector, however 14 new property trusts listed through
IPOs between 2012 and 2016, raising $2.2bn. Market cap has grown to $130bn.
Many of these were specialised and focus on a specific type of property such as data centres and self-storage.
In 2017 the sector consolidated as M&A picked up.
• Lessons learned and outcomes include:
A greater focus on capital management, lower gearing levels and diversification of debt and funding sources;
Sale of non-core businesses and properties, including offshore assets;
Sustainable distribution payout ratios; and
Rethinking of property and business risk, leading to less complex business models.
China in a Bull Shop
Chinese Property Investment
FIRB 2017 data sees declining real estate demand from China, affected by restrictions on purchases of existing housing, new FIRB application fees, less lending to foreigners by local banks and vacancy taxes. Chinese capital controls and restrictions on FDI by state owned firms, and a changing global economy, have also had an effect.
The 2017 FIRB Annual Report shows residential approvals falling sharply.
NB. There is no accurate data that tracks foreign investment in residential real estate. No one knows how much foreign investment there is, nor where that investment comes from. Settlers and foreign investors are easily conflated, but the former are not foreign and some unknown number of the latter do not proceed.
The Australian housing property market is now a year past its peak in the current cycle.
The Finance Two-step
After the GFC, European banks withdrew from Australia, to be replaced by lending from Asian banks.
“In 2015, foreign investment accounted for around 40 per cent of purchases, the highest proportion since the late 1980s. This compares with other increases in foreign investment in commercial property, such as the early 1990s, which reached around one quarter of all purchases for a number of years, driven by Japanese investors.”
There is a long history of foreign investment in Australian property, often successful (e.g. Brookfield and Blackrock). However, British land companies in the 1960s and Japanese developers in the 1980s did not do well.
The Chinese investment wave that started in 2013 has many similarities to the earlier Japanese one. The switch from offices to land banks and residential development looks to build sustainable, long-term development enterprises. The recent exit of Dailin Wanda shows that may be complicated.
"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."
"In history, a great volume is unrolled for our instruction, drawing the materials of future wisdom from the past errors and infirmities of mankind."
"We learn from history that we learn nothing from history."
George Bernard Shaw
History Has its Uses
Australia's history of property busts and collapses stretches back to the 19thcentury, and there have been many since the 1960s.
A common practice is the selling of debentures to unsophisticated investors to fund speculative developments, often in a Ponzi scheme where later investors pay earlier ones.
• Notable for this were the Cambridge Credit collapse of 1974, the Estate Mortgage
disaster in 1990, and Westpoint and ACR in 2007.
Developers use debt to increase their profits but overgearing is the route to disaster when markets turn, as th