Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 12 December 2014

Thriving Industries of Australia's Future?

From Manufacture to Services

If you are interested in economic history you may know that India is unique as an economy in that unlike perhaps every other country which has progressed from "developing economy" towards "developed economy" status, it has all but skipped the export-focused manufacturing stage of its development.

Instead India has gunned straight for its core competency in the services sector, including the providing of shared services such as call centres to the wider developed world.

I saw something else of interest when I lived in East Timor, where television ownership has never become widespread, but instead young people are increasingly skipping forward straight into the digitally connected age by owning mobile phones, and in the case of some younger Timorese, laptops.


Where I come from originally in Britain, with the exception of the fluke discovery of a few billion quid's worth of North Sea Oil (which was basically Scotland's oil but neatly massaged into UK revenues), the one economic success story over the last few decades has been the emergence and then inexorable rise of "The City" as a key global financial centre. That is, London.

The triumph of financial services over manufacturing has not only been important to the development of the British economy and correspondingly to real estate trends - in real estate terms in particular, it has meant absolutely everything.

And how.

The "use great leverage to invest for 'stronger' yields" meme which was so often promoted at seminars in the pre-2007 era is a rather less popular theory today since so many regional investors and homeowners are still even now underwater on their 95 to100 percent mortgages the best part of a decade on.

Australian Industries

You only need to look at the recent Australian trends we've analysed here in manufacturing investment (capital expenditure) to know that just as in other developed countries, manufacturing is now in decline in Australia. 

Other developing countries with lower wages will pick up, while Australia as a high-cost country falls into manufacturing decline.

While there has been much debate as to whether the government should prop up unprofitable industries or allow them to fail naturally, the next high profile closure will be the automobile manufacture industry, which will impact parts of Victoria and South Australia heavily.

Vested interests will invariably argue that the decline of an industry doesn't matter to a region because, well, there are other industries which make up the remainder of the economy.

This is of course true to a point, but in my experiences in Britain the decline a key industry can be of vital importance to a region or city.

Actual and Expected Spend

The decline in actual manufacturing investment expenditure in the chart above is one thing; the decline in long-term expected capex is quite another,

Take the actual long-term expected manufacturing capex in South Australia as an example of a state with a significant manufacturing footprint which has capitulated from $1245 million in December 2010 to a meagre $410 million in December 2013 (the "expected" surveys being produced only annually). Wowsers.

Sure there are other industries in the state, such as defence. Healthcare is another growth industry. Over the longer term, there are significant resources assets which might be exploited, if commodity prices ever recover to attractive levels. 

But it would be drawing a mighty long bow to suggest that the collapse of more than two thirds of the planned investment of an entire industry in just the past three years alone will not have an impact on the local economy, and correspondingly, on consumer confidence.

The Australian Financial Review waseven shocked enough by the recent National Accounts data (which, as I've analysed here previously, revealed a number alarming trends) to ask the Reserve Bank Governor Glenn Stevens himself what on earth is going on - interestingly they have reached the very same conclusion about where the strengths (NSW) and weaknesses of the economy lie:

"One of the things that was surprising about the national accounts was how the strength was really concentrated in New South Wales. I think there was no surprise there’s weakness in Queensland and Western Australia, given the degree to which they’re tied to resources. Are you a bit shocked though at how fast it seems to be softening in South Australia and Victoria, and do you have any explanation for that?"

Alarm bells ringing loud and clear.

Which Industries Will Step Up to the Plate?

Another of the interesting trends we have seen in recent issues of the National Accounts is the contrasting fortunes of Australia's major industries.

While manufacturing has gone from being a mainstay industry in Australia to one of middling importance - and soon to become one of relatively even less significance - other service industries are experiencing an inexorable rise, particularly finance, insurance, real estate & hiring, often known by commentators as the "FIRE" sector.

This trend of the total dominance of the FIRE sector appears likely to become well and truly entrenched over the decades ahead. It's becoming an ever greater piece of the economic pie, and it's where economic strength will be founded in the decades ahead. 

Other industries which appear set to fair reasonably well in terms of Gross Value Added (GVA) include healthcare as the population ages, and mining.

Lest this is not an obvious point, in real estate terms mining towns are generally a terrible idea for investors. 

As Australia transitions into the less labour-intensive production phase of its resources boom, demand for real estate from FIFO workers is in decline - and now so too are rents and dwelling prices in mining towns. In many cases, they are now collapsing as vacancy rates soar to unprecedented levels.

The Rise and Rise of Financial Services

Having worked my entire career in the finance industry in one way, shape or form, I've met an awful lot of folk along the way. 

In the financials sector I've worked in Sydney (and London) with people from Melbourne, Brisbane. Canberra, Perth, Adelaide, Darwin...and also hailing from Europe, Africa, Asia and America.

People come from all corners of the globe to work in Sydney's steadily growing financial services sector.

Over the past 15 years, just as in London, I've often heard people say that residential real estate in Sydney is "overvalued". Detached housing close to the city is also detached from any income-based fundamentals, no arguments there! It's been that way for many years. 

Interestingly I'd estimate that around 950 out of every 1000 people I meet in the Sydney financial services world live in only three small hubs of the city: City & East, Inner West, Lower North Shore.

The others probably live in the inner south, while a few family-oriented folk do move out to the Northern or Hills Districts for space.

While other parts of the city are of course considerably cheaper, most finance professionals barely even countenance the idea of living to the west of Enmore or equivalent distances to the north or south of the city. Many are openly derisory. 

Often unwittingly, therefore, they quickly form a further part of the trend towards expensive inner suburban real estate in the harbour city, increasingly now for established apartment dwellings (though not so much the high rise stock). And so it continues, because Greater Sydney has:
  • a firing economy;
  • massive population growth of ~90,000 per annum;
  • a relatively small number of popular suburbs; and
  • a continuing dearth of the property types/locations that young professionals and dual-income couples desire to live in.
This is set to even more so become the case because while Sydney's economy is the star performer of the Australian economy, other cities and regions are slowing badly and experiencing significantly rising unemployment. This will likely result in lower interest rates and more fuel on the fire in terms of borrowing capacity.

Median prices will do their own thing, but if you know which types of property to buy and in which sector of the market there will once again be further strong gains to be found over the decades ahead.

A Model Successful Property Investor

If you look at a guy like Chris Gray from Empire, he has successfully identified this one big trend and acted upon it to his own great benefit.

Like myself, Chris is a one-time Pom that owns and invests in properties in London and Sydney. Some time in the not too distant future Chris will be a millionaire half a dozen times over, if he isn't that already.

People will says that he's lucky but he's not just that. Over a couple of decades of investing today Chris is a bona fide expert in the minutiae of successful property investment in Australia.

I am sure, however, that if you took the time to ask him Chris would tell you that the actual key to his success has not been his detailed knowledge of investment at all, but rather it has been a combination of the following factors:
  • Identifying one big, key trend 
  • Seeing the big picture rather than fretting about a potentially limitless multitude of possible problems, issues, worries, complications, complaints and hurdles
  • Consistently taking action rather than procrastinating 
  • Having a good head for and understanding of numbers (like me, Chris is - or rather was - an accountant and also like me is a former Deloitte employee)
  • Not being afraid to be a maverick, having the courage to be different and go against the grain, for example by renting his place of residence and investing elsewhere or by venturing into building his own business rather than relying on an employer for a salary
  • Paying no heed to the month-to-month market predictions and the perpetually portrayed doom and gloom in the popular and financial media, which over the longer term have generally been about as useful as an ashtray on a motorbike for real estate trends
  • Investing for the long term by buying only in prime properties in prime locations and never, ever selling a single one.
In fact, next time I see Chris around the traps, I'll ask him myself. Bet I'm right.