Written by Michael Ferguson, Senior Financial Strategist at Inception Wealth Group
Many articles have been written about the real estate market in Australia. At best, they only provide a very broad generalisation. At worst, most fail to accurately make any kind of distinction between individual property markets. As such, most of the “experts” have in recent months been predicting doom and gloom.
Although SARS 2 Covid-19 has and will continue to affect the overall Australian economy, there exist many opportunities to successfully invest within particular sections of the property market.
In order to make sense of the economic impact of this “crisis” and indeed to identify where these opportunities exist, a clear distinction must be made between the following crucial points.
Firstly, and in the opinion of your author, there is no such thing as the “Australian Property Market”. Trying to in any way compare the capital cities of the individual states and territories with, for instance, small country towns, is quite simply illogical. Then there are the so-called “mining towns” that experience an entirely different boom and bust cycle to the CBD’s of our largest cities.
The reality is that most real estate information focuses on the Greater Metropolitan Areas of Sydney and Melbourne. To a lesser extent, if not more frequently of late, Brisbane and Canberra are being mentioned. The reason for this is valid as the vast and overwhelming majority of the Australian population is concentrated in and around our Cities. In short, not all places are the same. They definitely experience, and are subject to, vastly different economic drivers.
Secondly, one must clearly distinguish between commercial property and residential property.
You do not need to be an economic genius to establish that the commercial property market is facing significant instability and will most likely undergo a complete rethink over the next few years. When analysing, even on a surface level, the changes to our daily working lives that we have collectively adapted over the last few months, it is clear that we have entered a “whole new world”. Working from home, in the pre Covid-19 world to the present, is an entirely different proposition.
In particular, some of the biggest Australian and International companies, that for decades have been working in and from the large office towers adorning the Sydney and Melbourne skylines, have been forced into company wide “work from home” solutions. The normally bustling and vibrant CBD’s have been all bare deserted for months. Hundreds of thousands of people that on “any given Wednesday'' afternoon would, pre SARS 2 Covid-19, be in their office at their desk, in the boardrooms or indeed out to lunch, shopping etc… well, they simply have not been there. They are working from home, happily in most cases.
Although these offices are sitting vacant, the lease payments and the attached rental agreements have not ended nor magically gone away. Late payments, as well as non-payments, of commercial offices leases has skyrocketed. At best business owners have spoken to their Corporate Lease Holders about coming to some kind of arrangement in these trying times.
Even harder hit are all the amazing, and until recently very successful and highly profitable restaurants, cafes and bars. Many of these establishments have had to close their doors entirely. Some have been able to remain “open” to an extent, however, they are not making even 20% of what they normally would have. Very seldom do you hear from, or about, the owners of these commercial properties. Many owners of commercial real estate are now also struggling to make their repayment on the loan they established to purchase the real estate.
Other parts of the commercial real estate landscape, such as shopping centres and strip malls have faced rapid change. Clearly, the supermarkets and chemists have remained open and largely unchanged. At times they have even seen increased demand. (Why anyone, ever believes that hoarding TOILET PAPER is going to help them, is entirely beyond me)
What is clear to me however is that the smaller, specialty stores within our shopping centres, of which there are thousands around Australia, have suffered immensely. How many of them will even make it back is entirely uncertain at this point.
Then there are the Hotels, Motels (holiday INN), resorts, and even the smaller B&B’s. Again here, you do not need to have a Degree in Economics to establish that they are in very serious trouble. Except for a handful of Hotels that are taking in the “14-day Quarantine quests” arriving from overseas, the rest are essentially 90% vacant.
In a “post-Covid 19 world”, which is likely many moons in the future, these crisis-induced changes will potentially significantly change very large sections of the Commercial Real Estate market in Australia.
Many of the largest companies on the planet have already stated that they are rethinking the size of the office space they currently still inhabit. Instead, they are looking at models, structures, and systems for 50% of their staff to operate from home, at least 50% of the time. “Working from Home” will very soon be the new normal for many of us around the world and indeed here in Australia.
Residential real estate has not been immune from this crisis either. Many of our fellow Australians are struggling. Unemployment has for all instances and purposes, doubled from what it was in January 2020. That sounds and feels like it was so long ago…. (actually only 6 months)
What this translates to is 600,000 to 800,000 people are directly affected. Many have lost their jobs entirely and abruptly. We have all seen, on the news at least, the long lines of people in front of Centrelink. Others are maybe receiving payments through Job Seeker or Job Keeper. Some of those lovely people, and by some, I mean probably most, are living in rental properties. Some are now struggling to pay their rent on time, or even at all.
And what is going to happen when these payments from the government come to an end. At that point, the unemployment rate could be 13 -15 %. The short version here is that no one really knows. Those that say that they “do know” are “guestimating” at best.
The following are some facts; Sydney CBD and Inner City apartment vacancy rates have gone from +/- 3-4% in January 2020 to above 15% in June. Melbourne CBD and Inner City apartment vacancy rates are worse. That is an increase of 300 % plus. More apartments are currently “Untenanted” than most worst-case scenarios had ever forecast.
As such, and indeed when speaking of residential properties in Australia, the further distinction must be made between apartments (in particular CBD and inner-city apartments) and the suburban houses in the high growth corridors of our capital cities. Even within this market segment a further distinction can, and therefore should, be made for the increasingly more popular townhouses.
An entirely different scenario is playing out in these suburbs and these communities. If you believe the government statistics, 7 - 8 % of the Australian working population is currently unemployed. The actual figures are most likely, and according to many economists, much higher especially in youth unemployment.
These levels of unemployment have not been experienced since World War II. The other side of this coin however means that 85 % are actually still working. Some are working harder than ever before. Especially our amazing nurses, doctors, chemists, ambulance, and police officers. Then there are the thousands of under-appreciated, yet absolutely essential people working to support these frontline workers. Cleaners, janitors, admin staff, etc.
There are hundreds of thousands of people working in our supermarkets and “essentials'' stores that also still go to work every day. Many of us, your author included, are happily working from home, running our business, and generally speaking getting on with our working lives. We may be ordering far too much delicious takeaway and home-delivered food. We may well be drinking “a little bit more” then we used too, however life did not STOP.
Despite the Covid-19 crisis, all of these people that are living, and working, in the sprawling metropolitan areas of our capital cities have one thing in common. We still all need a roof over our heads. A good portion of us own our own homes or at least are paying them off, and the rest are renting. Even the much neglected homeless are finally receiving more attention.
The demand for affordable, well-located properties in the suburban areas of our capital cities is increasing. Massively.
Anyone currently renting a very nice apartment in the CBD, that is paying $450 - 650 per week, or indeed $700 - 1000 per week in Sydney or Melbourne, may no longer be able to afford or justify the outlay. They are looking for more affordable and suitable options. There are hundreds of thousands of families renting beautiful 4 bedroom homes in the “best school zones” in the suburbs that are paying $500, 600 $1000 per week for the family home. Again here, in Sydney, Melbourne, and even Canberra and Brisbane, an average 4 bedroom family home within 15 kilometres of the CBD will set you back in excess of $1000 per week.
For those most affected by this crisis, the option of renting a brand new 3 bedroom townhouse, close to the new school, close to shops and transportation etc etc at $350 per week is sounding fantastic, if not absolutely necessary.
It is to this end that I refer you back to my title. Looking at, or referring to, the Australian property market as a whole is simply not possible. The above segmentation is required at least.
The well informed and astute investors amongst us, are seeing the opportunities that exist to invest in specific “Bricks and Mortar” assets, at a time when all other asset classes are looking more, and increasingly more, risky by the day.
The stock markets around the world have indeed “bounced back” to an extent, however one must ask why and how. Worldwide unemployment levels have skyrocketed. The GDP of most OECD (rich nation countries) is falling alarmingly. There is a multitude of indicators pointing to the next Global Financial Crisis!!
Should you wish to further discuss the above and/or wish to adjust your investment strategy in these crazy times that we live, please schedule a time by clicking on the link below.
© Michael Ferguson