Part 1 – My Predictions
For those of us in the real estate industry, we are certainly going through tough times. Coronavirus has affected real estate sales, rents, development, and construction. There is a significant amount of uncertainty on the size and duration of the disruption. As a veteran in this industry for the past 40 years, I have seen several recessions, but none of them will beat this one. There will be winners and losers.
However, we must remain positive and look for opportunities in the market. I have documented a 3-part series giving (1) my predictions (2) market opportunities and (3) the digital revolution.
Before I provide my predictions, let us first look at the general predictions by other industry experts.
Sharp fall in prices
Some economists, such as AMP’s Shane Oliver, predicts that house prices could fall as much as 20% if a recession lasts more than six months. A more limited downturn in which prices drop 10% is more likely, he thinks. In the best-case scenario, capital cities could see house price declines of about 5 per cent. What could trigger a major house price crash? While interest rates remain low, a sharp rise in unemployment to say 10 per cent or beyond will cause a spike in debt-servicing difficulties, forced sales and falling prices.
Shown below, is a graph by ANZ Bank displaying housing price forecast by capital city. ANZ suggests that while the deferred repayments on a home loan will help to prevent forced sales, the fall in demand will push prices down around 10% (peak-to-trough) on average across the capital cities.
Source: ANZ Bank
It should be noted however, there is not one Australian property market. History tells us that all states have their own market, driven by their local economy. There are sub-markets within markets dependent upon price point, type of property and geographic location. From state to state, each of the markets is doing slightly different things, but the broad point applies across all markets
Residential markets that will be affected:
- High-rise apartments: High-rise apartments mean higher density and more occupants and more social contact so health safety buyers will avoid them.
- Off–plan apartments sales: With physical stock becoming more available due to defaults, buyers will prefer to move in earlier rather than wait for a project to be completed.
- Blue-collar areas and new housing estates: Young families are likely to have overextended themselves financially and there will be many people will be out of work for a while.
- Suburbs with high levels of rental housing: The suburbs that are seeing the biggest jumps in rental listings are those that have a lot of remarkably similar rental homes.
- High-end properties: Another market that will be affected will be the more expensive properties as owners are forced to sell as they have been affected by the stock market crash.
Does the question arise, what will the housing market to normal condition? It will depend upon how soon our economy turns for the better, the level of unemployment reached and importantly, the level of consumer confidence coming out of our recession. Most economists see a rebound by mid-2021 but, in the short term, it will hurt.
In the event of a full-blown outbreak, commercial real estate would be hit hard as well. Production and economic activity will slow because people will likely stay indoors, lowering consumer spending would increase, and production and development would decline. Further, many more workers in the commercial area would lose their jobs, especially causal workers in the hospitality and retail sector.
The virus has forced office workers to work remotely, potentially changing the role of the office, and the future office building will also look different. It will cause a severe downturn for commercial real estate as companies drastically cut the size of their workspaces. It will also lead to an exodus of white-collar workers from big cities. Landlords are looking at a range of technologies that promote social distancing and public health in buildings. These include touchless entry, thermal energy scanning, higher-grade HVAC systems, and others.
Many retailers are already facing bankruptcy as foot traffic has diminished, especially in the CBD. Online shopping will be part of the new normal. Businesses who did not have an online option faced financial ruin and those who had some capabilities tried to ramp up offerings. There will also be the potential move to the suburbs as people escape high-density locations. With retail stores, landlords will have to consider repurposing their assets. Given their central location, the spaces could function as e-commerce distribution centres. A change like this would accelerate e-commerce adoption and the dominance of industrial real estate.
With the increased demand for Online Shopping, there will be an increased demand for distribution centres. Sustained home delivery demand will require significant investment in logistics and delivery infrastructure, with supply chains becoming local, agile, and smart.
THESE ARE MY PREDICTIONS
COVID-19 is forcing all businesses to innovate and change the way we work. History has proven that after a crisis such as a recession, smart businesses innovate and provide improved products. When SARs broke out, Alibaba launched its digital platform to facilitate online shopping, and it is now the world’s largest retailer and e-commerce company. Here are my predictions of what the real estate industry may look like once the pandemic is behind us.
From urbanisation to de–urbanisation
Urbanisation seemed unstoppable for the past few decades, especially in developing countries. Australia’s workforce will automate and will increasingly work remotely. It will see people choosing to find locations on the outskirts of the city where they have more space for work and home offices, rather than living in smaller inner-city dwellings. Similar experiences occurred during the 1918 Spanish Flu pandemic. It is likely to happen is most cities in the short term, but that they will return.
From On-site to Off-site
When construction works start after the lockdown, the question is, will construction workers remain distancing? Traditional construction methods mean several workers are working close to each other. The alternative solution is off-site manufacturing of prefabricated and flat-pack building products that can be assembled on-site with fewer workers. These products can be manufactured in a controlled environment where robotics come into play as well. Speaking of robotics, 3D Printing construction will start gaining momentum as well.
From international to local supply chains
The supply chain will shift, as well. More than 30 per cent of construction materials come from China which is facing their own challenges with COVID-19. The crisis has reminded governments of the importance of keeping critical supplies within their own countries. Businesses, too, will weigh up the costs and benefits of complex global supply chains, relying more on local suppliers. It will affect the type of industrial and retail real estate that is needed.
From apartments to townhouses
For those who choose working closer to the CBD and better amenities have a choice of a larger apartment or a townhouse. Preference will be townhouse living because you do not have the same issues you have in an apartment building such as sharing a lift, narrow corridors, and small balconies. Townhouses offer opportunities such as better distancing, a home office and access to a private garden.
From homeownership to renting
With over 1 million people losing their jobs, there will be a growing demand for affordable rent. While Government has introduced a six-month moratorium on tenants being evicted for failing to pay rent, the question is what happens when this moratorium runs out? Furthermore, with lower household income in the foreseeable future, there will be a higher demand for rental properties. There will be significant pressure on social housing. However, developers who have a adopted a “built to rent” model will help to ease part of this crisis.
From Hotels to co-living
With occupancy rates at a record low for hotels, motels, and serviced apartments and with a demand for affordable rent, consideration should be given in repurposing these structures into co-living and co-working spaces. Co-living was growing trend pre-COVID 19 due to the growing need for affordable rent. As a quicker solution than building new, these facilities could improve occupancy in within months. However, intelligent planning is required to ensure social distancing is regulated.
From Shopping Centres to Community Centres
With the surge in online shopping, retail sales are dropping in shopping centres, causing several bankruptcies amongst tenants. Retail landlords are in dire need of an immediate solution. These centres can be repurposed to improve occupancy and yields. Spaces can be converted immediately into several community facilities. These could include childcare centres, education and training centres, medical centres,
From Internet to PropTech
The mass adoption of remote-working technology through the pandemic phase will likely increase the pace of the PropTech, which is part of real estate’s grand digital transformation. It considers both the technological and mentality change of the real estate industry, and its consumers to our attitudes, movements and transactions involving both buildings and cities. It can also be defined as start-ups creating technologically innovative products and business models for the real estate industry. Proptech trends operating include virtual reality, crowdfunding, blockchain to name a few. People within the real estate industry who are slow in adopting this digital shift will be left behind.
WHAT ARE YOUR PREDICTIONS?
- Where will the new affordable areas that provide people with the right balance of space and local services/amenities be?
- Will a preference for the inner city and suburban living remain?
- Do people even need to live in cities at all?
- How will cities adapt to this new world and meet the increased demand for connection and experience post-crisis?
- How will commercial real estate used for office space be repurposed to serve new needs for companies or the community?
Listen to the second part in this series THE REAL ESTATE INDUSTRY AFTER COVID 19 Market opportunities.