Part 2 – Market opportunities
As per Part 1 of this article, the effect of Covid-19 will hamper traditional real estate developments such as apartments and retail centres. Given time these developments will recover and will return to normal in the longer term. However, what is the short to medium term development opportunities for developers? Developers should focus on projects that can solve an immediate problem and initiate an economic recovery.
Below are a shortlist and a brief outline of where I see these opportunities.
Hotels, motels, and serviced apartments have been the hardest hit since the start of the pandemic due to travel restriction, both domestic and international. In April, nearly 80% of hotel rooms in Australia are empty, and most hoteliers are estimating revenue losses of more than 50% for the first half of 2020. The industry will bounce back but not until travel restrictions start improving.
- Convert the rooms into Co-living
- As most hotels or motels have rooms already with en–suite bathroom facilities. The conversion cost could be minimal.
- The common areas such as the foyer and lounge rooms could be converted into the communal facilities required of co-living.
- Depending on the area required for co-living’s communal facilities, any surplus area could be used for co-working.
- According to JLL, hotel owners and investors can improve rental yields by up to 12.1 per cent if they convert an existing property into a co-living scheme.
- Currently, my team and I are undertaking a feasibility study in converting an existing motel into a co-living, and co-working facility and the numbers are looking good.
- Convert to senior independent living
- The demand for senior’s accommodation is ever-increasing, and there is a shortage of affordable housing for seniors.
- Ideally, an existing serviced apartment building would be great, especially if the apartment offers a variety of one- and two-bedroom units.
- Existing hotels would be ideal as co-living for vulnerable seniors. In Australia, we have a growing number of retired women who have lost their partner and financial resources. Some are now left homeless.
- Renovating an existing building and making new residences for others creates new jobs, improves the local tax revenue base, and brightens community spirit and the local economy.
- To develop new buildings will take at least two years in planning approval and construction, whereas these facilities could be ready within six months.
RETAIL CENTRE CONVERSIONS
Shopping and retail centres will never be the same again when the coronavirus crisis ends. Some retailers that have closed their doors during the pandemic and may never reopen as the induced lockdown has forced customers to abandon physical stores in favour of online ordering. Some retailers could vanish from shopping centres, and even those that retain physical shops are looking to shrink their store networks. Landlords have been significantly impacted by these store closings and have had to change their tenant mix or repurpose their shopping centres. Some centres can easily be re-tenanted while others will simply have to redevelop. Below are some ideas based on the two options.
- Re-tenant – This approach would be aimed at minimising cost and find tenants that could occupy spaces with minimal alterations.
- With vast open spaces, retail stores could accommodate education facilities that include a nursery school, classrooms, training rooms, libraries, or vocational training centres.
- Larger stores could be converted as co-working offices. As shopping centres are typically well connected, as well as offering retail and leisure amenities on-site, they could prove attractive workplace locations.
- Pop up stores or micro-stores could be the next generation as an anchor tenant. While online retail is becoming popular, customers may still want to see the physical product. Online retailers only require a small display space and storage. It could be like the current department store offering a variety of brands but under one roof.
- Other tenants potentially could include a call centre, gymnasium, or a small medical centre.
- Redevelop – Redeveloping a shopping centre will be very costly. Depending on the size and scale of the centre, part of the centre could be developed into the following:
- A community centre next to a shopping centre would be ideal and can include a public library, indoor sports activities, community, childcare centre or maybe a museum.
- A Healthcare centre with mixed-use of tenants in the healthcare sector can be considered as well. Tenants can include a medical centre, therapy centre, indoor pool, health spas, gymnasium, private clinics, and any other support tenants in the health sector.
- Another redevelopment concept is building an e-commerce distribution centre together with a self-storage facility.
Depending on the replanning and cost of a redevelopment strategy, the aim would be to re-utilise space with new tenants with the minimal cost and time. In doing so, landlords will keep not only their bank and investors happy but existing tenants as well by bringing additional foot traffic.
TOWNHOUSES AND TERRACE HOUSING
With social distancing and working from home becoming the new normal, apartment living will become less attractive to homebuyers. People working from home or with a family would need at least three bedrooms, and most apartments do not offer this level of accommodation. If they do, they are relatively expensive. Also, shared lifts and corridors do not help with social distancing.
In taking the concern with apartment living, townhouses, and terrace housing provide the answers to these new norms.
- With direct access from your vehicle or within close walking distance to your entry, there are fewer physical encounters with your neighbours.
- With a larger footprint and with more rooms, there is enough space to accommodate a home office.
- Having a private garden or courtyard is far better than a small balcony. There is sufficient space for entertaining and gardening.
- In addition to resolving the issues with social distancing and working from home, Townhouses and Terrace were in high demand pre-COVID-19. It was filling the gap in the market that apartment living was not providing and that is young growing families.
- With both Townhouses and Terrace Housing, the capital outlay is less and quicker to complete for occupancy. Depending on the scale of the project, they can also be built in phases which reduces the capital outlay.
A wholesale strategy is what I have been teaching fledgling developers before the Coronavirus outbreak. It is a low-risk approach for developers. The role of the developer is a development manager who charges a fee for finding a residential project and managing it to completion. The residential units in the development are pre-sold to qualified buyers or investors at a cost which increases their equity position on completion. As all units are pre-sold before construction starts the development risk is reduced and therefore, a profit margin is not required. This margin is passed onto the buyers, and the developer benefits from a guaranteed fee. It is an ideal strategy for the current COVID 19 period we are facing. Below are two areas where this can be applied.
Syndicated residential property development is a development where buyers pool their money together to develop a property with each syndicate member ending up with a unit of their own.
- This model can be applied to a smaller Townhouse, Terrace Housing, or a Villa development due to its flexibility in planning. Apartments may be more restricted.
- There is a saving on stamp duty which is only applied to the land component but not on the construction. However, there will be GST applicable to the construction and other development services provided.
- There are several legal and ATO issue to be dealt with in establishing this type of syndicate. Therefore, an experienced property lawyer will be required to ensure that the syndicate complies with all Government regulations.
Co-housing is a well-established model internationally but relatively new to Australia. It is s an intentional community of private homes clustered around shared spaces. Despite the diversity in the size, density and design of co-housing, there are some common characteristics:
- Residents participate in the design process to ensure the final building meets their needs.
- The design includes a mix of private dwellings and shared spaces and encourages community interaction.
- Residents are usually actively involved in the governance of the property.
For the success of this type of development, it is essential to have an independent development manager with expertise. It will alleviate any conflict between future owners.
THE IMPORTANT THINGS TO REMEMBER.
- Study the market and research
- Undertake a due diligence
- Prepare a preliminary study.
Do you see other opportunities in the short to medium term?
- With the Federal and State Housing incentives, will it suit project builders or are there opportunities for low rise apartment developments?
- Will large scale apartment developments bounce back and how soon?
- What is your opinion on commercial property development and where is it heading?
I would like to hear your comments.
Listen to the third part of this series. THE REAL ESTATE INDUSTRY AFTER COVID 19. Part 3 – “The future Technology Revolution”