2021 Outlook: A light at the end of the COVID19 Tunnel.
January 17th 2021 | , Urban Property Australia
What lies ahead for Australia’s economy and major property sectors in 2021?
Urban Property Australia offers a preview to some trends we expect to impact the Australian property market over the coming 12 months.
Australia Investment Activity
The emergence of the pandemic all but stopped investment in 2020 for the Australian commercial property market after an all-time high level recorded in 2019. Urban Property Australia research recorded approximately $15.5 billion of commercial property transactions over 2020, the lowest annual level since 2010. Investment activity was stymied as a result of a number of factors, including various levels of lockdown across Australia’s cities, Australia’s borders closed to international visitors and regulation changes made to the Foreign Investment Review Board (FIRB) affecting offshore investment activity.
Urban Property Australia expects another below-average year for investment activity for the Australian commercial property market with investors remaining cautious given the unpredictable and uncertain nature of the economic recovery. Although investors are likely to remain cautious, UPA expects that yields for the industrial sector could compress to yet another low for Australia given the structural changes in the economy as a result of COVID-19. Yields in the retail property market are expected to continue to expand as investors re-evaluate risk for the sector.
Australia Industrial Market
COVID-19 has accelerated the structural trends that the aided the industrial market in recent years and the growth of e-commerce could lead investors to upgrade the ranking of the industrial property sector ahead of office and retail property sectors. Without doubt, COVID-19, has accelerated the penetration of online sales in the short term and arguably in the long term as well.
While returns for investors have been driven by yield compression in recent years, investors should not rely on yield compression to deliver returns in the medium term with yields now at record lows and rental growth is likely to drive higher returns which has not traditionally been the case for the sector.
With COVID-19 having highlighted the fragile nature of the existing supply chains, Urban Property Australia anticipates one immediate consequence of the pandemic will be that most businesses will increase their inventory levels and try to mitigate supply chain risks in the future. This requirement for increased inventory will underpin further demand for industrial space.
Australia Office Market
Although Australia’s economic activity has resumed quicker than first anticipated post COVID-19, nonetheless, Urban Property Australia predicts that tenant demand will remain subdued through 2021, affected by the tapering of various Government support packages and evolution of workspace trends. With the onset of COVID-19, there has been a global debate as to whether tenant demand for CBD office space will diminish, or there by a re-emergence of suburban office space as employees re-consider their journeys into the office. While the pull to suburban office space is attractive in this time, access to employees and existing lease terms will ensure that COVID-19 will not immediately affect CBD office markets.
With many employees forced to work from home, office occupancy decreased drastically across the major office markets of Australia. While income of most office properties has been preserved to date, investors are increasingly questioning the future outlook for office space demand and therefore UPA believes examining the profile of tenants with greater scrutiny is paramount for considered investment decisions.
In the challenging leasing environment, landlords will entice existing and prospective tenants with increased amenities and over the medium term, we anticipate values between prime and secondary assets will widen.
Australia Retail Market
COVID-19 has accelerated the structural trends that the retail market was facing for many years. To their credit, retailers and landlords have done an exceptional job of adapting to the changing operational environment. It is increasingly becoming clear, that those businesses who have evolved through the pandemic will not only survive but may indeed thrive in the future.
Consequently, Urban Property Australia expects that retail landlords will have to continue altering their offerings, tenancy profile and adopting a partnership approach with their retailers even more to achieve sustainable results for both.
Pricing of retail assets has been adjusting for some time and it now appears prices fully reflect all the major risks in the sector. Risk premiums for the retail property assets now look fair, or even attractive, relative to other sectors. Having said this, retail is not a homogenous sector. According to UPA research, Neighbourhood shopping centres and large format centres have seen the least expansion in yields as their income streams are proving to be more resilient. Regionals and sub-regionals are experiencing greater yield expansion due to store closures.
Australian Residential Market
The performance of Australia’s housing market in 2020 outperformed expectations with Melbourne the only capital city to record an annual decline in house prices for the year. In fact, Australian home values finished the year 3.0% higher, driven by regional housing, where values which rose 7%, as remote working opportunities became more prevalent and demand for lifestyle properties and lower density housing options became more popular.
Although the trajectory for housing markets is looking positive as we move into 2021, Urban Property Australia believe downside risks remain. As demonstrated by Melbourne’s second round of lockdowns, new restrictions associated with a COVID outbreak would set back the economic recovery and have a negative, although temporary impact on housing markets.
While the risks related to less fiscal support and the expiry of mortgage repayment deferrals have diminished as the economy’s recovery is on track to outperform previous forecasts, closed international borders will continue to constrain population growth, adversely affecting housing demand, especially rental demand.
A recovery in economic activity is underway across Australia but is proceeding at an uneven pace. Some industries remain constrained by mandated and voluntary social distancing, particularly in hospitality and tourism, while other industries continue to feel the aftereffects of Australia’s recession.
The recovery has also varied across the country. The outbreak in Victoria and the associated strict lockdown measures induced a temporary setback in the State, but the economic recovery has continued elsewhere. Nationally, more than half of the employment lost in the initial downturn has been regained.
The near-term economic outlook will depend significantly on health outcomes, the prevention of the spread of the virus, and advances in medical treatment, however looking ahead, the Australian economy is forecast to grow by 3.0% this year and 3.9% in 2022.
The global economy is recovering from the initial COVID-19 shock. Monetary and fiscal policies have provided substantial support to households and businesses, and further sizable fiscal stimulus for the recovery phase has recently been announced in some economies. Among the major economies, the recovery in China is more advanced than elsewhere.
The pace of the global recovery has slowed and become more uneven in recent months. Resurgences in COVID-19 infection rates and the reintroduction of lockdown measures will reduce economic activity in many European economies over coming months.
Economic activity in Australia’s major trading partners is forecast to gradually recover in coming years, however economic growth outside China is expected to remain below pre-pandemic forecasts over the next couple of years because of the effect of continued social distancing restrictions and behavioural changes on business investment as well as consumption.
Regards, Sam Tamblyn
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