Trends to watch out for in 2021

Walking through the CBD, it looks like things are starting to return to normal. Despite this there have been some changes that have accelerated underlying trends that existed prior to COVID as well as some other trends. Recognising the trends and responding to them will be the key to success over the coming year.

Working From Home is Not a Fad

We have covered the acceleration of a working from home trend that existed prior to COVID in other articles. More than a quarter of households could have someone working from home permanently. This should be embraced for a number of reasons not the least that it alleviates pressure on roads and the public transport system. Presently, working from home is starting to change apartment design with more prominence given to home offices and sometimes co-working spaces in building podiums.

2021 The Year of Alternative Assets

Build to rent was also a trend that had been talked about prior to COVID. It appears that there is finally some progress on this front that has little to do with government handouts, new planning rules or tax advantages – it seems to be a rather useful residual stock play best suited to institutional developers as they have the balance sheets to hold the stock.

Affordable housing and inclusionary zoning were also around before COVID, but developers are understanding the benefits of providing affordable housing for a period, getting it managed by a community housing organization and potentially repurposing down the track (as they do in the US and UK). The returns are competitive. This will all stop if the stock has to be held in perpetuity or a developer cannot work out how to hold the stock after construction. But there is a growing interest in the alternative asset class.

Without International Travel What’s Happening to Hotels

In the US, there is a great deal of activity in hotel conversions. In many, downtown areas hotels are being turned into co-living spaces. This trend is occurring in the mid to lower end hotels. Hotel occupancies have taken a big hit in Australia during COVID. There are some rather large co-living providers that still have surplus stock as a result of border closures reducing the number of foreign international students. That said, there are some opportunities in co-living developments in Australia and while not expected to follow the growth in the US it should be one to watch over the coming two years. Given the strength and resilience of the Australian property market, it is more likely that co-living and apartment development will be blended in any repurposing of hotels. Also, keep an eye on hotels being repurposed for medical uses in some specific instances.

The Great Regional Shift is Overstated in NSW but Not in Victoria

Over Christmas, there were reports of residents moving from the city to regional areas. Every year, there are stories of major sales of holiday accommodation. Our view is that regional movement was just a replacement for the normal Christmas holiday stories. Without jobs and employment growth and transport to major cities it is difficult to sustain the regional transformation trend. (This is definitely an area where the government should reactivate regional policy, but that is another article). As the baby boomers retire, they will want to release some cash that is tied up in their houses. Moving to regional areas will enable them to release equity and that trend will continue and grow just by virtue of the fact that more people are retiring. But it is unlikely to grow at a greater rate than the number of people retiring unless more jobs can be created.

Latest ABS statistics show there has been an uptick in migration out of Sydney comparing December 2019 to 2020 (-8032 to –9,317). There was a 30% increase in people over 65 leaving Greater Sydney. The people leaving Sydney were primarily older over 45. However, there is a substantial loss of people from Greater Melbourne where in December 2019 had positive net migration of 361 and then –7445 and –8,491 in the September and December quarters in 2020. However, unlike Sydney, Melbourne experienced most of the population losses in younger cohorts 15- 24 year olds and 25 – 44 year olds.

Hyper Localism – Place Making Should Start to Support Local Communities

There has also been reference to “hyper localism” caused by COVID. This is new and interesting. It is fascinating that the trend is occurring with a rise in the place making movement.  It has little to do with place making and more to do with the fact that people think they are less likely to contract COVID locally. That said, there has been a resurgence in local retail and restaurants at the expense of CBD’s. While place making didn’t cause hyper localism it can potentially sustain it. People are rediscovering their local area and further activating local areas will keep them local. This will open up more opportunities in underdeveloped local centres – if Councils allow it.

Funds Will Continue to be Cheap and Available but For How Long?

There will be continuing to be a flood of funding available for development. At no time in recent memory has funding been so cheap and available. With changes made by APRA during COVID, banks have opened up their books to development funding and non-bank lenders have growing funds under management. Probably not this year, but down the track governments will have to stop printing money and use open market operations to finance unprecedented budget deficits. This may put upward pressure on interest rates in the medium term and certainly not in the short term.

Migration is the Unknown Quantity

COVID has sharply accentuated a slowing of Australian net immigration. According to Government estimates there will be -72,000 net migration across Australia in 2020-21, down from 154,000 in 2019. But for the property development sector, with household formation rates at 2.6 people per house this means that for every year of no net migration there will be 87,000 less homes required in 2020-21. It has often been said that Australia had an undersupply of housing of around the 100,000 mark. If immigration doesn’t turn around within the end of this year, then it is possible that the market will move into oversupply. This is why we think the price increases that have been recently experienced could lose steam by the end of the year (but that is also dependent on the other trends).

The Impact

COVID has accelerated many of the underlying trends in the economy. Many of the trends are countervailing making it extremely difficult to make predictions with certainty. The only prediction that we can make is that responses will determine the outcome. In a perverse way COVID has created its own sort of disruption which in turn creates opportunities. How the industry seizes on the opportunities and the response of consumers will set the scene for an interesting 2021.

Property Market Reviews

Prepared by our in house economist.

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