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. This should be embraced for a number of reasons not the least that it alleviates pressure on roads and the public transport system.

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.

The National Disability Insurance Scheme  (NDIS) was also around before COVID but there are many new funds emerging with solid returns based on guaranteed rental agreements with NDIS. Disability housing has grown materially over the last 12 months and is likely to continue with long term rental agreements.

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.

The Great Regional Shift is Overstated – In NSW

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.

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 you have a skittish population that thinks that by sticking local you are less to contract COVID. 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 re discovering their local area and further activating local areas will keep them local. This will require an understanding from place makers that they are not creating places for urban elites from other areas but for local communities. It will be very interesting to see where this is heading.

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

There will be continue 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. It is sometimes useful to have a plan you may not need.

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).

Stamp Duty Reform Will Likely Have a Negligible Impact

A lot has been said about the significant reforms proposed for stamp duty. If they go ahead (this year or next year) we cannot see the reforms effecting the market immediately after implementation. They may be influencing behaviour at the moment as purchasers are looking to bring forward acquisitions so as not to have to pay a tax annuity post introduction. It is a possibility but probably remote. There are swings and round round a bouts with the reforms. They will remove distortions (the lock in effect) of the existing stamp duty regime, the changes could slightly dampen home values (which some think would be a good outcome) as banks will factor in the annuity into borrowers’ ability to pay and reduce the total lend on a property. The effects will likely be manifest over the medium to long term.

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 a very interesting 2021.