Aussie Property 2022 - Omicron Calls The Shots
January 18, 2022
Just when our politicians decided that it was their time to lead by pushing our trusted health officials to the side and prioritising the economy, Omicron stepped in to show how it was never their call to make. Getting back to business, getting kids off to school and starting to repair the economy for 2022 looks to be on hold, whilst everyone succumbs to the virus. We are in another self-imposed lockdown of sorts and the first quarter of 2022’s performance will be down on economic expectations, except for our enthusiasm for toilet paper. What is the obsession with toilet paper? Is this possibly an Australian wipe out?
What is the obsession with toilet paper? Is this possibly an Australian wipe out?
The positive news is that this version of the virus, whilst highly infectious isn’t as virulent as Delta. The negative is the timing. We thought we were well prepared, in fact in a stronger position than other countries as a result of our high vaccination levels and a history of controlling the spread of infection. This assessment was premature and filled with hope.
To add to the turmoil, in May the Federal election will be on. That’s no cause for celebration but traditionally elections are a handbrake on all investment decisions. So instead of ramping up the economy, 2022 looks like another year of living cautiously in small bubbles on our big island staring at curtailed living standards and dreaming about things we used to do and when we might do them again.
Our vaccination armour has added to our personal safety, but it hasn’t given us the freedom we imagined.
Our vaccination armour has added to our personal safety, but it hasn’t given us the freedom we imagined. We will no doubt prepare for further mutation waves by remaining boosted and carefully navigating high density gatherings.
From a human behavioural perspective, it seems that we are willing to make our homes our luxury gaol cells and this time we have become our own medical assessors, data inputters and gaolers. With such high responsibilities thrust on our shoulders it’s no wonder we all have an opinion of Djokovich’s vaccine status or lack thereof.
So, what does 2022 have in store for us in property and how should we approach this year?
What we do know is that our appetite for property is insatiable. The Australian residential market grew to over $9 trillion dollars which dwarfs the ASX, Superannuation market and the commercial property markets and is still larger than all of them put together. I saw in early 2020, prior to COVID hitting Australia that Hong Kong residents who were locked down were also locked on to Australian residential property, via regular visits to our websites. So, the infectious attachment to residential property in Australia is a shared dream in the Asia Pacific region.
Regardless of the pandemic, property values have been strongly supported in all areas, even those where income has retreated. It seems that all property assets are investments because there is simply no end to the reserves of capital and to hefty capital gains. This has translated into a greater focus on growth and less on income, which will remain low and, in many cases, weak.
Residential, Industrial and Medical property sectors are hot, like molten lava and with good reasons.
Residential, Industrial and Medical property sectors are hot, like molten lava and with good reasons. Residential property (our homes) are now more than just our version of a castle. It’s the best gaol cell you can own. It even doubles as an office. If it had a moat and drawbridge it could be its own quarantine centre. In this environment where isolation is prudent the home has even greater utility and therefore value. Private outdoor areas are in high demand and whilst that remains, a house will outrank an apartment until the house is out of financial reach. That situation is now quite common in Sydney suburbs so watch well located units, kick.
Industrial property is also hot because we keep ordering consumer goods on-line. No sense in visiting a shop and catching COVID if the alternative is to have it delivered, contact free to your doorstep. Given the delivery vans are usually small trucks and are loaded locally the amount of warehouse space for storage and distribution is in high demand. Industrial property is now effectively quasi retail so with its added utility comes greater value. Across most markets even secondary industrial space is bridging the gap between prime and secondary as the market compresses. It’s becoming harder to determine values and data centres or anything to do with cloud computing is prized.
Secondly, the wealthy Baby Boomer generation are entering the final phase of their lives
Medical property is becoming sophisticated and therefore more interesting. There are two reasons for this. Firstly, the pandemic has focused a spotlight on science, biotech, medicine, research, care and remedies. Secondly, the wealthy Baby Boomer generation are entering the final phase of their lives and are doing so with much grander expectations of prolonging life, enjoying their wealth and focusing on health, exercise, diet, medical advice and medication. Whilst the previous generation had limited interest in their health, the Baby Boomers have taken the opposite stance and are keenly inquisitive. Living beyond 80 is realistic and living to 100, a possibility. With that in mind building medical precincts and expanding into medical tourism, retailing and F&B will be in vogue as convenience and quality become more valuable.
So, what of the other property sectors? When we push aside the hot sectors, we find the old faithfuls in degrees of tatters.
Retail property has had mixed results, only neighbourhood convenience and high-end luxury have remained strong. Consumers of neighbourhood retail realise that they must support their local retailers for the benefit of their community whereas regional malls have little appeal and offer access via the web. Luxury shopping would normally go hand in hand with international travel but with tourism and travel being taboo, demand has shifted. Big ticket consumption opportunities, expensive gifts and fashion are sought after for the wealthy and privileged. Flagship city stores are open by appointment or accessible in short queues. If you are not doing much then even queueing is socially fashionable, at least you seem to have a purpose and it shows you have money. For food courts, cinemas and the day out in air-conditioned comfort, the shopping mall is out of fashion. Consumers are also paying down debt and trying to save so discretionary spending has evaporated since the Christmas splurge.
Food and Beverage has been smashed and it is amazing that this loved sector has even survived. Over the past 10 years this has been the saviour of retail but with socialising being crucified, F&B has been on its knees. Christmas and January were to have been the moments that the industry got back on its feet and celebrated but instead it was kicked again, it is quite dispiriting for operators. If it wasn’t lockdowns, it was customers and then staff shortages. Even great restauranteurs have had to question their commitment. This has nothing to do with capability, this is about when that sector can again become viable, when will the customers and staff return.
Office, long considered the darling sector because it accommodates white collar workers in cities where values are at their highest, has been damaged.
Office, long considered the darling sector because it accommodates white collar workers in cities where values are at their highest, has been damaged. It’s not a case of workers returning to the office - it’s a case of why do you need to attend the office? This is at a crossroads and there is no obvious solution. Few CEO’s know what to do. The majority believe that they need an office headquarters to be a base and from where to function, but most CEO’s believe that the HQ won't be as large as it is was. The common belief is that about 70% of existing space should be retained. Then there’s the utility of the space. How will it be used? Will it be activity based, will it be dedicated workstations and what will the purpose of congregation be? Socialisation is not valuable when isolation is the necessity. With access to cities dominated by public transport the office sector will remain substantially unoccupied this year, like the past two. As a result, I am seeing incentives rise to very high levels and now face rents are beginning to retreat. Demand is the issue and without a clear plan for the future use owners may need to start thinking about alternate uses for office floors.
In all situations I see opportunity and that’s the beauty of real estate. You buy land and you get to develop buildings which meet market needs. Sometimes the needs are long term and in times like we find ourselves in now those uses should be re-prioritised. This pandemic has put many of the uses of land to the test and in some cases the buildings are no longer suited to the market demands. With that comes opportunity. In the case of office space, it will be interesting to see if some of the big financial institutions can muscle their staff back to the office with the threat of sacking or if the labour market remains strong enough for staff to get another job and continue the trend of working from home.
These are new times, and the market is on a fresh adventure. The pandemic isn’t just going to go away, it has dug in and we must accept living with it to combat it and then rally. I’ll keep tabs on the progress of the various market segments I see and keep you informed.