2020 Year in Review
Australia managed multiple economic setbacks through 2020 including a serve drought, the worst bushfires on record, mass flooding and the global COVID-19 pandemic. Australia’s strong fiscal management and prompt implementation of various stimulus packages by the Federal Government including Job Keeper and Job Seeker meant Australia was able to quickly exit from its first technical recession in nearly 30 years.
Economic growth is forecast through 2021 as Australians spend domestically given their inability to travel internationally, historically low interest rates and substantial infrastructure expenditure by the State and Federal Governments. This optimistic outlook is further driven by the containment of the virus within Australia and the COVID 19 vaccine rollout which commenced in February 2021.
Responsive Government action has seen the unemployment rate decrees to 6.4% as at January 2021, down from 7.4% in July 2020. Further, the Reserve Bank of Australia is forecasting 5% growth in Gross Domestic product over 2021.
Work from Home
The forced work from home “experiment” made organizations rethink their office requirements. This flexible working environment proved the effectiveness and efficiency of available technology. However, many organizations are requiring their staff to work at least part time from the office. It is expected that office occupancy will continue to increase through the latter half of 2021 and 2022 as businesses seek to reclaim lost efficiency, build office culture, and provide better opportunities to work collaboratively.
Interestingly, in 2015 only 13% of the office-based workforce had “flexible work arrangements” while a Roy Morgan Research survey released in June 2020 found that over 58% of traditional office workers were working from home at the peak of Australia’s lockdown. The recent push by companies to bring staff back into the office with flexible working arrangements highlights the ongoing relevance of office space. 2021 has seen an increased acceptance from business and Government to have flexible working arrangements with agreed minimum required days in the office. Early research is suggesting that the new normal could be around 3 Days in the office and 2 remotely.
2021 Outlook
Foreign purchasers accounted for most commercial real estate transactions through 2020. This attests to Australia’s well recognized and ongoing position as a safe and transparent investment market and supported by its strong underlying economy and world leading management of the COVID-19 pandemic.
Further, a record low cash rate of 0.10% makes the cost of debt attractive and provides a natural hedge for offshore investors. This has enhanced investor trust and intertest in the commercial property market, as they seek to achieve a low weighted average cost of capital which improves total returns. Combined with a large amount of foreign capital seeking higher yields with the perception that assets may be mispriced. As a result, industry experts forecast increases in transactions across all asset classes in 2021 underwriting asset values and believing in longer term fundamentals.
Australia’s long term economic outlook is expected to improve with growing real estate sectors including Industrial, Commercial and Residential with particular interest in alternative sectors such as Data Centers and Health Care. Changes in FIRB (Foreign Investment Review Board) thresholds returning to pre-COVID levels will streamline asset purchases increasing additional offshore investment.
Capital Markets – Commercial Real Estate Australia
The Industrial property sector led the market in 2020 with a strong economic performance managing Australia’s uncertainty with COVID-19. Being the only sector in 2020 to increase in transactions from 2019 by 13% (CBRE). Face rents broadly held firm whilst incentives rose nationally, it remains the preferred sector of investment across Asia Pacific for 2021 as investors seek to reweight their exposure to industrial and logistic asset classes (CBRE). The sector is set for growth with the addition of 350,000sqm annually over the next 4 years to meet to high demand, with ecommerce set to be a key driver of new warehouse accommodation (CBRE), which comprises traditional warehouse space, last mile logistics, bulky goods/retail, and the evolution of parcel lockers. The sector outlook for 2021 is forecast to see industrial rents and capital values remain stable on a national level over the next two years.
Throughout 2020 the Office sector experienced disruptions with net absorption reaching historic lows and vacancy rising to levels not seen since the 1990’s. Nationally vacancy rates sit at 13.3%, recording a negative net absorption of 116,000sqm in the December 2020 quarter. Effective rents are expected to decline over the course of 2021 impacted by an increased supply of sub leased stock by businesses managing COVID-19. In 2021 vacancy rates are further set to increase with subdued tenant demand before levelling out. However, with the resumption that offices will return sooner, accommodating staff will likely require more space to meet different office configurations due to COVID-19. The unknown question remains with closed borders will we see a skill shortage in the finance, engineering, and healthcare sectors, where many of the candidates have been sourced offshore in the past. In any event the sooner we can open the boarders the better for Australia. Overall, even with some uncertainty we expect asset values to remain stable as overseas investor demand should continue to outweigh supply.
The Retail sector experienced record trade growth across e-commerce in 2020 and forecast to remain at raised levels throughout 2021. Although experiencing the largest declines are department stores which have been late to embrace e commerce and are set to experience a 2.6% annual decline in space needs over the next few years. Reforms in consumer spending shifting towards online has resulted in the amount of physical retail space required declining. Homewares and home furnishing are set for the strongest market growth in floorspace over 2020-2024 with Compound annual growth rate of 2.5% (CBRE). Rent declines in 2020 are also set to stabilize in 2021. Due to homeware spending and non-discretionary spending, regional shopping centers and bulky good retail will be favored asset class in 2021 however major CBD and near CBD shopping centers with a large level of discretionary spend will need to rework their offerings to generate more consumer traffic and we expect this to take some time. As a result, continued pressure will remain on the value of these centers.
Two alternate asset classes which have found favor amongst institutional investors are Health Care (Medical, Pathology, Hospitals, GP clinics, Aged Care) and Data Centers. This is somewhat quantified by Australia’s ageing population, by way of reference Australia will have over four million people aged between 65-84 by 2022. In addition, Data Centers support cloud storage which has allowed employees accessibility to work remotely. Large demand was experienced across the asset classes in 2020 and is set to grow dramatically in the next five years (Savills). These investments are highly attractive to investors with short development times, minimal capital expenditure and long lease terms to “sticky” blue chip tenants, who invest substantial capital into the facility.
Whilst the pandemic has impacted Australia’s economy it has been surprising to see how fast we have rebounded over the short term. Industry leaders and business sectors remain highly positive and globally Australia is seen as a safe destination to invest with strong government fiscal management. Real Estate assets classes to watch in 2021, will be large industrial logistics, quality regionals retail shopping centers and healthcare and data centers. If taking a longer-term view, there is a lack of development opportunities for office buildings in the major CBD’s of Melbourne and Sydney, where demand is forecast to out-way supply.
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