wealth real estate

COVID19 – Property Market Impact

It’s a commonly searched question since the coronavirus and COVID-19 outbreak.

How will the Coronavirus affect house prices?

In short, yes. Of course, it will. It is going to affect every part of our economy and lives over the coming months. The silliness of the Great Toilet Paper Shortage goes to show that people are scared and not necessarily behaving rationally. And doesn’t the news media just love it? Can you think of any topic that is consumed so voraciously with the latest headline?

So yes, the property won’t escape. So, the question really is, how? Firstly, a caveat; the current circumstances are genuinely unprecedented, so no-one can be absolutely certain. But history does give us some clues.

When uncertainty in the economy and in society occurs, the normal reaction is to put off big decisions. So, a slowdown in activity with property sales will likely occur. The lack of sellers following the 2018 slump in prices, led to steep price increases in 2019 when confidence returned. As more sellers came to the market, price growth started to slow. The current nervousness will feed into this slowing of price growth.

However, the other significant factor is the stock market. In past times of crisis, with the share market turmoil that goes with it, people with spare money (investors) look for where to place it to get the safety and also some return. Thanks to consistent reductions in interest rates, there are virtually no returns from cash. The probable main beneficiaries of this are gold and property. At least this applies to Australian property anyway.

With both positive and negative influences now in play on property values, which one will win out? Our best guess is that there will be a short-term stalling of price increases, followed in the medium term by a continuation of more subdued growth. But as we noted, current circumstances are genuine without precedent and logic may well go missing in action for a while. Nevertheless, it is time to be genuinely grateful we live in Australia.

The bottom line is it will be negative - prices will go down. People, up until now, have been talking about the property market developing a bit of momentum, with the interest cuts we had last year and the easing in credit conditions.

But coronavirus has changed the story for 2020.

Rate cuts and stimulus packages can only do so much

The Reserve Bank cut rates soon after news broke of the developing coronavirus outbreak. On its own, that’s positive for the housing market (meaning prices stabilise or go up).

But the reason the bank is cutting is coronavirus is negatively impacting the economy as a whole – there’s no escaping that fact. Yes, the government has released its stimulus package and there may be more fiscal stimulus on the way, but there are limits to what any government can do. There will be negative effects on employment. It will be a short, sharp shock to the economy.

We fully expect a strong rebound by 2021 but in the short term, it will hurt. There are sectors in the economy where people will lose jobs and it’s fair to say coronavirus is generating uncertainty more broadly in the community and, in turn, in the economy.

In the housing market, the bottom line is there will be a pullback by buyers and that will take the momentum out of the market, and we could see some price falls.

The other element is you can look at what it’s done to other asset prices. Yes, interest rates are lower but other assets, notably equities, are being hit.

For a lot of people with wealth tied up in the share market, their wealth has been diminished. So the capacity for many people to use that wealth to buy into the housing market has been reduced.

buying property online

I’m looking to buy. What do I need to know?

In this environment, buyers who are in very secure jobs are actually in an improved position because the overall market is weaker. Coronavirus will take out a group of buyers – those adopting a wait-and-see approach or who are simply unable to buy due to reduced income.

But there’s another group of buyers: those who are in jobs but who face uncertainty about how coronavirus will affect their pay or whether they will keep their job at all. Many of these types of buyers will be taken out of the housing market for now.

Despite the loss of some buyers, real estate agents have had to rethink how they sell properties.

Virtual tours of homes, private inspections and online auctions are now the norm. Sellers can still sell via private sale too, as always. Auctions will continue to be held online. Prospective buyers can continue to register and bid online. Only ‘in-person’ auctions have been suspended due to social distancing rules.

Inspections will continue via realestate.com.au’s New Virtual Inspection Tool which will allow buyers and sellers to remain in business. Buyers can inspect a home virtually and then if they wish to visit a property in person, they can arrange a private visit through the selling agent. Digital inspections allow real estate agents to use videos – either shot professionally or via smartphone walk-throughs – which would be available to renters and buyers via ‘Inspections’ sections of Buy and Rent listings on realestate.com.au.

Alternatively, buyers can always engage a buyer’s agent. A buyer’s agent can act as a “middleman” at a time when house hunting has become more challenging. While buyers can’t attend traditional open homes at the moment, private viewings are still permitted. By engaging a buyer’s agent, purchasers can get a helping hand shortlisting homes, but be aware there is a fee involved (between 1.5 to 2 per cent of the purchase price plus GST, however some charge a flat fee).

I’m looking to sell. What do I need to know?

If you’re a seller, you need to appreciate things are going to be weaker. Those would-be sellers who have flexibility will be able to defer and that could cushion prices fall.

There will still be people who need to sell for whatever reason. The turnover will decline but there will still be properties coming into the market.

However, in short, yes. Sellers’ agents, buyers agents and the rest of the market have adapted to the new restrictions. Virtual tours of homes, private inspections and online auctions are now the norm. Sellers can still sell via private sale too, as always.

I’m a property investor. What do I need to know?

The market has been getting more difficult for the investor. The market in, for example, Sydney is oversupplied at the moment and there’s already been some downward pressure on rents. Yes, investors can benefit somewhat from the decline in rates but that benefit is offset by declining rents.

Then, along comes coronavirus.

The weakness it is causing in the economy will accentuate the downward pressure on rents in the short term and that’s something investors need to be cognisant of.

If prices come down, investors could be in a better position to buy (to create or add to an existing property portfolio) but that weakness in rents is a real factor – it has been for some time and is unlikely to go away any time soon.

No matter your state, the overall picture is broadly the same. From state to state, each of the markets is doing slightly different things but the broad point would apply across all markets. Coronavirus is everywhere. Its impacts on the property market will be everywhere too.

The Melbourne market has been strong and the vacancy rates aren’t as high, but there’s no doubt coronavirus will increase caution among many buyers and encourage a lot of sellers to defer.

Listed versus unlisted property securities – different impacts

Depending on the duration of Coronavirus, the experience of investors in listed and unlisted property securities may be quite different.

Listed property securities, or A-REITs, are exchange-traded and are valued second to second by the market. This results in an immediate valuation adjustment for any news, or investor sentiment. We have seen the impact of this over the past few weeks, with high levels of daily and intra-day volatility.

On the other hand, unlisted property securities are unit priced periodically (monthly, quarterly or annually) on an appraised valuation basis. The Trustees of unlisted property securities have a set valuation policy that determines when each asset in the portfolio is valued. Often 25% of the portfolio is valued each quarter, resulting in 100% being valued over the full year. This generally prevents an over or under reaction from any individual news event and delivers a less volatile experience for investors.

Although A-REITs are subject to daily market valuations, the assets held within each listed security are still valued on the same principle noted above for unlisted securities. Because of this, we can see large gaps between the implied value, based on the price of the listed security, and the Net Tangible Assets (NTA) of the assets, which lag.

Over the past 6 weeks, for example, the A-REIT sector has gone from trading at a premium to NTA to a significant discount demonstrating this effect. Examples include Dexus Property Group (ASX: DXS), which has gone from 15% premium to 5% discount and GPT Group (ASX: GPT), which has gone from 3% premium to 19% discount. On the flip side, A-REITs will be the first to respond on any positive news with respect to Coronavirus.

Not all A-REITs are the same

It is important to assess the different risk profiles within the A-REIT sector.

At the lower end of the risk spectrum are the passive rent collectors. These A-REITs have a portfolio of existing core assets that are generally high quality, with strong tenant covenants and balance sheets that are conservatively geared. These securities represent a purer exposure to property assets.

Further up the risk curve, are the listed property securities that introduce equity-like risk from more active revenue streams such as funds management, development projects or operational risk. During periods of strong growth, these types of A-REITs tend to outperform because of the higher level of risk. However, when the market moves to ‘risk-off’, the defensive characteristics of the pure property securities provide some downside protection and a more sustainable level of income for investors. Despite this, with the extreme reaction to Coronavirus from the market, A-REITs are withdrawing their guidance provided during the reporting season less than two months ago and we expect to see some cut their dividends.

Different sectors, different impacts

In addition to listed property securities being embroiled in the stock market downturn, the most immediate impact of Coronavirus within the real estate sector has been connected to assets that host large groups of people that have a floating population, such as shopping centres and hotels. Foot traffic at major shopping centres is well down and in hotels, occupancy is low and cancellations are up.

The second group of assets, which also host large groups of people albeit with a more permanent population, include office buildings and social infrastructures such as aged care, childcare, schools and even prisons. The ability to compartmentalise and control these types of assets is far greater than in the first group. Only now we are starting to see a reaction to Coronavirus with companies who occupy these properties implementing Business Continuity Plans with flexible working policies and quarantining taking place.

The final group of assets are more affected from the supply side. In this group are tenants of industrial buildings with logistics operations that are being affected by the restrictions on the movement of goods. Equally, in the residential property sector, the construction industry requires materials to complete properties and then purchasers to acquire completed stock – many, particularly offshore buyers, have left.

hands exchanging house and money

A rebound in 2021

2020 will, in many ways, be a hard year for the economy. Talk of a recession is growing and while the big companies may not lay off a lot of people, a lot of small businesses are facing the prospect of low to no revenue. They may have no choice.

The financial capacity of small and medium-sized business will be harshly affected. If you’re a restaurant and nobody is coming in, you may have no option but to reduce staff or close. The stimulus package is well-targeted but there’s no stimulus package in the world that could stop some of these effects happening.

The RBA has talked about a rebound in the second half of this year. Hopefully, they are right but I expect at least by 2021. Either way, it’s important to remember the rebound will happen.

People will recover. People will go back to restaurants. People will go to football games. Things will eventually bounce back. Things will go back to normal eventually – but there will be some business casualties along the way.

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