Change asset selection approach as coronavirus restrictions loosen?
May 19, 2020
The unlocking of covid-19 restrictions has started and will increase in coming weeks. Minds are turning to adapting to our new reality and property investors’ thinking is no different. How could the most vital component of property investment – asset selection – differ in the future?
The answer will come after understanding the fundamental shifts in demand and supply at both a macro and micro level. Looking at the top-level economic impacts – be they GDP changes or job losses – is a necessary part of the analysis, but not sufficient for completeness. It has never been truer that a prospective investor only buys an asset not the entire market. That asset’s long-term prospects are as influenced by local economic, geographic (right down to its position on a street), social and legal drivers as it is by national settings. And investors must of course think about demand and supply in the rental market as well, not least how tenants will respond to events.
For instance, assets in locations close to the greatest employment opportunities (our CBDs) earn a significant value premium above those further out, largely reflecting shorter commute times. Will the working from home phenomenon of the last few weeks extend to long-term behaviour changes that are enough to erode that premium?
The National Cabinet made clear that the return to our conventional workplaces will be a measured process. Working from home may remain a significant part of the working week for several months given the need to reduce workplace density, so staff onsite presence will be curtailed and staggered. On the other hand, when we do commute, congestion may be worse in coming months if sufficient public transport users switch to driving due to worries about safe distancing on trains, trams, buses and ferries. Don’t be surprised if more people, especially tenants (who can change locations more easily than home owners) opt to be within cycling/walking distance of work.
There are also suggestions that the lockdown will change accommodation tastes. Supposedly, we will want bigger homes so household members can have more personal space. Perhaps, though ABS social trends data show most Australian households have either sufficient or surplus accommodation. Indeed, a desire for a good choice of private space within a home may well see a push against open plan living, a feature of many larger homes.
Ongoing restrictions or societal appetite around indoor social gatherings will likely see us spend more of our leisure time in the open than before. Suburbs with good access to parks, cycle tracks and other outdoor recreation such as tennis courts, outdoor pools and basketball courts may well be more attractive than otherwise similar places.
I suspect the CBD high rise residential sector will struggle in coming months due to its reliance on missing overseas students. In time the sector will eventually recover if government plans to allow the return of international students subject to hotel quarantining on arrival come to fruition. Indeed, if Australia continues to demonstrate internationally it is a safe harbour from the pandemic, then the recovery in student numbers may be faster than expected.
However, there may also be a drift of CBD building use from business to residential purposes if demand for office space weakens. Buildings may be reassigned to residential which may exacerbate the residential oversupply problem. It seems the high-rise sector just can’t get a break from bad news.
More generally, it is important not to overweight the impact of the pandemic. Yes, there will be lifestyle adjustments that may be for the long term, but many shifts will be short-lived so investors should not focus too much on those when making their decisions. Ultimately, investment is always for the long term. I am confident that the best planning assumption will be that we will eventually return to a similar lifestyle that we had last year. Richard Wakelin