As in most parts of the world, the COVID-19 pandemic has seen vast implications for the Australian real estate. How will the NSW capital’s property market – one of the biggest in the country – fare moving forward?
Herron Todd White's latest Month in Review determined that Sydney’s commercial property sector has been affected by the virus outbreak. Over the coming months, the retail sector will continue to feel the adverse effects of the pandemic, with the true knock-on effect yet to be known for some time, the report noted.
King Street in Balmain, in particular, have borne the brunt of enforced closures.and Darling Street in
Other usually strong retail precincts, including the CBD, Bondi Beach and , have also been severely impacted by the abrupt halt of tourism and additionally in the case of the CBD, the closure of most offices, according to Herron Todd White.
On a more positive note, some locations that seem to have weathered the storm better than others, including Macleay Street in Potts Point has seen many retailers continue to trade throughout the pandemic, and as a result, the increase in vacancy does not appear to be as significant as we have seen in other retail precincts.
Further, the residential property market currently sees more Sydney investors looking to up the ante by undertaking a number of renovations in order to add greater value to the assets.
Herron Todd White found that the downtime delivered by isolation “has spurned on owners looking to improve their assets through maintenance and upgrade”.
Similarly, anyone with the financial means who’s keen on more substantial renovation will find willing trades and suppliers hoping to quote.
“Renovation is a popular option in many parts of Sydney, particularly in inner Sydney and harbourside locations where extension and renovation of an existing home is a more viable option than a knockdown and rebuild,” Herron Todd White noted.
“These areas often have heritage and other planning restrictions that make it difficult to get approval to do a complete rebuild. In addition, it is also desirable to maintain the period features of older dwellings whilst upgrading the fit-out and increasing the floor space.”
Meanwhile, in the middle and outer rings, there is more appetite for knockdown and rebuild, increasingly for duplex and small [townhouse-style developments to take advantage of larger land parcels, according to the research.
Granny flat builds also continue to be a popular option in these areas, either for extended families or for those looking to obtain some additional rental income.
“Owners look to enhance their homes by something as minor as fresh paint or some additional landscaping, through to a full-blown second-floor addition and full renovation.”
Ultimately, the impact of COVID-19 on Australian property market may not be as severe as anticipated, with only a slight decline in vendor price satisfaction, national research by RateMyAgent found.
Results of the Price Expectation report revealed the ACT as the happiest state (45 per cent) in terms of selle satisfaction, with joint second place going to Victoria and South Australia (40 per cent), followed by Tasmania (39 per cent) and NSW and Queensland (37 per cent) and trailing last, Western Australia (27 per cent).
Sydney and Melbourne continue to dominate property growth as they stand to be the only two capital cities to have experienced growth in both the housing and apartment sectors, according to research released by the Real Estate Institute of Australia
During the past quarter, the weighted average median price for houses for the eight capital cities increased to $786,923, with Sydney, Melbourne, Hobart and Darwin all having increases
The weighted average median price for other dwellings increased to $602,293 over the quarter, with prices increasing in Sydney, Melbourne and Adelaide but decreasing in Brisbane, , Canberra, Hobart and Darwin.
REIA president Adrian Kelly said that the quarterly change in median prices was the largest quarter increase since 2017, which was the beginning of the housing boom of 2017/18.
“Over the quarter, the median rent for three-bedroom houses increased in all capital cities except for Brisbane and Perth, which remained steady and Darwin, which decreased… The median rent for two-bedroom other dwellings increased in all capital cities except Darwin, which had a 2.4 per cent decrease,” according to him.
Western Australia remains as the most affordable state for buyers and tenants for the 11th consecutive quarter.
The latest RateMyAgent Price Expectation Report also shows that the initial impact of COVID-19 on the market wasn’t as severe as expected, as the housing market has remained resilient.
RateMyAgent CEO Mark Armstrong said: “While we still need to analyse the long-term effect of the pandemic and keep a close eye on economic conditions, we are seeing the industry begin to recover, particularly with the easing of restrictions and a slight drop in the national house price.”
Seller confidence continues to show signs of improvement, with new research finding that the week concluding 28 June recorded the highest number of auctions held in nine weeks, according to CoreLogic’s latest Property Market Indicator Summary.
For the week ending 28 June 2020, there were 1,424 homes scheduled for auction across the combined capital cities. The volumes have returned a preliminary auction clearance rate of 64.5 per cent.
“This was the highest number of auctions held in nine weeks, demonstrating an ongoing improvement in seller confidence as auction clearance rates hold reasonably firm under higher volumes,” CoreLogic said.
In comparison, the previous week saw 1,251 homes taken to auction returning a preliminary clearance rate of 66.1 per cent, which later revised down to 59.6 per cent at final figure. This time last year saw 1,295 homes taken to auction across the capital cities and a clearance rate of 62.9 per cent was recorded.”
Sydney saw the largest volume of auctions, with 614 homes going under the hammer over the week, returning a preliminary clearance rate of 66.9 per cent.
The previous week saw 522 homes taken to auction across the city, returning a final clearance rate of 61.6 per cent. One year ago, 503 auctions were held in Sydney and a 67.9 per cent clearance rate was recorded.
Despite the current COVID-19 pandemic, the Sydney unit market continued to witness significant demand, according to Ray White Commercial.
Residential vacancies have remained low in the Sydney CBD, with REINSW results showing vacancies of just 4.10 per cent – far superior than commercial markets.
Similarly, Ray White’s Sydney Block of Units Overview June 2020 report found that average yields in 2020 were recorded at 4.37 per cent, within a range of 3.03 per cent to 5.58 per cent. This remains higher than the average Sydney residential yield of 3.00 per cent recorded by CoreLogic in May 2020.
“The block of unit market is tightly held, owners have enjoyed [long-term], stable income streams and see this investment option as a [low-risk], retirement income while enjoying the price growth of the residential market,” the report noted.
Sydney unit market’s gross yield range has been the major drawcard for private investors in recent times as interest rates have fallen considerably and the relative ease in obtaining residential investment finance compared to commercial funding has also become attractive.
Furthermore, the sales recorded in 2017 and into 2018 saw a strong weighting towards developers looking for a development site to capitalise on changes in zoning and the allowance to build more apartments on the land parcel, maximising gross realisations, according to Ray White.
“Into 2019, as interest rates fell, private buyers have increased their enquiry levels on these assets. As a limited number come to the market each year (30 transacting in 2019), this has put upward pressure on values and the discounts associated with buying in one-line [have] shrunk as yields continue to fall yet keeping an attractive spread to bond rates,” the report noted.
Older-style stock typically is well located with easy access to shopping and transport so have proven to be attractive to buyers as well as tenants, however more recently we have seen the increase of developer stock also enter the market, the report highlighted.
Across Sydney, a number of blocks of units sell each year. This in one-line transaction is attractive to many smaller private investors as an alternative to commercial investment as it’s a comfortable asset class and has a high demand rate keeping occupancy levels high.
“We have seen this market evolve over the past few years with many developers purchasing these assets for redevelopment purposes while more recently with interest rates at all time lows the private investor has re-emerged and hotly compete for this limited pool of assets,” the report noted.
“The attraction of these assets not only are their limited vacancies and secure income stream, but the longer-term exit strategies which can see significant value uplift if redeveloped or strata subdivided and sold.”
Moving forward into the remaining six months of the year, as the world recovers from the COVID-19 outbreak, there are two likely scenarios that could play out, according to Domain research.
Domain economist Trent Wiltshire said that the first possible outcome would be modest price falls, while the second one would be a slow pick-up in property sales.
“The most likely outlook for property is for prices to fall modestly in some areas and be broadly steady in others, combined with a slow increase in transactions from weak levels.”
“The key factor supporting prices so far is that few people have been forced to sell their homes due to losing their jobs or having their incomes cut. This has been enabled by the government’s financial support packages assisting households whose income has fallen, in combination with banks allowing people in financial difficulties to defer mortgage repayments,” he highlighted.
Westpac-Melbourne Institute’s consumer survey data indicates that, while people think it might be a good time to buy, there is no rush because they think prices may fall a bit further. This suggests sales volumes will remain sluggish for the next few months, according to Mr Wiltshire.
Perth, Adelaide and Canberra are the property markets most likely to rebound fastest, where prices are likely to grow at a modest pace and sales activity should pick up.
Couple this with the fact that there are few or no COVID-19 cases in these cities, investors can rest assured that the local economies should be able to operate fairly normally.
Holiday and coastal areas near capital cities may also become more popular with people more able to work from home, but this could be offset by people selling holiday homes due to a fall in their incomes.
“Inner-city Sydney and inner-city Melbourne look to be most at risk of price falls due to having a large proportion of renters and also due to significant job losses, particularly in hospitality. These inner-city areas are also where a large number of international students typically live. But with borders closed and universities teaching online, international student numbers have fallen substantially.
“Asking rents in inner-city Sydney and Melbourne have fallen by about 6 per cent in the June quarter, whereas the outer suburbs have held up reasonably well. Falling rents and rising vacancy rates means many investors may sell, which will push down prices, Mr Wiltshire said.
With Australia faring much better than many countries when it comes to managing the COVID-19 pandemic and with even the most dire economic forecasts predicting a recovery as soon as next year, Australia will be an attractive and stable economy in which to invest and a secure and safe place to live.
This is likely to lead to an influx of migrants and foreign investors from all over the world, including the United Kingdom, the United States, South Africa and Hong Kong.
Ultimately, despite uncertainties, investors are reminded that the Australian property market is extraordinarily resilient, particularly looking back to its rebound from similar economic and political shocks to the system such as the GFC, Y2K, September 11 and the banking royal commission. Sydney, Melbourne and Brisbane markets have experienced only small dips and recovered relatively quickly during these events.
Those who have predicted severe 20-30 per cent drops in the property market this year are now walking back those forecasts. AMP Capital chief economist Shane Oliver, who was forecasting falls of 20 per cent, has now revised his predictions to falls of 5-10 per cent.
Many markets across Australia continue to have low supply, which has prevented property prices from falling significantly.
“During times of uncertainty, a drop in buyers is typically matched with a decrease in supply, which allows property values to hold firm. That means that any drop in prices is likely to be minor and short-lived,” Binnari Property’s managing director David Hancock said.
“In any event, property transactions will continue as people buy their first home, upsize, downsize or look for ways to invest outside of the sharemarket.”
At the end of the day, it is unlikely that the Australian property market will sustain any long-term falls due to a combination of migration, foreign investment and government intervention, Mr Hancock highlighted.
In fact, real estate trainer and auctioneer Tom Panos said: “I think we’re about to see the best buying opportunities in the last decade… Why? Because there’s stock hitting the market.”
Investors who want to succeed amid a recovering economy are strongly advised to focus on big data as a means of standing out from the influx of investors who are looking to take advantage of the property market.
EG Fund’s CEO and founding director Adam Geha explained that the old 'gut check' approach is still relevant, but big data allows for wiser decisions to be made when it comes to property.
“I’m suggesting one of the things you need to be doing is looking at a structured technology-based approach to data. Data is proliferating, it is now very timely, it is coming out weekly, sometimes daily, and it can significantly improve your decision making.”
Further, property as an asset class remains very forgiving, with the majority investors able to get ahead without having to create complex strategies.
“Australian real estate is actually a very kind playing field in that it generally rewards most of the players. It does that because we have a fundamentally strong economy that is well governed, that is transparent and peaceful, with strong population growth.”
Investors in it for the long term, in particular, typically do not need to overreach to grow their assets.
“You don’t need to look left and right. Sydney will do very well if you give it a 10-year period. There has never been a 10-year period where Sydney did not deliver a 5 per cent plus compound capital growth in addition to a 3 to 5 per cent yield.
“When you leverage that at 70 or 80 per cent as you can do in real estate, you do supremely well.”
“I often think people try to complicate it, but what you’re really doing is taking a bet on Sydney, and Sydney has been very kind to investors who have taken a bet on it for the last 50 years,” Mr Geha noted.