Coronavirus: Once-hot property markets catch a chill

You wouldn’t want to be a property investor now.

Population growth is tanking. Over the next 18 months alone, net overseas migration will fall 310,000 short, on government estimates, thanks to the coronavirus pandemic.

With about 2.1 people per dwelling, that’s some 148,000 homes we don’t need to build.

Rents in capital cities, already anaemic, looks like falling off a cliff. “Demand for both new and established housing had fallen,” the Reserve Bank board heard at its May meeting, noting “rental market conditions had deteriorated markedly since mid-March”. And investors are unlikely to be reassured by the prospect of more negative gearing opportunities, given compensating capital gains are much less likely for a long time.

The situation is particularly dire for commercial property investors, who will suffer a double whammy of both lower population growth and a newfound desire among businesses to shrink their office presence and retreat from CBDs.

“A large amount of new office space was expected to be completed in Sydney and Melbourne in 2020,” the RBA board also heard.

A period of working from home has demonstrated businesses don’t need as much of a physical footprint, and lingering social-distancing requirements — such as a two-person lift limit — will make office towers close to unusable for many months.

“Valuations of commercial property assets are expected to decline over the period ahead because of lost rental income and lower expectations of future rental growth,” the RBA noted in its most recent quarterly update.

“This is likely to be most pronounced in the office and retail sectors, given the large-scale shift to working from home and the acceleration in the shift towards online retailing.”

The prospect of sharply lower rents will throttle plans for new construction, too. A little over 15,000 new houses and apartments were approved in March, slightly down on February, latest ABS figures say.

Commonwealth Bank economist Gareth Aird reckons dwelling starts will tumble to their lowest level since the 1990s.

Pain naturally won’t be confined to property investors and the construction workforce. About 8 per cent of APRA-regulated funds’ $1.9 trillion in assets is invested in listed and unlisted real estate — largely commercial property.

The share price of giant listed real estate trust Stockland is still down almost 45 per cent from its February peak, compared with about 22 per cent for the broader sharemarket.

Industry Super Property Trust, a vehicle through which industry super funds invest in commercial property, was valued at $18.6bn earlier this year, but valuations for unlisted investments will become trickier.

In the longer term, values are likely to rebound. Population will still grow, but more slowly. And the value of CBDs is likely to remain, given the threat of the virus will ultimately wane.

Concentrations of smart people lead to greater levels of innovation, a phenomenon known as agglomeration economies. Population density means greater specialisation and efficiency of production. Some people like living in cities, too.

Moreover, the shift won’t be as disastrous for Australia’s CBDs as it might be in other, less salubrious cities around the world. The appeal of Manhattan is mainly proximity to work, while Sydney’s CBD, for instance, will still have the harbour and beaches nearby.