Real estate experiences losses and wins during the pandemic

At the onset of the COVID-19 pandemic, the market outlook on Australian real estate was dire, with major banks forecasting national house prices to fall more than 10%. However, according to ABS figures, residential property prices only fell 1.8% in the June quarter.

Taking the long-term view, residential property prices gained 6.2% over the last 12 months on a weighted average across the eight capital cities. Supply in the market also tightened during the June 2020 quarter which could have been a potential driver for property prices holding up. 

“Notwithstanding the optimistic outcome in the June quarter, there remains an expectation for residential property prices to decline well into 2021 albeit at a much lower rate than what has previously been forecasted by economists. The big question remains as to what the impact will be when the government stimulus potentially dries up next year,” said Eric Chan, Managing Director of Aura Group.

Commercial real estate has been less fortunate and has arguably suffered the bulk of the COVID-19 impact while tumbleweeds occupy hotels, offices and shopping centres in the busiest parts of town. 

To put this into perspective, there has been a 63% and 86% respective drop off in the number of active mobile phones in Sydney CBD and Melbourne CBD on 16 Oct 20 compared to the high of this year on Feb 20(1), indicating lower movement of people and connectivity in business districts. Vacancy rates in commercial real estate rose from 3.9% on Jan 20 to 5.6% on July 20 in Sydney(2).

Net face rent for commercial real estate appears to be holding up despite COVID-19, (this is rent disregarding incentives such as rent-free periods or rent reductions), however, net effective rent has been substantially affected in Sydney CBD and Melbourne CBD.

There are a few bright spots that can be found within the industrial real estate and regional retail sectors. Data centres and distribution centres are among those which have benefited from the crisis driven by the increase in data usage and e-commerce spending. Local malls and suburban retail shops have also flourished as consumers stay local. Some believe there will be a permanent behavioural change in the way society works and shops. If that happens then these real estate asset classes will become the true winners of this pandemic.

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