Slow recovery in real estate is an opportunity
According to John McGrath, the founder and chief executive of the ASX-listed real estate agency McGrath, it could take five to ten years for the land’s industrial property to recover from the COVID-19 pandemic.
This could offer some good opportunities for investors.
According to McGrath, many Australians who still work from home or work less in the office will find that most of them don’t need as much space as they currently have.
“For businesses, this means trying to renegotiate if they can’t get out of a lease, or not taking up extra space if their lease has expired.
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“I think that will mean that there has to be an oversupply of commercial space in the next few years, which can only lead to one thing – reduced rents.
McGrath’s assessment is supported by research by MSCI, which interviewed 400 global property managers and investors at their Australia Property Investment Webinar in August.
At the time, there was general consensus that social distancing, remote working, and changing mobility trends could all affect property income growth, and therefore ROI, in major global cities like Sydney.
That aversion to real estate, which spilled over three-quarters of respondents, believed that a hybrid return-to-work approach could have a negative impact on prices as companies realize they don’t need that much real estate.
However, MSCI made it clear that this was not entirely clear as, while some areas of commercial property could suffer, there would still be a demand for good quality properties in good locations.
In other words, while a city like Sydney might suffer in some areas, it all depends on the old property mantra “location, location, location”.
McGrath agrees that “Prime is always Prime” and “If you are in Sydney’s Chifley Tower or Pitt Street Mall, as a landlord you will likely be safe because the demand for the best locations continues”.
Conversely, McGrath says, “Anything sub-prime or B-grade will put a little bit of pressure on falling rents and that will lower the values of assets,” he says.
Against this backdrop, McGrath sees some commercial properties being retrofitted into residential development, while others may only have to bear the brunt of the roughly 20 percent drop in values.
“Hopefully it will pick up again, but I think trade and retail have changed their trajectory a bit because of COVID,” says McGrath.
As for the real estate market in general, big cities will always be a good investment for private and commercial investors, according to McGrath.
“They always feel expensive, but after five or ten years they look cheap.”
Outside of the larger cities, the regional areas are currently stronger than ever, as the changing nature of work (accelerated by COVID-19) means that more people don’t have to spend a full week in the office to be looking for a lifestyle than after being close to work.
“Some of these regionals used to be a bit of a hit and miss, but now I think if you pick the right regional lifestyle variety and are within two hours of a major airport or city, you’ll be up and running close. “
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