Is There A Correlation Between The Real Estate Market In Melbourne and Coronavirus?
It is an obvious question with perhaps a not so obvious answer. The commencement of 2020 has seen an ever resilient property market with no apparent impact from the Coronavirus. Unlike the impact being felt from toilet aisles in our supermarkets to our district centres such as that of Box Hill or Glen Waverley, the property market continues its own journey with no real consideration as to the medium or long term impact the virus may have on each and every household.
At its latest Reserve Bank meeting, interest rates were further cut by 25 basis points to an all time record of .50%.
As per the Statement by Mr Philip Lowe, Governor of the RBA, “the Board took this decision to support the economy as it responds to the global coronavirus outbreak.
The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path.
The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending.
Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend”.
And I suppose, that is the ultimate question with no definite answer…When will the coronavirus be contained?
That is the million dollar question and until we all wait for a miracle cure or vaccine at the very least, we all hold our breath thinking…how much lower can interest rates go and ultimately, how effective will they be in an attempt to stimulate consumer confidence of which is at a low?
Whilst the federal government has all but given up on the budget surplus, the fiscal support proposed to be injected into the economy and our pockets is expected to be big. But how big and what will be the long term impact on the Australian economy as a whole?
I don’t purport to have the answers. In fact, no one does.
Below is a snapshot of each market segment as I see it today. Tomorrow may be a completely different story!!
Residential Real Estate Market Snapshot
Median house prices have surpassed $850,000 during the December 2019 quarter of which was followed by two consecutive quarters of growth. Auction clearance rates within the general Melbourne Metropolitan area currently between 75% – 80% however, is this a reflection of the volume of sales and stock levels being considerably less than previous periods?
Commercial Market Segment
The commercial real estate market continues to be resilient as a result of the limited supply of newly constructed commercial office accommodation both within the Central Business District and suburban Melbourne.
The limited supply has had a direct effect on vacancy rates and initial yields for investment grade stock.
The Central Business District of Melbourne is currently experiencing the lowest vacancy rate since the late 1980’s currently being at circa 3.2%. The completion of new developments over 2020 will only provide limited opportunities for organisations due to the level of pre-committed accommodation.
The suburban office market throughout Metropolitan Melbourne has also been subject to limited commercial office accommodation being available for sale and/or lease in general terms. With limited opportunities availing within the Central Business District of Melbourne, the suburban office market has experienced a firming of yields and face rentals with limited incentives being required to entice tenants.
Further, the strata office market remains a popular asset class with owner occupiers in particular.
Industrial Market Snapshot
The rising scarcity of developable land in most industrial precincts of Melbourne continues to place upward pressure on land values. Further, with no foreseeable change in the current low interest rate environment, the appetite for industrial real estate continues.
Prime and secondary rental rates throughout most industrial precincts have been subject to modest growth. Yields have been under increasing downward pressure for prime grade industrial properties with yields for secondary properties generally steady.
Retail Market Snapshot
The retail real estate market is the one sector of which is currently undergoing a shift in sentiment from both investors and tenants alike. Most retail shopping strip centres throughout Metropolitan Melbourne have been subject to higher levels of vacancies with no improvement earmarked for the short term.
Changing consumer spending patterns, rental levels being at an all time high coupled with rising operating costs for many operators has placed a degree of pressure on the sector not witnessed for some time. Yields have and will continue to soften with the onus now placed on fundamentals including the strength of tenancy profile and lease covenant.
We would anticipate the need for rentals to be reviewed with an adjustment downwards to a ‘market’ level throughout 2020 of which will affect capital values.
The above is a snapshot of where we are currently sitting. However, as we are in unchartered waters perhaps a degree of caution is now warranted by all participants. This all being at the backdrop of a stock market revisiting GFC levels.
For all and any property related advice, don’t hesitate to contact either
Jim Derzekos on 0412 361 367 or Mark Ruttner on 0411 419 674