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Finishing Off the Calender Year of 2021, Provides a Very Positive Outlook for Real Estate Property in General

Without hesitation the real estate market in Melbourne has seemingly had one of the biggest uplifts in levels of value and consistency of market forces that I have experienced. Simply, my initial thoughts back in March 2020 were very pessimistic for the year ahead….how wrong I and a lot of property participants were.

The obvious reasons are many, but low interest rates, under supply of real estate offerings, rate of return in excess of most alternatives of a fixed bank nature, coupled with necessary restrictions imposed by government have afforded a very consistent period throughout the Melbourne market, with few variances having directly affected market forces within all real estate sectors.

The usual discussions have been well documented within the media throughout 2021, however, noting that both industrial and residential real estate dwellings, in general, have been the stand out sub markets in my opinion, providing a prolific year for all participants within the real estate market from occupier, investor, funder to developer.

In all submarkets, regardless of most price points, we have been experiencing the cliché of “fear of missing out”, with yields compressing to levels unheard of in some instances, to rental levels in some sectors increasing with no market effect from Covid-19, nor State of Disaster. A scarcity of real estate in all sectors is evident with demand exceeding supply levels. Lastly, building costs have markedly increased due to wage increases and lack of materials.

In Victoria, we have witnessed one of the darkest periods in our history, with uncertainty prevailing to all facets of our daily living patterns, but still real estate property has to a very large degree remained resilient.

The question begs, is this simply a mirage or camouflage by circumstance, or will the current state of play continue to be the norm?

I find it hard to expect that, in general terms, anything of a significant nature will derail the current standing of the local market.

The RBA has clearly announced throughout the pandemic period that interest rates will not increase. Although personally sceptical, if this is correct, why would the market falter or change? Seemingly, we are on a smooth ride in the short to medium term.

The unknowns are few in a direct sense, with our politician’s mantra being loud and clear…”we are opening up”. Surely migration and international travel will bolster the already under supply of residential and tourist associated sub markets. Even the negative announcement of 6% occupancy levels within Central Business District of Melbourne, inadvertently provides a big positive with a take up assumed to the suburban office market within the Metropolitan areas of Melbourne.

The Central Business District will certainly have many hurdles to overcome in the short term. The return to the office policy to be adopted by employers will be one that determines how quickly this market segment returns to ‘Covid normal’. It is this ‘Covid normal’ that causes many stakeholders to be sceptical as to how this market segment will look in the short to medium term. Whilst face rentals may provide some degree of comfort for both the Landlord and the Bank, the level of incentives at play is likely to hit the ‘hip pocket’ and ultimately the attractiveness of commercial investments in general.

The standout has been the industrial real estate market in Melbourne, providing exponential growth through rentals, compression of yields and overall rates per square metre. It is the first time in my working career, that we have regularly utilised cap rates of between 4.0 – 4.5%.

The acute shortage of industrial land throughout all precincts of Metropolitan Melbourne be it in the north, south, east or west continues to be a major driver in fuelling this unprecedented demand. Our experience on a daily basis summarise the current state of the market as simply, there is ‘no supply’. Therefore, the laws of economics come into play in a market segment that has never been as buoyant as is currently.

It would seem that the only sector of which one may consider to be relatively static is retail. A ‘wait and see’ approach is also required within this statement, as we don’t really know as yet how many retailers are to re-open or eventually close. Yields have also remained relatively stable within this sub market regardless of the question of face or net effective rental and vacancy levels.

The majority of retail shopping strip centres throughout Metropolitan Melbourne have been resilient with the ‘work from home’ approach providing a stimulus to the local retailers that have been able to remain open throughout lockdowns thus far. Local demand has continued to provide a key driver to local eateries of whom have been able to provide a take away service whilst fresh food retailers have also enjoyed constant trade. Whilst static in most senses, the retail shopping strips that were suffering prior to the pandemic will most likely continue to suffer with no improvement foreseeable in the near future.

With the above in mind, there surely is no need to be cautious or pessimistic. The signs, in fact, are that the new year will bring some exciting and buoyant times ahead in real estate occupation and investment.

The writer is a Fellow of the Australian Property Institute, a Licensed Real Estate Agent and Specialist Real Valuer.

To discuss any property related matter, please contact Mark Ruttner, Managing Director
mr@fvg.com.au 0411 419 674

First Valuation Group
Suite 110/181, St Kilda Road, St Kilda, Victoria, 3182
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