Property Outlook 2021

Australians were given a taste of full-time working-at-home in 2020. Some businesses flourished, others floundered, and the vast majority fell somewhere in between. In our view, for the bulk of businesses the need for a physical office for staff to congregate, collaborate and learn has not disappeared. However, it is likely that the adoption of a ‘hybrid workforce’ will alter tenant demand and preferences.

For example, CBD office space appears at the greatest risk, with larger employers able to schedule office use on a per-team basis and employees more reticent about travelling into the CBD on densely populated public transport. Conversely, the ability for staff to drive to non-CBD locations, coupled with larger floor-plans and lower rise buildings, has resulted in more resilient rents in 2020. We expect to see continued outperformance by non-CBD office buildings in the year ahead.

The COVID stay-at-home orders in 2020 led to a rapid acceleration in the e-commerce penetration rate as consumers turned online for everything from homewares to fresh food and electronics. This drove demand for well-located, quality logistic facilities, that could handle the demands of cold storage and reverse logistics (customer returns).

We expect this to continue into 2021, as business build-out their delivery capacity to deal with higher volumes and respond to consumers' demand for shorter delivery times. This should support pricing and yields throughout the sector.

The drop in foot traffic has forced store closures and downwards pricing pressure has forced the sale of existing assets onto the backburner. The dramatic fall in rental collections to 72%, compared to 98% and 96% for industrial and office properties, illustrates the depth of the current challenges.

We expect these headwinds to continue for the next few years, with some centres forced to close and others compelled to transition to mixed-use hubs at lower yields.

The whips are cracking, and home buyers are off to the races, with the residential market benefiting from several tailwinds, including historically low mortgage rates, improved balance sheets, government grants, and an increase in housing requirements to facilitate working from home.

We expect to see some moderation in the pace of price increasing throughout the second half of 2021, as the government's Term Funding Facility to banks expires and bank borrowing costs increase slightly. Should there be evidence of systemic over-leveraging that threatens the stability of financial markets, then the regulator (APRA) may step-in and limit loan-to-value ratios.