I flagged a pivot from commercial to residential property a few months ago. Looks like its taking shape.
At the start of the crisis I talked about a potential pivot from Commercial to Residential property.
Things seem to be playing out more or less as I expected, though it’s still early days.
The basic idea here is that commercial property is going to struggle with the Covid economy – much more than residential property will.
As comparative asset classes, that means residential will become relatively more attractive.
Now the flows here aren’t direct. The people who invest in high-rise office towers aren’t the mum and dads who invest in a two-bedroom bungalow in Geelong.
But everything in our crazy old, highly-financialised economy is connected. Residential property will benefit from capital outflows, lower interest rates, and higher prices as investors gear out of commercial.
And the first waves of that are emerging.
The AFR is reporting that retail vacancy rates have spiked to the highest level in 20 years:
The vacancy rate across the nation’s shopping malls is the highest in more than two decades as the coronavirus crisis accelerates a wave of store closures in a sector already under challenge.
The national average shopping centre vacancy rate rose to 5.1 per cent in June from 3.8 per cent six months earlier, according to a survey by JLL.
Factoring in both CBD shopping destinations, where the rate has soared past 10 per cent and the relatively more resilient large format retail hubs, the vacancy rate rose to 6.3 per cent from 4.8 per cent in the past six months.
The JLL survey excluded temporary store closures in its count.
That last point is very important. This doesn’t include stores that have temporarily closed. Now, how many of those are actually just going to stay closed?
My bet is that at least some will. And if any do, that pushes the vacancy rate even higher.
The RBA in its recent Financial Stability Review, has already flagged commercial property as a flash point.
Office space in particular is set to see considerable new supply come on-line in the next couple of years:
Conditions in office markets were previously strong, but these are also expected to deteriorate in the period ahead. Of note, an above-average volume of office supply is due to be delivered into the Sydney and Melbourne CBD markets this year and demand will be unlikely to keep pace with this stronger supply (Graph 2.12).
So with an over-supply building in office-space, and record vacancy rates building in retail, the outlook for commercial property remains tough. Really tough.
But as I said, I expect residential to hold up much better over the longer term. Vacancy rates are edging higher, but so far it’s not too remarkable. And the supply/demand balance will remain tilted to under-supply.
Add record low interest rates to the mix, and residential property should perform well…
Well… it will perform better than commercial at least, and that might be all matters.