LJH Commercial | Special Report | Opportunities in a changing world

SPECIAL REPORT

SPECIAL REPORT OPPORTUNITIES IN A CHANGING WORLD

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SPECIAL REPORT

Opportunities In A Changing World The past two years has been one of the most challenging periods that the property sector has experienced. We have witnessed office occupancy plummet, retail shopping centres closed for all but essential stores for extended periods, and industrial property take centre stage as a critical need for the community.

The word ‘resilience’ was often thrown about prior to the pandemic; however, this period has provided owners of commercial property a lesson in what a resilient property portfolio truly means.

As it turned out, warehouses and factories, the least visible and glamorous of all property sectors, provided owners with the greatest ‘hedge’ against global upheaval. Childcare centres and healthcare, both relatively new sectors in terms of commercial property investment, also stood out as assets that are required to continue operations as a basic functionality of society. The coming year will be just as eventful as the past two, as we start to experience aspects of our lives that have permanently changed, and what facets of the way we work, live and play go back to the way they were pre-pandemic. And the way we move forward presents unique challenges and opportunities for each commercial asset class.

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Office The office sector was the ‘darling’ of the commercial property sector prior to Covid. East coast office markets in particular, CBD and suburban, recorded very low vacancy rates and strong rental growth as tenants competed for limited space. It was by and large accepted that this strong demand was a result of both population growth (which drives the organic growth of services type companies) and buoyant economic conditions, allowing for the growth in startups and the diversification of established businesses.

Going forward, one of those two conditions should still be evident in Australia over the next year. That is, buoyant economic growth. The IMF forecasts GDP growth of 4.1% for 2022 (noting these forecasts were produced prior to the Qld and NSW summer floods), and more stable growth of around 2.3% per annum going forward. This is above average GDP growth of 2.45% in the 5 years prior to Covid. So, while population growth has plummeted, and will take many years to recover, the economic recovery, and therefore the growth of white-collar businesses, is still looking solid.

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SPECIAL REPORT

Annual % change

Australian GDP, 2000 to 2026

5 4 3 2 1 0 -1 -2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

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source: IMF World Economic Outlook

In the near term, it is highly likely that most office workers will demand to keep the work from home flexibility that they acquired over the last two years. It remains to be seen though, if this translates into less office space required for businesses, given that many businesses in Australia increased their headcount significantly over Covid. Going forward, it is likely that while growth in space required will be muted, reductions in space required will be very rare, as most businesses are hesitant to give up space while employee numbers are increasing. That said, growth in office rents will be much slower than in previous years, given the demand ‘heat’ has well and truly come out of the market.

Retail The retail sector is likely to go through another period of change in 2022, but largely for non-Covid related reasons. Discretionary spending is already being impacted by the tapering-off of government stimulus measures put in place over the past two years. National retailers, such as Harvey Norman, have reported slower sales compared to the earlier Covid period, although these sales results are coming off a very high base.

In 2022, inflation will be the biggest risk for discretionary spending, as cost of goods is already rising faster than wages. The economic impact of global geopolitical conflicts is already being felt in higher oil prices which then flows through to almost all goods, as retailers and suppliers have to factor in higher transportation costs.

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On the flip side, it is likely that the number of Australians travelling overseas will still be very low compared to pre-pandemic times. Higher airfares due to oil prices, uncertainty around lockdowns, as well as disruptions in eastern Europe will all be contributing factors when Australians choose where they want to holiday. This should have the result of ‘locking in’ spending in the country, a net positive for the retail sector, even if visitor numbers to Australia are also subdued. Home renovation activity will likely remain very elevated, as people choose to spend money on their homes while they are saving money on overseas holidays.

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Discretionary spending is already being impacted by the tapering-off of government stimulus measures put in place over the past two years.

SPECIAL REPORT

Industrial The impacts on supply chains due to the pandemic and the geopolitical climate have already been felt globally. Increasing costs, as well as bottlenecks throughout the supply chain, either through lack of workers, containers or delays in shipping, will be a continuing trend in 2022. However, this will spur investment, from all levels of industrial investors (institutional down to smaller warehouse owners) to improve supply chain processes, and in many cases, expand existing supply chain networks. The sector, therefore, is still the one to watch in 2022, with ample opportunity for property owners to attract occupiers keen to expand their footprint.

This continued investment still has a long way to run.

In further positive news for the sector, actual income across industrial portfolios is rising faster than any other asset class. Dexus, one of the largest owners of industrial space across Australia, reported in its 2021 Results average incentives across its portfolio of 10.6%, down from 17.8% the year prior - As a performance comparable, incentives across their office portfolio have increased to 29.7% on average, up from 24.9% on the year prior.

Incentives and face rents in industrial property in Australia have tended to shift only very slowly, so this is a remarkable movement in one year, and further evidence of the current strength of the industrial market.

Moving forward, Australians will continue to rampup online spending (as well as resuming ‘bricks and mortar’ shopping) which will further drive demand and investment in industrial real estate. Longer term, as population growth in Australia resumes, this will add further demand to the sector, through organic growth in product that is needed to move through the network.

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LJ Hooker Commercial does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. LJ Hooker Commercial will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © LJ Hooker Commercial 2022