Why property stands sturdy as coronavirus smashes stock markets
History has shown when there are corrections in global stock markets, Australian property becomes a port in the storm.
As the stock market is ravaged by fears of coronavirus and the Australian dollar dips to its lowest levels in many years, Mark Williams of WILLIAMS MEDIA ponders the reactions of previous disasters. “This week we have seen a flow of capital to property,” said Mr Williams. “Property has become a safe haven in the past whenever there is a stock market correction. We saw this in the recession of 1987, the Asia crisis of 1997 and the Global Financial Crisis in 2008.”
Mr Williams said indications this week showed that people were again moving their money to property when stock markets suffer significant corrections. “In the past three days we have seen significant competition with above reserve results reported for both residential and commercial properties nationally. A record residential price in excess of $13m was achieved in the Brisbane suburb of Ascot,” said Mr Williams. “We saw strong bidding results at last weekend’s auctions. Tempered by the fact these auctions are the result of buyers and sellers committed to transactions weeks before the pandemic was announced. However, they continued on with the knowledge of the stock market’s worst losses in many years and coronavirus impacts on business starting to take hold.
“Upcoming auction numbers for the next four weekends has already been set. The auction numbers after that will show just how strong the market is, how much capital is flowing into property and how many people decide to hold onto their real estate, potentially creating an undersupply of stock. It will be interesting to see where the balance point is.
“Property buyers have access to the cheapest money in our history as interest rates to borrow are so low,” continued Mr Williams. “Historically we have entered stock market corrections when interest rates have been high and people would move their money into banks chasing yields. With rates so low during this correction, there is no return on money by moving it into cash accounts.”
Mr Williams said the banking system has been strong in the past and there’s confidence the Government has the banking sectors’ and economy’s back. “To be able to deposit money and borrow from these institutions with confidence is key” explained Mr Williams. “Smart Investors realise a strong banking system can be equally important to borrowers to protect their equity and debt stability as much as their deposits. Yield is also a big attraction for real estate investment especially with interest rates at historic lows.”
Mr Williams further highlighted that commercial yields ranging from 2-9% net are very attractive when secured by hard assets like real estate. As a result, yields may be pushed lower so investors should be cautious to select their tenant and sector risk wisely and ensure they are comfortable with their chosen risk profile which is usually market reflected in the net yield.
“A financially sound tenant one month ago may not be a sound one today, but prime property is always going to be prime property and will always invoke strong demand,” said Mr Williams.
Williams further said we should start to see strong competition for tenants who are health-based such as pharmacies and doctors, prime retail, office and especially industrial warehousing and logistics on the back of tech-based businesses. He also sees strong demand from commercial owner/occupiers investing in hard assets to occupy their business particularly when interest rates are far cheaper than renting in most situations.
“With the Australian dollar down to 60 cents in the US dollar, that’s a 40% discount to bring money into the economy from overseas expats and foreign Investors,” said Mr Williams. “Australia has always had an international reputation as a safe haven for real estate investment. Indications show expats are buying existing stock to bring their money home and park it into real estate, whilst foreign investors can purchase up to $275m in commercial property without FIRB approval. We expect to see off-the-plan residential apartment sales to become very popular later this year with foreigners, especially from Asian investors who are very currency aware – a 40% currency discount is very appealing.”
With the challenge of coronavirus for the real estate industry, Mr Williams said the use of technology was going to be the point of difference. “Change has been forced upon the sector overnight and smarter agents are utilising this period of change by upgrading their systems to use technology to its full capacity,” added Mr Williams. “On the other side of COVID-19 we will see real estate practices being much more efficient through the adoption of PropTech.”
This article was kindly reproduced with the permission of The Real Estate Conversation – Why property stands sturdy as Coronavirus smashes stock markets.