We’re all acutely aware of the events over the past few weeks and the devastating ripple effects forecasted for world economies.
Since late last week, we’ve received an exceptionally high number of enquiries from different areas of the real estate industry, calling upon our knowledge to understand the impact this will have on their businesses.
Given the tough social and financial measures introduced by the Federal and State governments, it’s a foregone conclusion that Coronavirus will impact the real estate sector as a by-product of the economic upheaval.
On a positive note we had extensive conversations with several banks and generally, they’re taking a very pragmatic position across the board to support businesses.
We anticipate the knock-on effect of the virus to impact the residential sector more dramatically in the next 2 – 3 months, and for the commercial and retail markets effective immediately.
Several of the key factors effecting the sector now in play are:
1. Lower Management and Ancillary Revenue
With increased redundancies and with more predicted to follow, should tenants’ default on rents, then management income will decline in line with the lower collection of rents. This is applicable to leasing fee revenue as well as a greater number of tenants are predicted to stay in their current property as opposed to relocating. The number of routine inspections is expected to decline due to social distancing, meaning this revenue stream will be reduced. Overall, revenue streams will decline from their current levels for the foreseeable future.
2. Rent Reductions
Residential rents are predicted to decline in line with the higher number of owners keen to ensure their properties remain tenanted – agree to lower rent rather than no rent. Agents have reported a large number of tenant requests for rent reductions.
Retail rents across many locations, will be savaged and similarly with commercial rents. Commercial rental adjustments may not be as severe.
3. Increased Stock Levels in Residential Managements
As tourism has stopped, owners of short stay properties are flooding agencies to lock in long-term tenants. Locations with high concentrations of short-term accommodation will see significantly greater pressure on rents due to increased competition.
4. The Bank Test and LVR’s
Banks will continue to monitor the market closely. For all lending, both existing and future, there will be a stronger “pressure test” on the portfolios’ ability to sustain the rigours of the economic climate. This in turn may result in tighter loan covenants, adjusted LVR’s and debt repayment periods. On the assumption that new credit guidelines are introduced, this will ensure that there’s less stress on borrowers should economic conditions continue to be difficult over a longer period of time.
5. Rent Roll Multipliers and Contract Terms
Whilst multipliers had stabilised in the months prior to the Coronavirus, there is a distinct and strong possibility multipliers will decline in line with the lower revenue generated from portfolios.
We anticipate the demand for rent rolls to actually increase in some areas due to the increase cash flow benefits this will bring to businesses.
With such extreme economic uncertainly there’s the distinct possibility we foresee where Purchase Contract conditions regarding retention periods and retention percentages, will be adjusted in line with the risk assessment on each rent roll.
Our role is to continue being a leading solution provider when it comes to consulting, valuation and brokerage services to the real estate industry during this current climate and into the future. If we can provide further advice or market commentary, please contact us as we look forward to being of assistance.