It's no surprise given the number and scale of challenges we have all faced over the past few years that most Australians have grown proficient at quickly responding to change. But while we’ve become fast to adapt, the focus on the near term can take away from thinking about the long, even mid-range impacts and knock-on effects from any disruption.
Take the recent jump in interest rates, as an example. They were prompted by a higher-than-expected rise in inflation, fuelled by supply chain shortages, international events, and strong domestic demand. The RBA’s move, likely to be the first of many, is significant and there is no doubt households and property investors will need to rein in spending and reassess their budgets in response.
While we expect Australians to respond and demonstrate great agility, long lead times and locked-in commitments will make it difficult and could result in an extended period of high inflation coupled with rising interest rates. How this manifests in property markets and different asset classes will of course vary over time.
In the residential space, for example, the construction industry has been hit hard. While owners have been eager to build with good levels of household savings and a desire to upgrade their homes, this is clearly becoming more difficult. Securing materials (let alone a builder) at a reasonable price coupled with lengthy and uncertain build times and now rising interest rates is making the decision to build or renovate harder and less likely.
What we see now is a shift among owners who had been planning a renovation or construction. Many are weighing up whether buying an established home might be more prudent given the cost and time blowouts. Our teams have certainly spotted this trend across the country as you’ll see in this month’s submissions. We’ve observed that homeowners and investors alike are being drawn to completed homes rather than those with renovation potential. Given costs are predicted to be elevated over the coming one-to-two years, I’d venture that finished homes will not only retain their price premium for some time, but the value spread between renovated and unrenovated properties will, in all likelihood, get wider.
Everyday cost increases are having a direct impact on the retail sector as well. The rising cost of living is a result of skyrocketing manufacturing and transport costs. Add in the interest rate increase pressures, and household discretionary spending comes into sharp focus. This plays into the financial security of retail business owners which, in turn, impacts values and yields on certain retail assets.
Our teams have looked at new development and refurbishment in retail and discovered most smart operators are employing strategies to attract and keep retail tenants who can endure over the long term.
As highlighted by retail specialist Vanessa Hoey in her national overview this month, workers are returning to CBD offices in some form too. This improves trading for inner-city retailers who can now rent space at a historically reasonable cost which is presenting opportunities for some companies to re-establish marquee storefronts.
Depending on the retail asset in question, tenants will also be attracted to recently upgraded space. While a retail tenant’s ultimate leasing decision will be most influenced by other elements such as floor space, location and exposure, the market is competitive. As such, having an upgraded space completed to a high standard as part of the lease incentives can only sweeten the deal.
Looking toward the rural sector and delays in the supply of production inputs, along with rising costs, do present a challenge. That said, strong commodity prices are offsetting some of the pain. Also, general strong property values across most rural markets aren’t likely to fall anytime soon. This fine balance will be monitored closely by operators for a while yet
The flow-through impacts of inflation and supply chain delays are far-reaching, and the way they affect each household isn’t always obvious. In my opinion, if you are trying to sell or lease a quality asset – whether it be residential or commercial – you should be able to get a premium for a property that’s new or renovated. How long this premium can be sustained is hard to judge unless you hold expertise in the field.
Source: Herron Todd White Month in Review May 2022, Gary Brinkworth CEO.