On a global scale, Australia both as a country and its real estate sector, fared relatively well in the face of a tumultuous year. Since the end of widespread lockdowns, there have been a small number of stumbles in the race to eradicate COVID-19, including in late 2020 and in the early stages of 2021. However, where the virus has appeared momentarily in the community, it has been mitigated effectively by the government and most importantly, swiftly. Nevertheless, the cadence of small outbreaks across the nation has meant that landlords, and their bank balances, have not been able to completely return to normal.
Landlord Subsidies
It is unlikely landlords will have to provide the extreme levels of support required in 2020 (peaking at 5% of rent credited in May 2020). The CREDIA Index measures the frequency of landlord assistance in the commercial real estate industry. In November 2020 landlord assistance was still three times higher than the same point in the year prior. This trend was sustained through the latter half of 2020 and we predict that landlord assistance will remain high, as consistent but small but small interruptions to business operations continue with regional lockdowns. With each local lockdown, occupiers continue to be guarded. Consequently, a number of occupiers remain reluctant to return to ‘normal’ rent payments and landlords will still be required to lend a hand.
Changing Regulatory Environment
As the nation plans for economic recovery, in December 2020 the Australian Treasury dipped their toe into the world of unique economic instruments by issuing negative-yielding debt for the first time in its history.
While this is not an unfamiliar strategy in Europe and Japan, the Australian government has clearly prioritised stimulation of their local economy. This will hold consequences for the commercial real estate industry in 2021 as investors will be encouraged to spend, and transactions in the commercial real estate market will likely be boosted.
Trends in Lease Retention and Vacancy Length
Another metric monitored by the CREDIA Index is average Lease Retention. As a result of predicted future infrastructure development and re-investment into existing assets, occupiers will be faced with greater choice in premises. This predicted increase in supply of infrastructure will put downward pressure on landlord ability to maintain current Lease Retention levels (28.4% in Dec 2020) unless they also adapt their assets to evolving occupier appetite, particularly in the office sector.
When examining the Office sector in isolation, a low interest rate environment dictated by the Treasury paired with a return to a physical working environment, will force landlords to evaluate how their product can adopt flexibility to suit tenants. It would be far too sweeping to suggest that Office landlords will experience higher Average Void/Vacancy Lengths (a CREDIA Index measure which showcases 322.4 days in Dec 2020 for Office units) in 2021. Rather it is more likely that those landlords who have not used the previous year to differentiate their offering will suffer from longer sustained periods of vacancy and the resulting shortfall of rent.
