As 2020 finally drew to a close, many pundits were questioning the year that was, the rapid rate of change that is, and what that would mean for the property industry in 2021. The South East Queensland corridor was particularly fortunate having shed some of the deep impacts that the COVID pandemic placed on us all. With only short lockdown periods imposed, and a small hiccup in January 2021, business has largely been able to trade, albeit in many cases, differently. Those businesses who took the opportunity to evolve in challenging times are certainly likely to reap the well-deserved benefits this year.
From a practical perspective what does this actually mean and what do we anticipate playing out this year:
- Historically low deposit rates continue to force investors to seek higher returns on capital. This demand is maintaining historically high pricing (record low capitalisation rates) that we anticipate will remain status quo
- Short and medium term funding costs remain at record lows, with crucial assessment criteria by credit officers easing (effectively putting more cash into the economy)
- Pricing differential between investments considered blue chip (i.e.10 year lease to known fuel operator) can achieve anywhere between a 100 and 300 basis point premium over assets that require significant upgrade/assistance. Funding any property purchase relating to the later will be more challenging
- There is a trend for tenants to commit to shorter term leases rather than the traditional 5 year terms for previous years. Market uncertainty and rapidly changing work practices are driving this behaviour. The flow on impact will be the potential impact to owner’s debt covenants (if the asset is financed), valuations and non-recoverable operational costs pertaining to more regular lease renewal requirements.
- Smaller tenancies are more readily able to be leased. We have seen many building owners focus on building subdivision. The real value in this is diversified income and risk
- Tenant incentives remain. Funding availability for tenants for fit out/start up operational capital is still difficult. Landlord contributions to assist establish tenants are filling the void of absentee financiers in this sector.
With Queensland faring so well (in comparison to our interstate and international counterparts) coupled with over $17 Billion in current private and public transformational construction projects, we remain bullish on Queensland’s ability to outperform over the coming 12 months.