We all understand that the environment in 2020 was a health crisis before it was an economic crisis. But together, they have created a nightmare for any economist trying to forecast what is going to happen in the property and debt market in 2021 and 2022.
TierONE Capital will not try and pit itself against the many professional research houses regularly churning out data and commentary on this topic. Instead, we’ll provide some commentary and thoughts from the “coalface” about what we think is happening right now and what we expect will happen in the property and debt market going forward.
For many, the market last year saw moderate levels of activity, but it was cautious and considered. Lenders were thinking about risk management and property values, whilst borrowers were more interested in refinancing and less interested in launching new projects. Investors were more vigilant but were still actively seeking strong risk adjusted yields. This all changed late last year with an uptick in borrower and investor activity on the back of multiple vaccine breakthroughs and extended periods of zero COVID-19 cases.
ANZ Roy-Morgan Consumer Confidence
Source: Roy Morgan Research, Macrobond, ANZ Research
Let’s try and summarise the current situation, courtesy of a variety of research houses:
The good:
- 93% of COVID-19 employment losses have been recovered. (Source: ANZ research)
- Consumer confidence is now higher than a year ago and close to its long run average. (Source: Roy Morgan research)
- Interest rates are historically low with the RBA Governor confirming rates will remain low until 2024. (Source: RBA)
- Housing prices are accelerating – although currently only back to 2017 levels. (Source: CoreLogic)
- Positive expectations around house prices are back to 2019 levels. (Source: CoreLogic)
- Building approvals, especially for houses, are at 10-year highs, with a bulging pipeline. (Source: ABS)
The not so good:
- Retail sales have been patchy and small retailers have been hardest hit, although activity is moving with a positive trajectory. (Source: ABS)
- Office occupancy rates are recovering, albeit slowly. (Source: Property Council of Australia)
Through our TierONE Capital Mortgage Fund, we have seen a sharp increase in loan enquiries from developers wanting to start residential projects. The focus appears to be on sites that are small to medium in size and would appeal equally to both owner-occupiers and investors. Many of the applications come to us with little to no pre-sales, as developers believe the sooner they start the more likely they can get their product away in the current property cycle. Access to construction funding is a higher priority than the total cost of obtaining funds. Lending to this market is not straight forward, and a lender needs to structure and monitor each loan to ensure risk is managed throughout the life of the facility. These are not “set and forget” loans but, properly managed, still represent good risk adjusted returns for investors.
The other area that has seen an increase in activity is in the residential land space. At TierONE Capital, we have seen a lot of enquiries from developers seeking finance to complete civil works for residential land subdivision in both the metro fringe and regional locations. Thanks to the Federal Government’s HomeBuilder grant program, this segment is getting hotter each month. As above, there is a reluctance to test the market with pre-sales, with developers instead hoping the market will continue to rise so when they release their product, they will be the beneficiary of improving market conditions and property prices. Land loans typically have more moderate LVRs compared to dwellings, however we are seeing LVRs increase as competition between lenders for this business increases.
We at TierONE Capital believe the recent sharp rebound in the property market represents both positive and welcome signs for investors, borrowers and developers but, is it simply an adjustment back to pre-COVID-19 levels, or are we seeing the start of another property bull run that will go beyond 2017 levels?
The TierONE Capital “crystal ball” suggests that we will not get much beyond the 2019 levels in 2021 – 2022 given:
- COVID-19’s ongoing impact on international borders and the local property market’s reliance on migration and, to a lesser extent, foreign students.
- Mixed or delayed recovery in retail, hospitality and entertainment.
- The likelihood there will be more COVID-19 quarantine ‘escapees’ and circuit breaker lockdowns.
- The full effect of loan deferrals and JobKeeper are yet to flow through to the property market.
- Scepticism about vaccinations and their effects and/or effectiveness.
- Potential new strains of COVID-19.
The recent positivity is sustainable but will not be an effective precursor to another 10-year bull property run unless, and until, COVID-19 is solved. We continue to like both residential dwellings and boutique apartments, as well as residential land, and believe mortgage lending to this segment still presents strong risk adjusted returns for investors. We believe both commercial and industrial sites are still attractive mortgage-backed assets, however they may still be vulnerable during this post COVID-19 property recovery and should be considered only at more moderate LVRs with appropriate loan covenants.
At the end of the day, I am reminded of what my economics lecturer once said to me, “… when in doubt, keep the graph and change the dates…”. If our “crystal ball” is wrong today, we can just change dates and we should be right at some point in time.
Kevin Said
Director, Chief Investment Officer
TierONE Capital
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