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Property’s challenges

Weekly economic briefing

In just one month, the federal government has introduced three economic “rescue packages”, designed to blunt the worst of the COVID-19-induced blows to our economy – and each has, rightly, been industry-agnostic, focussing on keeping as many businesses and employees as possible on life support.

However, now that a broad (if still imperfect) safety net is in place, the time has come to start looking at industry sectors more closely, and where and how an extended period of shutdown might warrant further specific support.

As the shutdown continues, economic malaise will certainly start to extend to one of the largest: construction and real estate.

The first big hit to the sector has already come as many individuals and businesses now cannot pay their rent or mortgage. And, as the housing market has all but vanished for the time being in the face of movement restrictions, rising unemployment and economic uncertainty, selling these assets has limited prospects.

We are seeing some piecemeal support here: from banks to mortgage holders, through a difficult to enforce moratorium on evictions, and now in the form of rent assistance for some households in NSW.

For property investment organisations, and especially those with retail assets, the loss of rental income is flowing through to valuations. This is starkly clear when we look at the performance of Australian Real Estate Investment Trusts (A-REITs) since “lockdown”.

These challenges will remain unresolved for as long as restrictions on economic activity are in place. However, in the absence of government assistance for this group, the cost of the shutdown is being forced onto asset owners, whose ability to bear that cost will be highly variable. As a result, there will be considerable financial consequences, even for those that can weather this unprecedented storm.

The second wave for the property sector from COVID-19 - and the more consequential for the economy as a whole - is likely to hit construction, which accounts for 17% of all Australian businesses. There is still a reasonable pipeline of activity, with building approvals rising in recent months after a long downturn, and no restrictions on access to sites.

Source: Standard and Poors Indices, S&P/ASX 200 A-REIT (AUD) Sector (April 2020)

Source: ABS Cat 8731, Table 06 Building Approvals Australia, Number of dwelling units approved by sector (April 2020)
However, ABS business survey data suggests that 6% of the sector has already ceased operating and activity could quickly diminish in the face of barriers to credit, supply chain issues, and loss of confidence. There are also longer term housing demand issues in the face of restrictions on migration, which is a large driver of overall growth in the economy, and the construction sector in particular.

Should this occur, the solution for governments, both state and federal, could be more straightforward. Given the significant shortage in social housing, additional funding here could support momentum and employment in the construction sector, with the added benefit of addressing an important social issue. 

Green infrastructure investment, especially in regional communities hit hard by both bushfires and coronavirus, also offers a way to spend stimulus dollars wisely.

The economic challenges of COVID-19 are deep and broad, but we have the opportunity to use these challenges to fast-track positive investments that will ultimately deliver better social and environmental outcomes.

That way, when we do get to the other side of the proverbial bridge, we can be confident that we have made the best of a bad lot.