Like many asset classes, property suffered during the COVID pandemic. However, almost fives years on, real assets are making a comeback, fuelled by Australia’s surging population growth. Chris Davitt (Dexus) and Jennifer Cowan (JANA Investment Advisers) discuss the outlook for property moving forward.

As the 2019 year drew to a close, returns for property were on track to come in at about 7 per cent for the year, making it a full decade in which every quarterly return between 2010 and 2020 had been between 7-9 per cent. But then the COVID pandemic hit, which was quickly followed by a global outbreak in inflation, triggering a dramatic rise in global interest rates. 

The property sector was not immune from the flow-on effects of COVID, which saw a rise in a number of trends that significantly impacted this sector. This included the strong uptake of cloud computing and video conferencing, which made it possible for many people to work from home during the lockdown periods.

Almost five years on, Chris Davitt — Fund Manager, Dexus Wholesale Australian Property Fund — believes part-time working from home is the new norm for most white-collar workers in Australia, which will mean reduced demand for office property moving forward.

Speaking on property at the 2024 IMAP Independent Thought Conference, Chris says since the outbreak of COVID, there has been plenty of time for property tenants to adjust their space requirements, and for developers to tap the brakes on supply.

Chris also acknowledges that as a consequence of COVID, construction costs have also increased significantly — officially about 35-40 per cent but anecdotally, considerably more — due to supply chain disruption, production costs, wage increases, and inflation. However, he believes we are very close to a point where the structural impact of COVID has fully washed through the system.

Jennifer Cowan — Senior Consultant at JANA Investment Advisers — agrees that against this backdrop of COVID-induced market volatility, it’s been a particularly hard time for real estate investors, with eight quarters of negative growth recorded.

However, JANA’s view is that we’re at the bottom of the cycle, but there are still concerns, such as very large redemption queues (the process of prioritising and fulfilling redemption requests from investors when a fund or investment vehicle temporarily suspends redemptions) that need to clear.

“While we don’t believe it’s all smooth sailing from here on, we do think it’s a really interesting time  in the market,” says Jennifer. “There’s a lot to like about the built environment — it’s where we live, work, eat, and play.”

Chris believes one thing that is different about the current cycle compared to the early 1990s market crash or the GFC, is that this cycle is all on the capital market side. “Operationally, across the various asset classes, things are okay,” he says.

“On the retail side, landlords have nursed their tenants through this cycle. Industrial is quite strong and even in office (apart from Melbourne, which is still weak), it’s generally not too bad,” he says. “Normally, a big property downturn is associated with much more pressure on the operational side. Whereas, currently, delinquencies are very low.”

Jennifer adds that sustainability is now a key component of assets in the property sector. She says this has created bifurcation in the market, between good quality assets — where employees want to work and retailers want to operate in — and poorer quality assets that are less attractive to tenants. Naturally, the higher rents and tenancy rates that can be achieved with better quality properties make them more attractive to investors.

In the wake of COVID, perhaps the biggest impact the pandemic has had on the Australian economy is anaemic growth. To address this, the Government has opted for a ‘Big Australia’ policy to kick-start and grow the economy through aggressive immigration targets. Population growth is forecasted to increase by around 7 per cent (or just under two million people) over the next five years.

However, Dexus believes this strong growth in population will provide significant benefits for real estate and opportunities for investors. In making the case for property, Chris believes population growth will support demand for:

• An extra 2,028,000 square metres of office space (mainly in CBDs);
• 6,000 more hospital beds and 209 million extra visits to general practitioners;
• 377,000 additional student accommodation rooms;
• An extra $11 billion in retail turnover, requiring 1.7 million square metres of shopping centre space;
• Approximately an extra 16,250,000 square metres of industrial space to support additional retail activity; and
• 760,000 new dwellings constructed and occupied.

With this trend in population growth, Chris is bullish on retail. However, he is less excited about building undersupply within the Sydney CBD, where no buildings are expected to be completed throughout the entirety of 2026. But Brisbane looks better.

“Brisbane is a diversified economy. It has a growing population and it’s set to benefit as the host city of the 2032 Olympic and Paralympic Games. Brisbane wasn’t locked down nearly as long as Melbourne was during COVID, which means return to work has been accelerated,” he says. “In addition, effective rents are on the move up in this market.

“Just take a look at who’s buying commercial real estate at the moment — it’s wealthy private investors. Having been through previous cycles, they see the opportunity in property, where they are focused on the arbitrage between what they can buy and sell it for.”

In terms of the industrial property sector, Chris says it’s been well-documented that Australia needs more industrial space, however, supply has been restricted by slow infrastructure rollouts.

With population growth, Chris does likes residential property. With a definite shift in government policy towards greater urban density, rather than continuing urban sprawl, he says there is an increased focus on high-rise development, particularly in Sydney, Melbourne and Brisbane. And while he doesn’t believe Australian cities will reach the levels of Hong Kong high-rise density, he expects to see more high density developments around transport hubs, like train stations.

While there needs to be more housing choice in Australia, Chris believes the property sector also provides other interesting opportunities. This includes in areas like purpose-built student accommodation, co-living housing, land lease developments, and built-to-rent housing. However, he concedes the downside to these opportunities are issues around high construction costs and supply, which currently makes these real estate options less attractive.