John Crane is a property developer, investor and consultant with 30 years in the industry. Since starting his own business in 1996 he has been involved in a broad variety of complex property transactions.
As Treasurer in 1990, Paul Keating famously described the 1990’s recession as “the recession we had to have”.
I had just commenced my real estate career in 1990, straight out of high school and after having worked for a real estate agent every summer for the previous three years. Those three years of work experience were in stark contrast to what greeted me in 1990.
Leading up to the recession, property prices were booming, money was easy to borrow and the stock market was going from strength to strength. Sound familiar? The recession of 1990 was international. Caused primarily by the excesses of the 1980’s, the employment of high interest rates by central banks to slow the asset price boom of 1988-89, the loss of consumer and business confidence as a result of the oil price shock and a slump in commercial construction resulting from overbuilding.
What I remember most vividly was my parents business being wound up by the bank and the subsequent sale of our newly constructed home for less than replacement value. Property prices dropped by as much as 20% and unemployment rates rose from 5.6% to 11%.
It will come as no shock that a number of the elements leading up to the recession of 1990 have been experienced in the past 10 years. But instead of the oil price shock, we have been hit with a pandemic. A one in a 100-year event which will undoubtedly, if not already, impact consumer and business confidence.
Some might say that the difference which will save us is from a long-lasting recession is that liquidity exists in the markets. But it will come at a cost - in the form of higher interest rates and lower gearing levels. Then it will start to dry up as lenders take a wait and see approach. Whilst in previous years the banks have been the main source of funds, the advent of non-bank and second-tier lenders has provided businesses other options. However these can come at a cost, both in terms of pricing and the potential for policy changes at short notice.
The major banks have been preparing for the recession. Their criteria has been tightening for nearly 3 years now, even before the pandemic. The biggest concern they now have is impaired loans. Two of the major banks have recently provisioned over a billion dollars combined with the other two majors to follow shortly. Amongst the industry there is a widespread view that these provisions will need to increase as the crisis grinds on.
Second-tier lenders (last into the market) will be the first to push for repayment. The major banks will follow.
Unfortunately, the recession is upon us with the latest GDP figures revealing that in the first three months of this year Australia’s economy shrank for the first time in nine years. It is safe to say that the following three months will reveal a similar situation as the impact of the pandemic started to be felt in the months of April-June 2020.
This is a recession we have to have but importantly as quickly as possible. It won’t have the same impact of the Asian financial crisis of 1997 or the GFC of 2008, but is likely to see a solid period of negative growth and high unemployment (north of 10%). Property prices need to correct, big business needs to contract and shed some weight and the stock market has to reflect that consumers have lost confidence and businesses have been impacted.
It is worth noting that for as long as the State and Federal government continues to prop up the economy it will be difficult to form a clear view on the length of this recession. At some point, there will be a cliff where the support, deferrals and assistance fall away and we will then understand the full extent of the situation.
In adversity there is opportunity. Such a cliché but appropriate.
The recession will bring with it opportunity. Some of the most successful property people laid their foundations in the period 1990 to 2000. The market dynamics will be different but the fundamentals the same.
Firstly, markets need to reset and as we know property takes a considerable amount of time longer than other markets to do so. Once it does though there will be good buying opportunities, and for a reasonable amount of time. Liquidity will be an issue, but for patient capital who have been prepared to bide their time there will be opportunity.
What must be remembered about property is that it is segmented and some sectors will fare worse than others. My views broadly on the Melbourne markets going forward are as follows;
Domestic Residential Housing - People under pressure will hang on for a long as they can, buyers will sit on their hands. Once a proper correction occurs it will take some time to recover as unemployment and strict banking guidelines will curb its return.
Residential Land Subdivision - Traditionally this market has been the domain of the first home buyer who unfortunately will find it difficult to borrow and will be forced to rent. First home buyers will be concerned with job security.
Apartments - This market was struggling prior to the pandemic with Government curbing overseas purchaser’s ability to purchase and removing stamp duty savings. I can’t see this market recovering until the Domestic Housing Market does.
Build to Rent (Apartments) - Has replaced the residential apartments market where large institutional investors have seen the potential to deliver product suitable for people who can’t or don’t want to purchase.
Commercial Office - Unlike the late 1980’s there has not been a significant amount of speculative construction, yields will remain low for low risk blue chip investments (domain of the large funds) but anything with risk will be priced accordingly.
Health Care - In the appropriate locations close to existing infrastructure and hospitals this market has potential to remain relatively unaffected.
Aged Care - Is a specialised market. The industry is in for a major shake-up as a result of what the pandemic has exposed as poor standards of care. The better operators will benefit from this shakeup and are likely to be relatively unaffected.
Industrial - Similar to commercial office yields will remain low for low risk blue chip investments particularly anything to do with logistics being relatively unaffected as online store sales take over.
Retail - One of the hardest hit, however a market that needed a correction in rents to provide a sustainable environment for businesses. As we emerge from the pandemic and owners start resetting their expectations this could be a market to bounce back first.
Student Accommodation- Impacted by travel restrictions as it is heavily reliant upon overseas students. Will receive State and Federal Government support to encourage students to Australia once restrictions relax. Similar to Aged Care this is a specialised market.
Hotel- Whilst impacted significantly it will benefit from overseas travel restrictions as people holiday locally. Notoriously difficult to fund and also a specialised market.
Obviously, these views on the markets are high level and general to the markets. There will be anomalies with the sectors as they in themselves have numerous segments.
What we must remember is that there have been recessions before. We will get through it as we will this pandemic. We will be stronger and wiser as a result.