Coronavirus: Short and Long Term Scenarios for Real Estate
Dexus, Goodman Group, Mirvac Group are favoured by financial analysts while mall-based real estate investments trusts might suffer in the coming months in response to COVID-19.
Office markets are set to grow slowly and there is positive news for residential developers, depending on how severely the pandemic pans out, according to the UBS real estate sector update.
A-REITs have fallen 30 per cent and earnings are down 10 per cent since the coronavirus crisis escalated in mid-February.
The trust were performing in line with the broader market despite defensive characteristics and the potential to benefit from reserve bank cuts.
The three pandemic forecasts for residential, office and retail markets were given by UBS analysts Grant McCasker, Tom Bodor and associate analyst Sam Merrick.
A moderate outcome would see peak virus infections in May, intermediate would have peak virus infections in June and severe with about 16 per cent of the global population infected hitting in September 2020.
Coronavirus impact on residential developers
UBS analysts turned more positive on residential developer A-REITs with interest rate cuts passed onto borrowers, strong owner-occupier demand and attractive site acquisition opportunities.
“Despite COVID-19 developing, auction clearance rates have remained strong in Sydney (76pc, 7 March weekend) and resilient in Melbourne (64pc),” they said.
“Further our channel checks with private developers indicate no current slowdowns since COVID-19, with any concerns presumably offset by the impact of lower interest rates.”
| Moderate | Intermediate | Severe | |
|---|---|---|---|
| Change in new housing lending from today | 10% | -10% | -20% |
| Movement in house prices from today | 5% | -5% | -10-20% |
| System Housing credit growth | 3.9% | 2.7% | 2.1% |
| System SME credit growth | 0% | -5% | -10% |
| RBA Cash Rate | 0.25% & QE ($50bn) | 0.25% & QE ($50-$200bn) | 0.25% & QE ($200bn+) |
| Banks pass through: | 45bps of 50bps | 50bps of 50bps | 50bps of 50bps |
| Fiscal stimulus | $10-$20bn | $20-$50bn | $50bn+ |
| Unemployment rate | 6.0% - 6.5% | 6.75% - 7.25% | 7.75% - 8.25% |
| A-REIT forecast changes (FY20 into FY21) | |||
| Revenue | 0 | -10 | -15 |
| Margin | 0 | -1 | -5 |
UBS Banks Research: Coronavirus Scenarios
Coronavirus impact on office markets
Office market fundamentals would move from strong to moderate levels and Sydney was more resilient than Melbourne in the short term.
“After a prolonged period of above trend rental growth in Sydney and Melbourne office markets, we anticipate a moderation in 2020-21 with net effective rental growth of 1-3 per cent per annum as low vacancy and minimal supply provide a buffer in a slower jobs growth environment,” UBS analysts said.
“While expectations for demand-absorption are below historical levels, the low level of supply and backfill space in Sydney gives confidence in the short term outlook.”
“From 2020-22, there is about 100,000sq m of vacant space from new supply and 160,000sq m from backfill space. This reflects about 5 per cent of the Sydney office market and compares with Prime vacancy at about 3 per cent.”
“For Melbourne, new supply is being delivered in 2020-21 totalling 390,000sq m (about 80pc committed) which equates to 8 per cent of Melbourne CBD office stock. In addition there is more than 50,000sq m of uncommitted backfill space coming to market.”
| Moderate | Intermediate | Severe | |
|---|---|---|---|
| Melbourne Net Absorption | +180,000 | +126,000 | +72,000 |
| Sydney Net Absorption | -17,581 | -58,605 | -117,209 |
| MEL Supply reduction (2022-24) | 10% | 25% | 33% |
| SYD Supply reduction (2022-24) | 5% | 15% | 25% |
| MEL Dec 2020 Vacancy | 5.1% | 6.7% | 8.3% |
| SYD Dec 2020 Vacancy | 6.5% | 7.8% | 9.7% |
| MEL Dec 2024 Vacancy | 9.3% | 10.5% | 11.8% |
| SYD Dec 2024 Vacancy | 8.7% | 10.1% | 12.0% |
UBS Prime Office Market Coronavirus Scenario Analysis
Coronavirus impact on shopping centres
Although initial results for the Australian retail market were down UBS analysts looked to other countries to see how the sector might perform.
SGX-listed Frasers Centrepoint Trust, with six suburban malls in Singapore, were resilient with shopper traffic nearly back to pre-COVID-19 levels with the exception of one mall which relied on expo events.
“Singaporean retail managed COVID-19 by a combination of government tax rebates and landlord support/rental abatement,” the analysts said.
“Tenant sales saw a similar recovery albeit at a lagging pace especially in discretionary trades. Necessity trades, in contrast, are performing well.
“Management remains vigilant but there are no plans for additional relief beyond the full pass-on of property tax rebates.
“Security deposits are being tapped on for working capital flexibility and should not have meaningful financial impact.”
In Australia foot traffic was down 8.1 per cent across the entire Vicinity portfolio with the biggest impact on Chadstone, the CBD centres, Chatswood Chase, The Glen, Box Hill, and the DFOs.
“The negative impact is expected to impact percentage rent, car-parking income, casual mall leasing, media and hotel bookings,” UBS analysts said.
“In addition VCX are likely to increase marketing spend to reignite the centres.
“We estimate the impact in the first half of 2020 to be $15m which is anticipated to reverse when concerns dissipate (predicted FY21).”
| Moderate | Intermediate | Severe | |
|---|---|---|---|
| Sales | 0-2% | Down 3% | Down 5% |
| NOI Growth | (12 months) | ||
| Shopping Malls | 0.5% | -3% | -7% |
| Marginal hits to occupancy, releasing spreads deteriorate, limited rental abatements, casual mall leasing, media & car parking income impacted | 1% decline in occupancy, tenants in holdover release at material discounts (i.e. 10%) | 2.5% decline in occupancy, ongoing rental abatements & releasing spreads (-15%), shopping centre closures | |
| Shopping Centres | 1.5%-2.0% | 0-1% | -2-3% |
| Supermarket sales strong boosting T/O rent | rental abatements and drop in occupancy | 2.5% decline in occupancy and ongoing rental abatements |
UBS: Potential NOI Short Term Impact of Coronavirus to Retail
