Beyond the numbers with Grant Thornton: Listen now
The property sector is generally cyclical and while many were feeling positive growth at the start of the year, COVID-19 has pushed us back down into the curve and out of our usual cycle. While we will come back out of it, in the interim the sector is going to suffer from a lack of confidence and the impact of job losses.
The residential sector has seen the social distancing restrictions severely limit the ability to market and sell property. Many properties due to go to auction have been withdrawn, and buying and selling property looks very different in a virtual world.
Commercial property on the other hand, has become a focus for policy makers – particularly those with retail tenants. The recently finalised Commercial Tenancy Code is intended to mandate relief to those small to medium sized tenants that have been impacted – however where does this leave the Landlords? While we’re only just seeing the States and Territories reveal how they will apply the Code and commit their own relief packages, there are already a lot of questions around how landlords, tenants, financiers and Government can keep the balance and share the pain.
Listen now as Sian Sinclair, our National Head of Real Estate & Construction, discusses how the property sector is responding, the key components of the Commercial Tenancy Code and what we’d like to see next from policy makers.
Welcome to Boardroom.Media. My name is Velvet-Belle Templeman, and I'm here talking to Sian Sinclair, National Head of Real Estate and Construction at Grant Thornton. Sian has extensive experience advising businesses in the property development and construction industries. Today we'll be talking the real estate and construction sector, which has certainly experienced a range of peaks and troughs in the last 24 months and is now having to navigate the fallout from Covid-19. Thanks so much for joining us, Sian.
Thanks for having me.
Sian, before we look forward, let's look back. It's been a tumultuous ride. What has it been like for the sector up until now?
Well, Velvet-Belle, when looking at the industry, we kind of need to consider things on an asset class or by sector basis because the performance has been different across those. But if we're looking first at the residential space, things had been looking pretty good coming into 2020. We were firming up, the pricing was certainly on the march up again, and we'd seen a lot more transactions happening. But with the restrictions, we've seen a lot of properties being withdrawn from the market simply because the restrictions not allowing open homes, auctions to take place with gatherings of people.
We've got a lot of slowdown in transactions that are happening at the moment. So we have in the last few weeks seen those that had transacted prior to, I guess, a lot of the restrictions coming in place, now settling. But with that we've got this gap now with a lot of transactions just, I guess, being held. Confidence has taken a hit, so people are more worried about their income stream or whether they've got any employment security going forward and they're more concerned about that at the moment than making big decisions around, am I building a house or making a house purchase as such. I know many of us, and there’s probably not many who don't have someone in their immediate family or in their circle of friends who has been impacted by job losses and therefore, concerned about income streams.
Then if we look at retail property assets, they had already been doing it tough for quite some time and something like this I think is really going to decimate the sector and we'll see a lot of future movement there. It's not just the closures and the inability to trade during the restriction period, but from that it will then be a slow return to normal. You know, a lot of people have adapted to the online way of life now and by the end of this many people are going to be desperate just to get out of their homes and I'm sure a trip to the shops is probably a delightful change from what they have been doing. The way of their interacting with these sort of places and premises is going to change, I think, a lot now.
But then on the other side, you've got things like the industrial and logistics properties where they've been consistently strong performers and I don't think this will change that because if anything, the logistics and the industrial has been I guess experiencing heightened demand. So that's probably on the positive side there. So I don't see a lot of change there.
Sian, the media is already talking about the bottom falling out of the property market.
Well, I mean, yes, the media does like to report the headlines that get the attention, but you know, generally the property sector is cyclical. And while, we didn't come out of too deep a trough this time around, the last couple of years have been certainly a little dampened, but we were sort of coming out of the upward side of the curve. But with this we've now found ourselves kind of pushed back to the bottom of the curve outside of our usual cycle. Whilst this significant pause or hibernation that we're seeing remains and then also dealing with the aftershocks of that, but we will see eventually the recovery march start to happen again, transactions will start to occur. The interest rates are so low at this point investors are looking at alternative asset classes in which to put their money. You know, so there are those, who will have the ability to capitalise on opportunities that’s presented by, I guess, the downturn in the market.
Speaking of investors, the federal government recently announced their Commercial Tenancy Code, including a moratorium on evictions for commercial property. Is this going to be a major impact on the industry?
Well, this one was a much-awaited announcement and obviously rentals are a key proponent of any business cost when there's premises involved. The Commercial Tenancies Code has been designed to protect tenants that fall into this small to medium sized business threshold so those under a $50 million turnover and that's on a grouped basis. So those that fall into that bracket, it's going to be a huge assistance where their business has been impacted by either closures or simply just the lack of foot traffic that's coming around mandating a rent-free portion of that relief. The guidelines are basically saying that if your business has been impacted, so say you've lost 100% of your trading ability at this point because it's just not viable to continue at this point, so you've shut the doors. The Code is mandating that really you need to negotiate and your landlord has to look at providing relief to the extent that you've lost your income.
So here we're talking a 100% of turnover and 50% of that needs to come in the form of a waiver of the rent with the balance as a deferral. And that's one of the key questions I've been getting from a lot of clients who are impacted from this. What is that difference between the waiver of the rent versus a deferral? And effectively the waiver is cash you won't receive as a landlord, so you're offering effectively a rent-free period. The deferred rent will still continue to accrue. It just doesn't have to be paid until this shutdown or pandemic period as the government defines it, is over.
So that accrued amount, the repayment period for that will be over the remaining balance of the lease. So if you have a nine year lease left to run, then you'll be able to repay what your otherwise incurring now, over that nine year period. However, if you've got a shorter period, say it's up in six months, there's a minimum protection period there of 24 months that you get to repay that deferral. So the intention is that the businesses that have really had their cashflow stopped at this point, it enables them to go into a holding pattern and effectively come out the other side with a viable business and not a huge amount of debt.
Sounds like there's some questions around this for what it means for landlords.
Well, absolutely. At the moment, landlords are the ones who will ultimately have to bear the brunt of these concessions, but they also have responsibilities and obligations to their financiers. So while banks have come out in some instances at the smaller end of town and offered payment deferrals on loans under $10 million that still leaves the landlord with a larger mortgage to repay at the end. So they're not missing out as such. And then, of course, there's anyone with a loan facility that's over 10 million is really bearing the brunt of this because there is a mandated rent-free period. So they are having to forego income.
We’re also looking at the states are having to implement this Code so they will each need to legislate the Code and the guidelines in their own form, hopefully in somewhat harmonious ways. So the rules are easy to follow for those who do trade across borders. But we're also looking for the governments will play their part through some land tax concessions, but we're still waiting now to see the announcements of that as those guidelines are implemented state by state.
And what would you like to see next from the policymakers?
Well, obviously, people are wanting to see this up and enacted quickly, so we'd like to see that. I'm presuming that they are working out what their final offerings are around providing support to landlords through land tax concessions and the local governments are looking at rate concessions, et cetera. And of course, the proviso is that any concessions received from government get passed on to the tenants. We were pleased to see, certainly the industry bodies had fought very hard against initial guidelines, which actually allowed tenants to just walk away from their lease obligations due to financial distress which would have had a huge impact on valuations and loan covenants, et cetera. So we were really pleased that that hasn't happened and whilst there is some fairness and support being offered to those tenants, it also affords some level of protection to the landlords.
So there is the stick in there. If the landlords don't engage and comply with these policies that have been put forward, that have been mandated then they may well lose any protections under the lease. What I would like to see though is the banks who are certainly a party to these arrangements because that's who the landlords have their obligations with. The difficulty will be where we have the larger end of town which are funded from overseas banks, and we have no control over that, but to what extent we can sort of see support. So rather than accruing interest and allowing deferrals of payments at this time, we'd actually like to see some level of income being foregone. So maybe some interest suspensions being allowed, so that it is everybody sharing the pain, which was the intention of the Code.
Sian, fast forward six to 12 months. What does the sector look like?
Well, I'd like to say hopefully returning to a normal level of transacting, but I think that's probably 12 months plus down the horizon and it's really going to depend on how long this hibernation period lasts for and how quickly we kind of come out and recover confidence. I think that's going to be very closely tied to unemployment figures. I think we can expect a longer delay before foreign transactions kind of pick up to the level they were. Not only are there additional FIRB protections in place at this time, but I think we'll see it'll be a very long time before people are feeling confident to or even allowed to travel across borders to look at transacting.
At the moment my concern is around maybe smaller self-funded landlords or self-funded retirees because you know, their lost income stream and how do they recover from that. But hopefully things will continue to tick along and we will once everyone's back to normal, I think a lot of the government policy has been put in place to enable us to pick up where we left off, but obviously there'll be a bit of debt to pay by everybody in relation to some of the sacrifices that have had to have been made during this period.
So when do you think we will see a recovery and how will we identify the signs?
Well, much the same as the performance by asset class. I think you'll see the recovery is going to be different by sector. And it won't just be an immediate return to normal once the restrictions that we're seeing now are lifted. Like I said, a lot of it's coming back to that rebuilding of confidence. So certainly, in the residential sector, I mean, obviously people still need housing and still have to make housing and premises decisions. So that will return to normal. But I guess the extent and how quickly that happens will also be tied to where unemployment is heading.
But from a longer-term view, thinking around office space, I think in the commercial sector, I mean we've had to adapt to the whole working from home model. So I think you'll find that that becomes more accepted and people are set up for it a bit better now. So, you know, and even with the retail like I said before, people are a bit more comfortable with that online shopping option. And so really, I think it'll be interesting to see what future tenancy negotiations look like and whether or not a lot of groups start reducing their footprint when it comes to actual traditional space. So yeah, I think there's a lot of changes and even the way our workplaces are set up that will come from that.
Sian, thank you for your time today.
Thank you.
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