Office crush: density no love story for landlords

AFR Article: Tuesday 22 June 2021. Page 30

Office workers in Australia’s two largest cities are not the most cramped in the world, but they are tighter than the global average, putting employers and landlords under greater pressure than others to spread people out in a post-COVID-19 environment, a new report by JLL shows.

Sydney’s white-collar workforce has an average office density of 11.1sq m per person and Melbourne 12sq m, making them more densely crowded than the global average of 13.3sq m, according to the Benchmarking Cities and Real Estate report.

They are not the tightest of office environments – call centre-heavy Manila has that distinction, with an average density of just 6.9sq m per person – but at a time when owners and users of office environments face pressure to reconfigure their space to attract staff and keep them engaged, Sydney and Melbourne are not immune.

‘‘Occupational densities will be part of a widening suite of dynamic ‘metrics that matter’, including those measuring human experience, which businesses and the cities they are housed in will increasingly need to access,’’ said Victoria Mejevitch, head of JLL’s Global Benchmarking Services.

The least-dense offices in the report are in Chicago, with an average density, based on occupied usable floor area, of 22.8sq m per person, followed by Los Angeles with 20.9sq m and Munich with 18.9sq m. New York was the densest US city, with an average 16sq m per person.

Density is not everything, however. Office costs matter, too. Some locations with the densest offices such as Hong Kong (9.1sq m per person) and London (9.8sq m) are constrained in the extent to which they can reduce density because of their high costs – more than $US2000 per square metre each.

Cities with low densities face little impetus to de-densify further, and in New York, with prices close to Hong Kong’s average $US2500 ($2672) per sq m, the pressure not to reduce density any further will be great.

Sydney and Melbourne, by contrast, are in a group of cities with average office costs around the $US1000 per sq m mark (sub-$US1000 for Sydney and closer to $US500 for Melbourne) and can more afford to de-densify because of their comparatively low office costs, the report says.

‘‘There is another group of cities, however, with comparatively tight densities but where relatively lower space costs mean that the opportunity cost of de-densification may be more compelling – Singapore, Sydney, Melbourne, Toronto, Paris, Milan and Madrid,’’ the report says.

It was a consideration for Australian landlords and employers, JLL Australia chief executive Stephen Conry said.

‘‘We have already seen social distancing protocols exerting upward pressure on workspace ratios and companies rethinking the configuration of their office space,’’ Mr Conry said.

‘‘The emphasis has been on creating productive work spaces that have a high standard of health and wellness.’’

Some sectors, such as technology, will be better able to reduce density and work remotely than others, such as healthcare and the legal industry, it says.

Office crush: density no love story for landlords2021-07-02T10:59:47+10:00

Housing now worth four times GDP

AFR Article: Wednesday 16 June 2021. Page 13

The average price of a residential property in NSW surpassed $1 million for the first time on record in the March quarter, while the total value of Australian homes hit $8 trillion.

Australian residential real estate is now four times the size of gross domestic product and about $1 trillion more than the combined value of the ASX, superannuation and commercial real estate.

The total value of residential property lifted $450 billion, the largest rise on record according to the Australian Bureau of Statistics, and prices in capital cities rose 5.4 per cent to be up 7.5 per cent for the year.

‘‘Strong demand for housing was supported by record low interest rates, government initiatives and rising consumer confidence,’’ said Michelle Marquardt, ABS head of prices statistics.

‘‘Price rises were observed in all segments of the housing market, with growth in house prices continuing to outpace price growth in attached dwellings.’’

According to the ABS, about $7.9 trillion of residential dwelling stock is held by households, which means their balance sheets experienced a major bump over the March quarter.

The increase in the property market was particularly pronounced in Sydney and Hobart, which recorded a 6.1 per cent price increase over the quarter, followed by Canberra (5.6 per cent), Perth (5.2 per cent), Melbourne (5.1 per cent) and Darwin (4.7 per cent).

The increase in Sydney was the largest quarterly rise in the ABS residential property price index since the June quarter of 2015, with houses lifting 8 per cent over the quarter to be up 10.8 per cent over the year, compared with 2.6 per cent and 2.8 per cent respectively for units, apartments and townhouses.

While the Sydney median house price has been above $1 million for some time, ‘‘this was the first time any state or territory had seen the average price of dwellings rise above $1 million’’, Ms Marquardt said.

NSW now accounts for $3.3 trillion, or 40 per cent, of the total market.

The price of an average residential dwelling in Australia increased by $39,100 to $779,000 over the reporting period, while an additional 44,300 dwellings were added, lifting the national stock to about 10.6 million.

The Reserve Bank of Australia acknowledged the hot housing market in its monthly board meeting minutes, released yesterday, and said policy-makers needed to keep a close eye on lending standards.

This comes after a sudden return of investors to the market sparked concerns that the Australian Prudential Regulation Authority could step in with macro-prudential measures to curb a possible credit-fuelled boom.

The RBA tweaked its discussion around housing market conditions in its post meeting statement earlier this month, and explicitly called out the greater role investors are now playing in the booming property market.

‘‘Members noted that housing markets had strengthened further, with prices continuing to increase in all major markets. Housing credit growth had also strengthened, with strong demand from owner-occupiers, especially first home buyers.

‘‘Given the environment of strong demand for housing, rising housing prices and low interest rates, members agreed on the importance of maintaining lending standards and carefully monitoring trends in borrowing.’’

The central bank acknowledged that higher house prices would be likely to have a positive flow-on effect for household consumption due to the ‘‘wealth effect’’ of higher prices making people feel more comfortable about their finances.

Housing now worth four times GDP2021-07-02T10:49:07+10:00

Hot UK housing market creates economic risk

AFR Article: Wednesday 9 June 2021. Page 40

London | The UK property market is heating up rapidly, and a mix of surging demand and double-digit price growth is causing concern an unsustainable bubble is building.

The pace of mortgage approvals is running more than a third higher than its prepandemic level, and housing could be heading for its busiest year since before the GFC as buyers rush to take advantage of a tax cut. But with affordability stretched and lenders easing mortgage requirements, the signs are starting to worry some Bank of England policymakers.

The government’s tax holiday is only temporary, potentially creating a cliff edge and precipitating a slowdown toward the end of the year, just as job support programs end. Bank of England deputy governors Jon Cunliffe and Dave Ramsden both said this week that they are watching the housing market ‘‘carefully’’ amid the boom conditions.

One risk is that banks relax lending restraints because of the wave of demand. Nationwide Building Society has started offering new mortgages that are 5.5 times the incomes of first-time buyers, above the 4.5 ratio commonly used. If others follow suit and tell regulators they need to adjust to the market, ‘‘we do start to see some danger,’’ said Neal Hudson, founder of Residential Analysts.

Still, demand could be propped up after the tax perk is phased out in the coming months as pandemic effects linger, particularly the work-from-home culture that has fuelled a desire for bigger homes outside urban areas.

After more than a year of pandemic restrictions, residential property looks unscathed. Chancellor Rishi Sunak’s stamp-duty cut, which saved buyers as much as £15,000 ($27,300), lit a fire under the market as other parts of the economy suffered.

The surge in demand can be seen in mortgage and transaction numbers, both of which reached multi-year highs. Despite criticism that the stimulus was not needed, Mr Sunak extended the perk to October past its original deadline of March.

In addition to the stamp duty effect, the pandemic also sparked a shift in lifestyle choices, and the desire for bigger properties is creating regional hotspots within the housing market.

That structural shift is happening on a global scale, with the UK one of 13 countries that had double-digit house price growth in the past year, broker Knight Frank LLP says. That’s prompting authorities across the world to pull levers to put the brakes on rampant house price growth. Canada’s bank regulator has tightened mortgage lending requirements in light of its own housing boom, and New Zealand’s central bank is also threatening to act.

Back in the UK, ‘‘there are quite a few people that are worried about what’s going on with house prices outside of London,’’ said Marcus Dixon, head of research at LonRes, a property data company. ‘‘We don’t mind a little bit of growth but we don’t want a crash.’’

The latest figures from Nationwide Building Society put price growth close to 11 per cent. While that may be skewed because of the slump in activity during the UK’s first lockdown a year earlier, values are still on a tear. Statistics office data puts average gains in the first quarter at 9 per cent.

The mini-boom is an issue for those who were struggling to get on the property ladder even before the pandemic. With most lenders requiring a 20 per cent down payment, the average amount raised by new buyers to get a mortgage rose 23 per cent in 2020, Lloyds Banking Group says. Affordability was already stretched, particularly in London. Critics of Mr Sunak’s stamp duty cut say it added to the unequal fallout from the pandemic on younger workers. ‘‘One cannot ignore that housing booms shift wealth towards existing and generally older homeowners and can therefore widen intergenerational inequity,’’ Mr Cunliffe of the Bank of England said last month.

The divergence between those who can and those who cannot afford to buy a home hits at the heart of the Conservative Party’s push to get more people on the housing ladder. Its ‘‘Generation Buy’’ policy appeals to the British dream of home ownership as the main way of accumulating wealth.

But while many people built savings in the pandemic because they couldn’t take holidays, young workers were disproportionately in industries most affected by lockdowns, such as retail and restaurants, leaving them out of pocket at a time when they might be trying to save for a deposit.

The government has introduced a guarantee program for 95 per cent loan-to-value mortgages. But other criteria mean it is not always easy to get those loans. And for those who do, 5 per cent does not give buyers much of a margin above negative equity if home values fall. The program also stimulates demand without doing anything for supply, increasing the risks.

Hot UK housing market creates economic risk2021-07-02T10:38:56+10:00

Mortgage and rental stress worsen in May

AFR Article: Wednesday 9 June 2021. Page 40.

The proportion of households struggling with their mortgage has climbed by more than 3 percentage points in NSW and Canberra during May, as sky-high home prices stretched some families to their financial limits.

More than two in five (41.3 per cent) NSW households are now in mortgage distress – a rise from 38.2 per cent in April, while 42 per cent of Canberrans also struggled – up from 38.3 per cent, analysis by Digital Finance Analytics shows.

Mortgage stress across many states has been rising since JobKeeper ended in March. In Tasmania, 56.8 per cent of households were in mortgage stress, and more than two in five in Western Australia. The rest recorded a slight drop in the proportion of distressed households.

Households are deemed in distress if they earn less than they spend. The rolling survey of more than 52,000 households was conducted at the end of May.

‘‘The end of JobKeeper is beginning to bite and the lockdowns are not helping,’’ said DFA director Martin North.

‘‘Many households in stress have less hours worked than they want, and no income growth. Bigger mortgages by first time buyers and equity drawdowns are lifting repayments as lending standards ease and more interest-only loans are being made.’’

Stanhope Gardens in Sydney’s northwest posted the highest proportion of households experiencing mortgage stress, with 91.5 per cent of families spending more than they earn.

Mortgages have ballooned in the suburb after the median house price surged by 10 per cent in the three months ending May 31 to $1.2 million. In the past 12 months, house prices climbed by 15.7 per cent, CoreLogic data shows.

Households in the western Sydney suburb of Bidwill were also stretched, with 88.9 per cent earning less than they spend. Families were forced to take on bigger debts to buy a home after the median house price had risen by 9.2 per cent to $580,738 in just three months and by 16.1 per cent in a year.

Rental stress also surged across all states except the Northern Territory, where it improved marginally. In May, the proportion of households in rental stress jumped by 4.59 percentage points in Canberra, 3.46 percentage points in NSW and Victoria, and by 3.29 percentage points in Queensland.

‘‘There was a significant rise in rental stress, as the fallout from the removal of renter protections hit, and the JobKeeper and JobSeeker support ended,’’ Mr North said.

The number of households in rental stress nationwide rose from 1.78 million in April to 1.95 million in May.

‘‘The end of government support is hitting renters hard . . . more tenants are being asked to move or accept rent rises,’’ Mr North said.

‘‘Some still owe rents from the past year, which were not forgiven, just postponed in many cases.

‘‘Investors are trying to lift rents to alleviate negative returns, adding to the pressure, and some investors are now listing their investment properties, hoping to sell into the current market rises.’’

Mr North said mortgage and rental stress could worsen in the months ahead. ‘‘Until incomes rise, the conditions are set for more pressure on household finances.’’

Mortgage and rental stress worsen in May2021-07-02T10:37:20+10:00

Negative gearing tumbles on lower interest rates

The proportion of landlords negatively gearing rental properties has fallen below 60 per cent for the first time on record, reflecting a decline in interest rates.

Of the 2.2 million taxpayers owning at least one rental property, 1.3 million declared a net rental loss in 2018-19, according to new annual data published by the Australian Taxation Office.

Overall, net rental income was negative $3 billion.

Total gross rental income of $47.8 billion received by landlords was less than deductions for their cost of interest, capital works and other rental deductions incurred.

Despite the decline in negative gearing there are still many landlords owning multiple properties who are claiming a tax deduction for earning less rental income than the cost of running investment properties.

The number of landlords negative gearing at least six properties was 11,226 in 2018-19.

Some 10,935 landlords negative geared five properties, 26,719 owners had four properties claiming a net rental loss, 74,955 property investors had three properties negative geared and 250,035 had two properties claiming a loss.

Almost 1 million people – 931,132 – had one property negatively geared.

Landlords who claim a net rental loss are in effect betting on making money from a property investment via house price increases.

There were 19,113 fewer negatively geared landlords than in 2017-18, the first fall in five years, analysis by The Australian Financial Review shows.

As a share of landlords, 58.6 per cent claimed a net rental loss – the first time since records dating back to 2003-04 show a sub-60 per cent result.

The decline in negative gearing coincided with the Reserve Bank of Australia cutting the overnight cash rate to 1.25 per cent by June 2019 – then a record low.

The share of landlords claiming net rental losses peaked at 69.6 per cent in 2007-08, when the RBA raised the cash rate to 7.25 per cent during the mining investment boom and when market mortgage rates were about 10 per cent.

The share of landlords negative gearing property is likely to continue falling in the low interest rate era, because low mortgage rates make it harder to claim a net rental loss and make it more likely rental income will exceed the expenses of owning an investment property.

Landlords reported gross rental income of $47.8 billion in 2018-19.

More than offsetting this were deductions of $24 billion for rental interest, $4.1 billion for rental interest and $22.8 billion for other rental deductions.

Negative gearing tumbles on lower interest rates2021-07-02T10:32:30+10:00

Rental risk as Victoria investors sell

Australian Financial Review Thursday 3 June 2021

Victoria’s recent stamp duty hikes, higher land taxes and newly legislated minimum standards in market rental housing are prompting landlords to sell out and put the supply of rental stock at risk, agents warn.

Last month’s state budget property tax increases, along with new laws around renting that came into effect at the end of March, had prompted some landlords to give up, said Michael Love, the head of Melbourne’s northern suburbs-based Michael Love & Co agency.

‘‘They’re turning around and saying ‘Is real estate the vehicle I want to be investing in for a return?’,’’ said Mr Love, whose company manages 6000 rental properties.

‘‘They’re investing to get a return where they’re taxed heavily, there are additional costs and holding costs which have never been there.’’

Anthony Webb, the head of eastern suburbs-based real estate agency PhilipWebb, agreed.

‘‘It’s the vibe of the legislation is just making the pendulum swing that much towards the tenants,’’ said Mr Webb, whose business also has a rent roll of about 6000 homes.

‘‘It’s this combination of things making landlords go – it’s too hard and we’re going to sell.’’

It’s likely some landlords will sell out in the face of higher costs. A regulatory impact statement accompanying the new legislation said it was likely that as a result of introduction of minimum standards, 9 per cent of rental providers would increase rent, 4 per cent would sell the property and 4 per cent would not acquire future rental properties.

But low interest rates, and a buoyant housing market, are also prompting many residential property investors to come back into a market they had previously departed.

Housing values surged to record highs across all capitals except Perth and Darwin, with more growth expected in coming months as strong demand from buyers outpaces the falling volume of listings, CoreLogic figures this week showed.

Dwelling prices across the combined capitals surged 2.3 per cent in May – the second fastest growth rate since the 1980s.

The latest official home loan numbers last month showed investor lending, rose in March at its fastest pace in almost two decades.

New data showing home loan commitments to investor buyers jumped 12.7 per cent from February, the fastest increase since July 2003, to a seasonally adjusted monthly total of $7.8 billion.

They were ‘‘enormous’’ numbers and challenged the picture of a market solely driven by owner-occupiers.

But real estate agents said that landlords selling out would lead to a net loss of rental stock that would hurt tenants.

Rental risk as Victoria investors sell2021-06-09T13:32:42+10:00

House prices surge as listings slip

Australian Financial Review Wednesday 2 June 2021

Housing values have surged to record highs across all capitals except Perth and Darwin, with more growth expected in coming months as strong demand from buyers chases a dwindling number of listings.

Dwelling prices across the combined capitals surged 2.3 per cent in May – the second-fastest growth rate since the 1980s, according to CoreLogic analysis.

Underpinning the growth, total listings around the country fell by 6.3 per cent over the month, separate figures from SQM Research show.

All capital cities posted strong increases, led by Hobart with a 3.2 per cent lift in prices. Next was Sydney at 3 per cent. Capital city prices are now on average 7.8 per cent above the previous record set in September 2017.

The growth momentum will eventually slow, however, as affordability worsens or if the banking regulator steps in with macro-prudential curbs, analysts say.

Dwelling prices over the year jumped by 10.6 per cent nationally – the strongest growth in almost 11 years.

In regional areas, home prices rose by 2 per cent in May and were up by 15.2 per cent on the year – the largest growth rate in nearly 17 years.

House prices posted 2.6 per cent monthly growth, while apartment prices rose by 1.4 per cent. House prices over the past 12 months rose by 11.4 per cent, while apartment prices grew by 3.5 per cent.

The housing boom is expected to continue until there is a policy response, likely to be macro-prudential tightening, rather than Reserve Bank rate rises or government policy or tax changes, investment bank UBS said.

‘‘Our view remains that macro-prudential policy tightening will likely be implemented around October – when the Council of Financial Regulators is due to meet, and the RBA release their semi-annual Financial Stability Review,’’ UBS economist George Tharenou wrote.

‘‘The trigger flagged by APRA (Australian Prudential Regulation Authority) was a substantial increase in housing credit growth to above income growth – which is a condition we expect to be met by then, given our view housing credit lifts above 6 per cent year-on-year year ahead.’’

AMP Capital chief economist Shane Oliver said the worsening affordability was becoming an increasing constraint once again.

‘‘Poor affordability will start to bite as the year progresses and the massive pick up in housing construction will dampen price increases, particularly with the borders remaining closed,’’ he said.

While still trailing house price growth by a wide margin, unit values have strengthened across capitals as investors start to return to the sector.

CoreLogic research director Tim Lawless said unit prices were likely to increase further as house prices rise to unaffordable levels.

‘‘I think we’ll see demand diverting to a more affordable sector of the marketplace like apartments, particularly in Sydney where the pricing gap between houses and apartments is around 50 per cent,’’ he said.

Even in the Melbourne CBD, where high-rise apartments have borne the brunt of the downturn, price rises are starting to be seen, Mr Lawless said.

‘‘We’re only seeing subtle growth in apartment values at the moment, but every single subregion of inner Melbourne has risen in value over the past three months,’’ he said.

Sales turnover has also risen with unit sales now tracking 15 per cent above the average.

‘‘I think part of that will be driven by investors who are starting to come back and become more active in the market, but also through demand being diverted into the sector purely through the lower price points that they are offered,’’ Mr Lawless said.

In the near term, prices are set to rise strongly as new listings fall by 2.4 per cent over May to 79,673 properties on the market nationally, figures from SQM Research show.

Total listings around the country have dropped by 6.3 per cent over the month and were down by 19.2 per cent from a year ago.

‘‘The reality is that the 79,000 new listings are simply not enough to satisfy buyer demand right now,’’ SQM Research managing director Louis Christopher said.

‘‘Buyers are so desperate that they are now raiding the oldest stock that has been on the market for months due to some defects or priced too high.’’

House prices surge as listings slip2021-06-09T13:27:10+10:00

Dear  Valued Client,

As we turn the page over and close what has been an unprecedented year, the focus is now on 2021 and 2022 given the prevailing uncertainty across all markets.

A number of new and ongoing developments bear close watching:

  • Sydney outbreak containment – this is new and has obvious consequences on the domestic front.
  • Global and domestic economies – will they continue to surprise on the upside?
  • US Covid – will the re-acceleration lead to harder lockdown and potentially an economic slowdown in the US?
  • Vaccine Data- Whilst latest data form Moderna and the China vaccines remain positive a new virus strain has been spreading in the UK. The ability to deliver effective vaccine at necessary scale remains a challenge.
  • US Fed and growth in its balance sheet continues to be strong.
  • Brexit negotiations appear to be progressing to plan.
  • Constrained world trade – China and various trading partners – could potentially result in undesirable outcomes.
  • The Australian Economy – Level of uncertainty post full withdrawal of the stimulus in March 2021.

The COVID-19 pandemic has had a stunning impact on the global economy and to a lesser extent, on the local economy.

This in turn has led to a permanent shift in the operating landscape for millions of businesses and to varying degrees, changed all our lives.

On balance, we are cautiously optimistic that progress forward is possible on both health and economic fronts, the Australian economy has maintained improvements in this respect.

In saying that, 2021 and perhaps a couple of years out are likely to experience a degree of volatility given that asset classes (in general) appear to be fully valued, high liquidity appears to have played a part in this outcome.

On reflection, history tells us that this often brings about some uncertainty.

Excessive liquidity by central banks although warranted, can over-shoot and create unintended consequences (asset bubbles). A potential outbreak in inflation, although currently with low probability, is also of concern.

At times like these it is always good to gain a perspective and focus on what we can control and ignore the uncontrollable.

Some of the controllable areas might include:

  • Review our financial, estate and personal protection plans.
  • Calculate and control our lifestyle costs ( When things don’t add up start subtracting )
  • As investments are made, consider the principle of ‘dollar cost averaging’
  • Consider Dividend Reinvestment Plan ( DRP)
  • Diversification and history are our best friends, reflect and actively rebalance asset allocations
  • ‘Cash is king’ as we accumulate wealth, not so in retirement
  • Target modest improvements and find many of them

In closing, we would like to take this opportunity and thank you for placing trust in AMCO to provide guidance and certainty during what are unquestionably uncertain times.

We wish you and your family a Merry Christmas and a happy, healthy and prosperous new year.

Danny D. Mazevski 

Chartered Tax & Financial Adviser