"A high population growth combined with low interest rates are likely to drive residential property prices to new highs once the coronavirus is truly over," said Scott Kuru, co-founder of Freedom Property Investors

By Ian Horswill


Posted on June 9, 2020

There’s no question that the coronavirus pandemic is forcing investors to challenge their views on where to invest in the future.

While many investors are searching for opportunities on new ground, others are sticking with the tried and tested markets, confident they’ll keep delivering solid, reliable returns well into the future.

“One of the traditional favourites is real estate. And commercial has long been a popular sector,” said Scott Kuru a property investing mentor and co-founder of Freedom Property Investors, an educational community for people seeking to build wealth through property.

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According to the Association of Foreign Investors In Real Estate (AFIRE)), the USA is the world leader in commercial property investing, ahead of Germany, Canada, the UK and Australia.

However, the commercial real estate market should be treated with caution as an investment vehicle, Kuru said.

“The reason for this is the rapidly changing business landscape. And while COVID-19 has caused turmoil in the commercial real estate sector, the reality is it has only hastened a trend which has been quietly underway for years now,” he added.

Scott Kuru looks at the investment options.

Retail Property

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Retail investing, for example, is suffering the effects of COVID-19 faster than other sectors. Most shops in Australia have been closed for months, with others having remained open yet deserted.

Many massive chains have closed in the last few months, some of which admittedly were in trouble before the pandemic. Brands like Tigerlily, Harris Scarfe, Bardot, Jeans West, Kikki K and Ishka have either closed forever, or are on the brink of collapse.

And of course, Target recently announced sweeping store closures as well.

Flight Centre is also close to collapse with virtually no holiday flights being booked through the chain at the moment. And while some of these chains may fight back as stores re-open, others will disappear forever.

The other elephant in the room for retail real estate of course is the continued growth of online shopping. More and more consumers are choosing to shop online instead of in stores. According to analysts IBISWorld, online shopping is growing at 15.5% per annum in Australia alone.

Companies such as Amazon and eBay continue to enjoy record growth, with major retailers such as the Myer and David Jones chain have expanded their online presence, and accelerating their efforts as COVID-19 took hold.

Of course, it is not just major retailers expanding their online presence. Smaller retailers are also expanding their eCommerce capability, also as a direct response to COVID-19.

Office Space

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The future of office space as an investment appears shaky as well. And COVID-19 again is playing a significant role.

At the beginning of the pandemic, workers were forced to work from home. And surprisingly, many workforces have found it beneficial and efficient. Today’s technology has made it a more seamless experience. And it is now far more acceptable for small businesses to work from home instead of leased offices.

One of these benefits for companies, of course, is saving money on office expenses. And as a result, we are likely to see smaller offices and potentially higher office vacancies.

Industrial Property

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The industrial sector is possibly the least affected.

However, it’s still tough being a manufacturer in Australia. Cheap goods from China continue to flood the local market, making it tougher for local manufacturers to compete.

However, service-related factories will continue to provide some stability. Warehousing and distribution, construction and automotive-related industries continue to be in demand.

Unfortunately, as more and more factories and sheds become vacant, it’s the tenants who have the upper hand in driving rents down as excess supply puts the ball firmly in their court.

Is there a better option?

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Residential real estate could still be a very attractive option for investors who crave solid returns and stability.

The rows of empty shops and factories are a good reason to consider residential over commercial. Particularly when so many old warehouses are being converted into apartments and offices.

Residential real estate continues to be fuelled by our population growth rate of 1.8% and record low interest rates. And despite predictions of a massive crash, it has defied the expert predictions time and time again.

In 2011, prominent economists predicted residential price falls of up to 40%. Instead, Sydney’s median price climbed from $600,000 to smash the $1,000,000 ceiling just six years later. People need a house to live in, and this is a constant force in the market.

It’s no surprise then that Corelogic recorded a very slight 0.03% increase in house prices in April.

Of course, don’t expect prices to rise every month in the short term. With record high unemployment, a slight decrease is almost inevitable. However, with high demand for property along with low interest rates it’s unlikely we will see a significant drop in prices.

This makes now an excellent time to pick up well priced properties in excellent areas. Houses in popular suburbs close to transport, shopping, schools and work centres make excellent investments.

However, you should be cautious about searching for bargains. This can be counterproductive since bargains only typically appear in suburbs which aren’t popular with buyers and renters. And while you could grab a big saving, it’s unlikely to deliver the returns you want in the long term.

Conclusion

While opportunities may continue to present themselves in the commercial sector, they are unlikely to perform as well or as reliably as residential property in popular suburbs, Kuru said.

“And, a high population growth combined with low interest rates are likely to drive residential property prices to new highs once the coronavirus is truly over,” he said.