With COVID-19 wreaking havoc on individuals and economies across the world, it’s fair to say this market disturbance is unique to anything we’ve encountered in our generation – the Spanish Flu was the last event of this nature and that took place from 1918 to 1920. Whist we acknowledge that there has been some significant disruption to our daily lives, we’re pretty confident that at some stage soon we’ll be able to leave our property and our lives will begin to return to normal.
Is the current economic environment likely to lead to significant oversupply?
With the governments doing all they can to provide assistance for individuals, businesses, landlords and tenants, the current spike in unemployment is not currently resulting in streets and neighbourhoods flooded with “for sale signs”. We expect to see the supply of properties that are available for sale remaining relatively tight, as disadvantaged home owners are provided with mortgage payment holidays and disadvantaged tenants are protected with a 6 month rental moratorium on evictions.
Despite the many Australian’s who have experienced changes to their employment conditions, there are still a large majority of Australians whose incomes remain unchanged. The government restrictions around isolation has led to enforced changes to those peoples spending habits, with their discretional spending significantly dropping and their savings on the rise.
Is now the time to stash some cash or take advantage of opportunities?
Over the years, successful investors have often accredited their wealth creation strategies to bravery and courage when others were fearful. Many in line with the famous Warren Buffett quote, ‘be fearful when others are greedy and be greedy when others are fearful’. Hindsight shows us that some of the most rewarding investments were made during the GFC or by simply adopting a counter cyclical investment approach.
Here’s our predictions as we deal with the COVID-19 crisis and why now may be a strategic time to invest:
- We’re likely to see property supply continue to slow as potential sellers sit tight
- Interest rates remain historically low and are likely to be historically low when isolation ends
- We’ll see continual government stimulus applied to shore up the whole economy, which we expect will have a positive flow on effect to the property market .
This leaves the property market in a strong position once we transition back into normal life, providing a unique opportunity for potential investors with cash available.
What we do know is that with supply already constrained pre COVID-19, we feel that high quality properties will likely be even less available once life returns to normal. The strategy to wait for this period to pass may prove to be detrimental for potential investors who have the ability to pounce.
One way to capitalise on the current investment climate, but also mitigate some of the potential uncertainties, is to consider an off-the-plan property purchase. This allows you to place a deposit down on a property (typically 10%) which will be constructed and completed at a time when we anticipate COVID-19 will be a distant memory. Additionally, supply of quality properties is likely to be even further constrained in 12-24 months’ time.
Does the investment process change given the current environment? Are there greater risks?
From a risk perspective, the deposit for an off the plan property is held in the sellers (developers) solicitors trust account and is returned to the buyer if the project doesn’t proceed. Recent changes to laws in this area over the last 2 years have ensured that the purchaser holds the power should the property not be completed before the agreed sunset date.
With flexibility coming into the marketplace from a seller’s perspective, we’ve been able to negotiate some favourable terms for our recent investors on off the plan properties. These include:
- The ability to exit their investment without penalty if their job situation changes in the future
- Reduced deposit amount i.e. 5% rather than 10% – to allow investors to hold onto savings for other purposes
- Whilst not normally required for quality properties in tightly constrained rental markets, we’ve secured 12-24-month rental guarantees to provide security on rental income. Importantly these rental guarantees were based off the retail selling price and are not as a result of an inflated purchase price
Not all property markets and property types perform the same
It’s important to remember that there are thousands of sub property markets across the country, many of which will be impacted differently. Areas with a high percentages of owner occupiers are far less likely to suffer price falls due to oversupply issues and are more likely to have well performing rental markets. The biggest price falls in any vulnerable property market will be the investor grade product in over supplied suburbs, but do you really want to purchase a compromised investment for the long term just because it’s a bit cheaper today?
Post COVID19, the fundamentals for the property market look strong with limited property supply, record low interest rates and significant government stimulus likely to be pumping through the system. Opportunistic investors can now access A+ off the plan properties, with favourable terms that provide maximum flexibility should their personal situation change.
If you would like to speak to one of our team about the best property strategies for investing in a COVID19 environment, then please click here to contact us.
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