Budget focus on jobs and financial support – a positive for real estate

Australia has traditionally relied on strong population growth to underpin growth in real estate markets.

Due to the COVID-19 pandemic which struck the world in early 2020, border closures have thrown the brakes on immigration, and according to the budget papers, Australia has gone from an annual population growth of 1.5 per cent over many years to just 0.2 per cent today1. This represents one of the biggest obstacles to growth in commercial real estate in 2021.

Fortunately, the Australian Government’s 2021-2022 Federal Budget has focused on keeping the taps of stimulus spending on and the creation of jobs.

We believe that the commercial real estate sector in Australia is in a far stronger position as we exit COVID than its peers across the developed world, and the money being pumped into the economy will continue to have very positive flow on effects for commercial real estate.

While the challenges of COVID-19 remain and in the short-term, we’re unable to rely on the population drivers that have traditionally ensured growth, the Federal Budget 2021-22 will ensure the sector continues to grow for a number of reasons.

The jobs dividend and consumer confidence

Treasurer Josh Frydenberg and his department feared unemployment could reach 15 per cent as a result of COVID. At the time the Treasurer delivered the Budget the unemployment rate was at 5.6 per cent. The Government aims to drive that towards 4.5 per cent as a result of economic stimulus.

The focus on job creation is going to greatly support the commercial real estate sector. We think that the benefits of an improving jobs market will flow through to the way we occupy office buildings again – one of the biggest shifts during COVID.

The last time unemployment was around 4.5 per cent, vacant office space was just 7.0 per cent nationally2.

It should also flow through to the way we spend in our shopping centres. Consumers are feeling much more confident again and we believe that the Budget is going to keep building that confidence to spend.

These are both significant positives for the outlook for commercial real estate.

Low interest rates environment

The Budget is positive for capital markets.

The total borrowing of Government is heading towards $1 trillion – or 30 per cent of GDP3. The Government will continue to issue bonds which is likely to suppress yields and therefore keep interest rates lower for longer.

We can’t rule out potential interest rate increases in the future but overall, the picture on rates will remain muted. This should be positive for investment markets and particularly real estate capital markets for 2021 and beyond.

The strong and stable market conditions domestically will be very attractive to offshore investors.

Massive infrastructure spend

The Australian Government’s 10-year infrastructure program is now $110 billion, with an additional $15.2 billion in new project funding announced in the 2021-22 Budget. The additional infrastructure spend will support 30,000 jobs, according to the Morrison Government.

Infrastructure spending by government has a direct correlation with the performance of real estate.

Logistics is a segment that should benefit as a result of the money going into infrastructure because it directly improves logistics capability. A particular focus will be the construction of logistics centres around e-commerce hubs.

Our reliance as a society on online retail is only going to grow and improved logistics through better roads, rail freight and ports will be another positive for that sector, with additional funding in the Budget for the National Freight and Supply Chain Strategy, including $2 billion to deliver an intermodal freight terminal in Melbourne.

Australia remains in a strong position and is comparatively attractive to investors looking for resilient markets to allocate capital.

Many of the drivers of population are simply out of our control in the short term, and the vaccine programs is likely to need to reach full capacity before we can reopen the international border and allow people to come back into Australia.

Overall, Australia is a very good place to be right now and remains an attractive market for investors, particularly those looking for yield. When you look around the globe at countries battling high levels of COVID while they continue to try to vaccinate their populations, Australia has remained very resilient.

We have a very strong economic base to draw from to plug these gaps and ensure growth for the long term and in our opinion, this bodes well for commercial real estate.

1 Budget Papers, Treasury
2 Deloitte Access Economics
3 2021 Budget Papers

Author: Luke Dixon, Head of Real Estate Research – Real Estate Sydney, Australia

Source: AMP Capital 17 May 2021

Reproduced with the permission of the AMP Capital. This article was originally published at AMP Capital

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.