An economist identified seven major risks and threats that could hamper activity and growth across residential and commercial property segments.
In a recently published whitepaper, CreditorWatch chief economist Anneke Thompson said there are big picture threats and industry specific threats hounding the overall property market.
“The risk for landlords is being amplified through the current economic conditions,” she said.
“As inflation continues to rise, so will the mounting cost-of-living pressures. The negative housing wealth effect from house prices falling will likely mean that demand for discretionary goods wanes further and construction and residential demand will also weaken as costs rise.”
1. Rising rates
Ms Thompson said rising rates have an obvious immediate impact to residential property.
“The impact to commercial takes more time to reveal itself but another impact will be to business confidence,” she said.
“When businesses feel less confident, they tend to pause any big decisions or commitments around office moves or investment.”
2. Work from home trend
The biggest impact of the work from home trend on a residential property standpoint is the exodus of people from bigger cities in search of more spacious and laid-back lifestyle markets in the regions.
On a commercial property perspective, Ms Thompson said commercial tenants are increasingly becoming reluctant to sign 10-year leases or leases with annual increases linked to inflation.
Central business districts, which are heavily dependent on workers, tourists, and international students, might take some time before showing signs of recovery.
However, retail strips and local centres could potentially benefit from this work from home trend.
3. Inflation
Inflation will have varying impacts across property segments, with households being more cautious about their spending particularly on housing.
Meanwhile, this will have a direct impact on retailers and landlords in the commercial space.
4. Energy costs
Ms Thompson said rising energy costs will have a more substantial impact on the commercial space.
“Rising energy costs will also be hitting the outgoings bills of office, industrial and retail properties,” she said.
“It is likely that when annual outgoings budgets are being drawn up, a huge increase to energy costs will need to be factored in.”
5. Prolonged vacancy
Prolonged vacancy is one of the industry-specific issues investors face, particularly in the commercial segment.
“Current economic conditions expose landlords to more lengthy periods of vacancy if they have a tenant that defaults or needs to vacate,” Ms Thompson said.
“Particularly for landlords of CBD retail premises, there will now be fewer businesses that are willing to come in and occupy space, particularly on current passing rents.”
On the residential front, rental supply remains tight, which may be more of a challenge for tenants.
6. Tighter credit controls
Credit controls will also pose threats if economic uncertainties persists and triggers major shocks.
“While commercial property is in a financially much healthier state now than it was going in to the GFC, the risk remains that banks increase their lending hurdles on commercial landlords if the economy continues to worsen,” Ms Thompson said.
7. Changing occupancy trends
Occupancy trends will impact the office sector the most but any change to the ways tenants lease space would impact the market gradually.
“Flexibility is the key word and providing this in leases will be a big challenge for the industry, as certainty of income has been one of the key reasons why investors, and financiers, have liked the sector,” Ms Thompson said.
“If we do move into a world of, say, shorter leases or more break clauses, this would mean more risk passed on to landlords.”
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