Risks and caution accompany continuing growth
2021 was a record year for property, driven by the lowest interest rates in history, buoyed by strong employment, a high savings rate and a chase for yield-generating assets. As a result, we saw the highest growth in decades within the residential property sector. The unexpected momentum from 2020 carried forward to 2021, with an overall growth rate of more than 22%.
As office landlords struggled to come to terms with ‘hybrid working’, the commercial property industry showed signs of stabilisation in retail, strong growth in healthcare and record demand for industrial.
While these themes are expected to continue, a range of risks have also emerged for the new year:
Interest rates: a series of rate rises are expected to commence in the second half of this calendar year (or in 2023) impacting the cost of credit, capitalisation rates, development feasibility and pricing.
Credit availability: The Australian Prudential Regulation Authority introduced tightened serviceability buffers in 2021 and is poised to further constrict credit availability should growth continue at similar levels this year.
Supply chain issues: COVID-19 disruptions, the availability of skilled labour and supply of materials will continue to be a risk for developers, owner occupiers and investors. In terms of cost overruns and project delays, these issues present a key concern across each property subsector.
Federal election: Property taxation policy is often a key consideration during an election campaign and possible change of government. This year may not be the exception.
While strong employment, interest rates and other fundamentals expected to generate further property growth in 2022, lenders, investors and owners will remain somewhat wary after two years of uncertainty. Caution will be exercised around the quality of their assets, the diversity of their portfolios, and the nature and breadth of their relationships.
We also predict a stronger focus on counterparty due diligence by joint venture partners, tenants, builders, and key contractors, alongside further headwinds in the investor-focused high density residential space.