The property industry remains in a strong position to ride out the Covid-19 crisis, said powerhouse panel of Darren Steinberg, Kylie Rampa and Jonathan Callaghan at our latest livestream event.
The leaders from Dexus, Lendlease and Investa kick-started the discussion with a round of applause for the government response to the pandemic.
“There’s no question that what is happening is a profound and severe contraction to the economy,” said Callaghan. But the response has been “exemplary,” and Australia was “in as good a position as it could possibly be,” Investa’s chief executive officer said.
“Containment [of the virus] has been successful, and construction sites have continued to operate – not at the same productivity – but [construction] is a huge employer and that has softened the landing for Australia,” Rampa, Lendlease’s chief executive officer for property said.
Dexus chief executive officer Steinberg said the “global synchronised downturn” was “more severe and quicker than the Great Depression” and a V-shaped recovery was unlikely. Dexus was preparing to “grind out of this,” and “with a tough 18 months’ ahead”, the Dexus CEO did not expect to see a “real improvement” until 2022.
Navigating a new code
The panel’s discussion on the commercial tenancy code of conduct, released by National Cabinet in early April, was illuminating.
Callaghan said Investa was dealing with a lot of distressed tenants and approached rent abatement in a “compassionate and ordered way”. A committee had been established early in the crisis to collect and prioritise abatement requests; the commercial code of conduct added another “layer”, he said. “We’ve had to hire people to help us through this period.”
Rampa said the code has simplified dealing with tenants. “Landlords do recognise the stress and the strain on tenants… everyone is collectively working together to find the best solution and nurse the industry through short-to-medium term pain.”
Steinberg said Dexus had received many rent relief requests across its portfolio, but some of those were “opportunistic”. His company’s focus was on small-to-medium companies that could not make it through without assistance, while larger corporates with access to debt and equity markets should access their own equity before asking Dexus for relief. “Landlords shouldn’t be the first port of call for these big operations.”
Steinberg said Dexus was also seeing a lot of rent renewals, as tenants recognised “it is much easier to stay put in this environment… they won’t make the seven-to-10-year call now”.
Capital waits for certainty
Turning to investment, Rampa said a lot of capital was “sitting tight” and waiting for more certainty. Other investors, basing their decisions on long-term trends, were willing to accept short-term volatility. Investors who missed opportunities after the global financial crisis “because they took too long” were unlikely to make the same mistake again, Rampa said.
Capital would be around “for the good stuff” but that would be “at close to valuation”, Steinberg added. Pointing to the lessons learnt from the GFC, he said the better buying will be in 18 months – but it will be the secondary stock.
The mantra of “quality, quality, quality” held firm, Steinberg asserted. “Quality real estate holds up really well through the cycles, which is why there’s a premium for the good quality assets.” In comparison secondary stock is “virtually unsaleable” today.
Callaghan was more interested in the sellers than the buyers. “There’s not a tonne of distress in portfolios. No one is going to make a sell decision unless they have to… I find it hard to see who the sellers will be.”
Rampa agreed. “Owners of high-quality assets aren’t showing signs of distress, so it will be new product, backed by governments.” Lendlease expects strong demand from capital for the “new breed” of sustainable assets with next-level wellness features.
None of the panel was worried about the death of the office. “Businesses need to connect, collaborate and feel part of a community,” Callaghan said. But the “days of hot desking” were over, Steinberg added. A new discussion about density and space usage was imminent, but more remote working and less density “could balance each other out,” Rampa added.
The crisis has brought out the best in individual businesses, the property industry and the nation, the panel agreed. But Steinberg urged governments not to “waste a good crisis. Now was the time to be “bold” – to rethink tax rates, penalty rates and the GST – to set Australia up for recovery.
Missed the Property Council’s last livestream event? Don’t miss the next one! On 15 May, we’ll dissect the legislative landscape around the country and discuss how landlords and tenants can navigate Covid-19’s wild ride. Register today.