Issue 13 | Thursday May 21st 2020 | The Rental Market Affects the Sales Market
Hi, Andrew Bell here with you.
I am sure like most of us we are pleased to see the relaxation of many of the restrictions and we are hopeful that we will continue to manage this well and avoid the risks that some people are touting of a second wave of COVID-19. I am extremely optimistic.
Following my summary of April in my last eNewsletter, I had a large amount of enquiry from people wanting more information, and I gather most of those enquiries were from investors. As the rental market makes up around 60% of the entire residential real estate market, we realize what happens in the rental market does have a very profound effect on the real estate market as a whole, so I will today give some more detailed information about our residential rental market. If anyone would like more details regarding the commercial market I suggest you reply back to this eNewsletter as it does differ so differently between retail, office, and industrial space, and different areas of the Gold Coast, so a response or information provided would need to be adapted to your area of interest.
Let’s start with the much talked about hit on individual tenants and the requests for rental relief. It appears that across the nation through most rent rolls the request for rent relief came in around 20% of the total rent roll. For many, rent has remained at that level simply because perhaps inexperienced property managers took the requests at face value. However, when digging deeper and working with tenants, and the assistance from many programs by Federal and State Governments, we were able to get our rent relief levels to just 6%. Within that group, we had the small group of landlords who have had long-term outstanding tenants and they were happy to provide them with a rent-free period for a couple of months. A forgiveness of rent. However, the great majority have simply provided rent reductions for three months on the proviso that the amount by which the rent has been reduced will be paid back during the term of their lease or at the end of their lease. I must say, with the exception of just a handful of people, there has been enormous goodwill from both landlords and tenants in this regard.
Now to the bigger question of vacancies. Three percent vacancy for the past 40+ years has been considered a balanced market. Vacancy rates above 3% means a higher level of vacancies and therefore a softening in rent, and vacancy rates below 3% means a stronger demand for rentals which sees rents rising.
Previously through my 45 odd years in the industry, the lowest I have seen vacancies rates was around 2%. However, by mid-March of this year, our rent roll, which is the largest on the Gold Coast, recorded a 0.4% vacancy. It is what I describe as an acute shortage situation. Whilst that wasn’t reflective of the rest of the industry, which was around 2%, it was an incredibly low rate – almost 0% vacancy.
However, the minute self-isolation and levels of restrictions came in, airlines stopped flying, borders were closed, and fundamentally most hotels shutdown, all of the properties that were in holiday let situations (Airbnb etc.), faced the prospect of a long period of vacancy and no rent. It caused many those people to immediately switch from holiday letting into permanent rentals. In the same of 4 weeks, vacancies across the entire Gold Coast rose from 1,200 properties in mid-March to 3,500 properties by early April. I could give you a lot more information about the breakdown of how that impacted in different regions and different property types such as apartments versus houses, but it will make this report too long.
The immediate situation was a huge supply of rental properties and because of the COVID-19 situation, very little enquiry in late March and early April. My goodness, how the situation has now changed. Rapidly we saw an acceleration in the second half of April of rental demand. We have now become so busy we have had to increase staff levels to handle the volume of rental enquiries and inspections. We are now letting properties at record levels and looking deeper into that we have identified an interested trend. More than 50% of the rental enquiry were people who had moved from interstate, and particularly out of Victoria. Our early research is telling us that these people were sitting at home during late March and early April and reassessing their world. Some had lost their jobs, some who owned businesses felt that the business would not reopen in the future, and some just wanted a better life. Huge numbers of people have made that bold decision to make their move now. Not next year, but now. COVID-19 had forced their hands and they seized the moment.
It is certainly helping to wade through the big increase in vacancies, however that was unlikely to be enough to stabilize that vacancy factor in the short-term. What will be a game changer is when airlines start flying again, borders are opened, and domestic tourism fires up again. The Gold Coast is expecting a huge influx of holidaymakers, especially coming up to the June/July school holidays. As such, many of the properties that came out of holiday lets will go back into them. As quickly as we saw the big increase in supply for permanent rentals, we are likely to see much of that disappear by July/August., and so this situation of high vacancies is just a very short-term knock-on effect of COVID-19.
There is a whole other expertise that will need to be worked on as we go through some pretty challenging economic conditions that are likely to face us certainly through the balance of this year with higher levels of unemployment, most likely an extended period of a recession, and so on. Our office has certainly had a lot of experience through those conditions in the past and the commonly used term ‘this will pass’ certainly applies, but it does need good strategies in landlord and tenant relations and around vacancies and rentals to ride that period of time.
Great to see that the few restrictions that were placed on real estate have now fundamentally been lifted, with just a little restriction on the numbers of people. We are back into public auctions from June onwards and open homes are back on from last weekend. We are thrilled to see the great volumes of people who were back out and about at our opens.
I trust your world is getting back to a little degree of normality, although I know it will never be the same again. Just as 9/11 had such a dramatic affect around security and the way we travel, I am sure COVID-19 will have a huge ongoing impact on how the hospitality industry and so many others industries function in the future.
I couldn’t be prouder to be an Australian for the way we have handled 2020 through droughts, fires, floods, and now COVID-19. I’ll be with you in a fortnights time.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group