25 February 2021

COVID-19 Vaccine’s anticipated impact on Australian commercial real estate

by Jason Huljich

As the Pfizer and AstraZeneca COVID-19 vaccines begin to roll out, we are already seeing the effects of the pandemic’s impact starting to unwind. According to the ABS, nationwide payroll jobs have bounced back to pre-pandemic levels. There are also 2.1 million fewer individuals claiming JobKeeper and 520,000 fewer businesses, according to the Federal Treasurer, Josh Frydenberg.

So, with a return to work normality, what does the vaccine rollout mean for the Australian commercial real estate sector?

Office

We anticipate white collar workers across Australia will continue to return to the office as the workforce increasingly becomes vaccinated. This will see a rollback of social distancing limitations and an uptake in office space. Across our portfolio, we are already seeing tenants more actively seeking a return to the office and we expect this trend to be accelerated in coming months.

While there still might be an element of working from home, we don’t expect this to mean homebased five-day work weeks for the vast majority of office-based companies. Importantly, as business burgeons then headcounts grow, which also means increased demand for office space. Again, this has a near to mid-term impact on office uptake.

Additionally, we are seeing a resilient performance across the metropolitan and fringe office markets with a growing trend of workers wanting to be closer to home, avoiding long commutes and creating better work-life balances.

Currently, listed office REITs are trading at an approximate 20%+ discount but we expect this to improve in the coming six-to-nine months as the vaccine rollout programme progresses.

Healthcare

Healthcare real estate stepped into the spotlight during the pandemic as the undersupply across the industry became increasingly apparent. Investor appetite has been strong and there is a rising demand for new, modern facilities within the private sector. Throughout previous decades, particularly within the regions, allied health and medical centres have been housed in adapted buildings creating cost inefficiencies.

We believe more custom-made properties will emerge and a shift to short-stay and day hospital usage will increase. The demand for healthcare real estate assets will continue, underpinned by Australia’s ageing population and rising chronic diseases. The challenge the sector has is keeping up with demand while the undersupply will continue to generate robust yield compression.

Industrial

Throughout the pandemic, industrial assets have seen a silver-lining. This was predominately driven by increased demand from online, non-discretional retail such as the grocery and pharmaceutical sectors. According to Australia Post, in 2020 more people shopped online than ever before and ecommerce increased 80% year-on-year in the eight weeks following the WHO declaring COVID-19 a pandemic.

We believe this trend won’t dissipate and online retail is here to stay. In fact, we see further maturing of the industrial market with the emergence of strong subsectors – including cold storage facilities and data centres. The latter benefitting from an increased dependence on video conferencing systems, entertainment streaming, e-commerce and e-retailing.

Equally, we are seeing a renaissance in the manufacturing sector as some offshore supply chains are replaced with domestic production to meet local demand.

However, like healthcare real estate, the challenge across the industrial spectrum is the supply of quality, investment grade products. Here, too, we are seeing significant yield compression.

Development

With undersupply across the healthcare and industrial sectors, both markets can expect to see an uptick in construction activity throughout FY21 and FY22. This creates modern high quality assets, which can attract longer-term leases. Investment in these assets are likely to attract both domestic investors as well as cross-border capital demand, especially as Australia and New Zealand’s economies are anticipated to rebound strongly.

Therefore, we are optimistic the COVID-19 vaccines will have a positive impact on the domestic commercial real estate markets. We anticipate an increase in office occupancy, rising demand for modern healthcare assets, and further demand for industrial assets, particularly within the submarkets of distribution centres, cold storage facilities, data centres, manufacturing warehouses and logistics.