10 predictions for Australia’s property market in 2021

But according to Knight Frank, the outlook remains bright as the market continues to respond positively to low interest rates and the weight of private and institutional capital seeking to be deployed.

2021, the property consultancy’s experts predict, will put a hold on urbanisation, shift the landlord tenant relationship, alter residential demand, drive strong rental growth in the prestige market and boost competition in non-bank lending, among a number of other key changes.

Let’s take a closer look at its 10 top predictions for 2021:

1. Urbanisation on hold, but cities will re-asset their strength

At one level, COVID-19 seemingly threatens to upend the status quo of city-centricity, but the weight of evidence on the relative productivity of cities argues strongly that they will remain the engine rooms of the national and global economy.

Importantly though, this will no longer be dominated by our major cities, said Ben Burston, Knight Frank Partner, chief economist, Australia.

“Regional cities like Wollongong, Newcastle, Geelong and the Gold Coast will see accelerated growth,” he said. “They have sufficient scale and critical mass of service sector jobs to continue to develop rapidly, while also benefitting from a tilt in lifestyle choices due to the pandemic that will see some people opting for a less CBD-centric working life.”

2. ‘Thinking big’ on next wave of transport and social infrastructure projects

Governments will be seeking to move the needle on economic recovery in 2021 with an ongoing pipeline of new infrastructure projects, enabled by the low interest rate environment.

“We expect to see renewed debate on projects previously considered to be too expensive or not an immediate priority, such as faster rail connections between Sydney, Newcastle and Wollongong, additional airport capacity for Melbourne and improved access for cyclists in all of our major CBDs,” said Mr Burston.

“Besides these transport initiatives, we expect more emphasis to be given to social infrastructure projects going forward, encompassing social and affordable housing, renewable energy and aged care facilities.”

3. Offices will adapt to remain key to collaboration, training and cultural cohesion

Hybrid work arrangements will result in a shift in emphasis for offices towards their central role as an enabler of collaboration, culture and connection, with less emphasis being placed on facilitating individual, focused work.

“Physical offices will be increasingly grounded in the concept of wellness, both mental and physical, meaning greater emphasis on green spaces, exercise and retreat rooms as well as natural light,” said Mr Burston.

“In an environment of higher vacancy and the greater choice this implies for tenants, lower-grade space which cannot meet more stringent requirements will increasingly become redundant.”

4. The landlord-tenant relationship will need to adjust

Flexibility will be increasingly sought by tenants, and landlords will have to adapt to these changes. “Reflecting uncertainty over future space needs, large tenants will seek a mix of core leased space and flex spaces, which can be scaled up and down as needed, and also look for an end-to-end service where workplace planning, design, fit-out, head lease and flex space are managed under the one umbrella,” said Mr Burston. “Alongside more frequent break clauses, this will place greater management pressure on assets with long WALE tenancy schedules potentially having a number of break points.”

5. Shifting pattern of prime residential demand

The COVID-19 pandemic, subsequent lockdowns and closed state and international borders have given people time to reflect on their lifestyles. Demands on the home are expanding, reflecting changes in the way they live and use their space.

“As a consequence, more and more people are seeking detached family homes and favouring waterfront and rural homes in particular,” said Knight Frank’s head of residential research Australia, Michelle Ciesielski.

“Large gardens and outdoor space are now more of a priority, with the lockdown period emphasising the connection between wellbeing and the great outdoors. All of this will drive strong demand for prime property in 2021, with prices in our major cities set to rise, led by Sydney, Perth and the Gold Coast.”

6. Short supply of prestige residential rentals

While the major cities across Australia have experienced minimal uplift in new sales listings, over the past year, prime rental properties have also become scarce, in stark contrast to the mainstream residential market.

“We anticipate strong rental growth in the prestige market during 2021 driven by increased renovation activity, demand for part-time city living to complement rural or country homes and rising expat demand,” Mr Ciesielski said.

7. Investment performance will be relatively strong compared with previous downturns

Given the high level of uncertainty over the economic outlook, forecasting returns is more challenging than normal.

“But on the basis of a gradual recovery with no further major lockdowns, we expect capital growth in the office sector to average -1 per cent for calendar year 2020 and -2 per cent in 2021, leaving total returns a little over 4 per cent and 3 per cent, respectively,” said Mr Burston.

“The investment return performance of the industrial sector will continue to be relatively strong, with total returns likely remain around or just under 10 per cent in 2020 and 2021. This would mark a much stronger return performance than that experienced during the GFC.”

8. Premium on income security as investors look to re-weight and adapt their portfolios towards industrial and specialist sectors

Question marks over the strength of occupier demand in the office and retail sectors are resulting in a reassessment of risk with a greater focus on covenant strength and length of income.

“This will continue to drive strong demand for industrial and logistics property in 2021, as investors seek to increase their portfolio weightings to the sector,” said Mr Burston. “This will drive further yield compression in the industrial market, supported by the adjustment to lower interest rates. In addition, the desire for defensive income returns and diversification will see a further expansion of specialist asset classes such as healthcare, cold storage, data centres and build-to-rent.”

9. Overseas investors to drive the office market in 2021

In a more challenging environment, with higher risks to income and less expectation of capital growth, we expect overseas buyers to step up their share of major acquisitions.

“Major global funds are more accustomed to the shift down in interest rates and lower capital growth expectations, and overseas family offices will at times be driven more by the desire to diversify and preserve capital over the long term,” said Mr Burston. “On the other hand, domestic investors seeking higher returns will be cautious until the risks to the occupier market ease.”

10. Lower return environment will drive appetite for debt strategies and boost competition in non-bank lending

The shift to a lower return environment will see a further deepening in the real estate debt market during 2021 with a proliferation in the number of lenders and a widening of their remit to offer greater diversification within the space.

“Lower expected capital growth will narrow the gap between expected returns on equity and debt strategies, tilting the risk/return dynamic toward debt,” said Mr Burston. “The entry of new non-bank lenders into the debt market will widen competition resulting in a broadening of the scope of borrowing available to borrowers, including longer loan tenors and higher LVRs than traditional bank lenders will offer.”