A COMLETE GUIDE

RELATED TO COVID 19

IMPACT ON COMMERCIAL

REAL ESTATE

B Y : R I L E Y MAR K

Abstract

The coronavirus has now touched every aspect of daily life, inspiring fears of both economic

instability and the outside world more generally. It’s been a particularly challenging and

uncertain time for commercial real estate, with the current pandemic reshaping both high-

level market forces as well as the ground-level process of purchasing and leasing properties.

I. Introduction

Successful real estate investing is about identifying asset and pricing cycles, and crystallising

the right investment thesis at the right point in the cycle.

The novel Coronavirus has infected lakhs of people with the death toll of over 1.30 lakh. As

real estate investor, you need an answer of the question ‘How does this affect commercial

real estate investing?’

As most of the world goes into lockdown, we see the impact of the pandemic in the following

ways on real estate.

II. How covid-19 will impact realty sector

It is difficult to think of a business that has not been impacted by the covid-19 pandemic.

However, for the Australian real estate sector, the impact of the crisis can be a double

whammy. The sector, especially the residential segment, has already been struggling with

project delays, regulatory changes and low sales for the last few years.

The quantum of impact will depend on how long the lockdown will last and how long the

economy will take to get back on track. Many experts said that the situation may deteriorate

into a recession similar to what we saw in 2008, if not worse. Here are the possible outcomes

for the real estate sector.

Project delays

If you are among those homebuyers who were expecting to get possession of your house

anytime soon, be prepared to keep paying both the rent and equated monthly instalments

(EMIs) for a few additional months, as project deliveries will get deferred. Given the

lockdown, construction in incomplete projects has come to a complete standstill across the

country.

“We foresee a delay of around seven to eight months in project completion on account of

supply disruption due to the virus outbreak and the National Green Tribunal ban on

construction last year across the national capital region (NCR)," said Amit Modi, director, ABA

Corp., real estate developer.

The duration of project delays will not just depend on the lockdown. Even after the lockdown

gets lifted, it will take time for developers to resume construction work in full swing as most

of the labourers have left for their home towns. “With fear of the pandemic looming large,

many may even opt to stay back in their villages longer. This will lead to shortage of labour

and further project delays," said Anuj Puri, chairman, ANAROCK Property Consultants. As per

ANAROCK research, as many as 156.2 million housing units are currently under construction

across Brisbane, of which nearly 46.6 million units were to be delivered in 2020.

Demand-supply disruption

During times of uncertainty, most people defer plans to make big-ticket purchases. As a

result, home sales are bound to fall. “Housing sales in the first quarter of 2020 plunged by

42% over the corresponding period in 2019," said Puri.

Developers, typically, schedule project launches during festivals such as Gudi Padwa, Akshaya

Tritiya, Navratri and Ugadi, which fall in March-April. But given the ongoing lockdown due to

the pandemic, most of them have deferred their plans this year.

Price reactions

Most experts and developers believe that prices will largely remain stagnant though the costs

may go up. “There will be no change in prices as transactions are not taking place. The prices

will resume at the same level," said Mohit Goel, CEO, Omaxe Ltd, a real estate developer.

Niranjan Hiranandani, national president, National Real Estate Development Council

(Naredco), a real estate developers’ body, agreed. “In the primary market, I do not foresee

any major changes. The market scenario has been ‘challenging’ for some time now, and

possible discounts have already been factored into the current pricing. I do not see the

option for any further rate reduction," he said.

Developers anticipate increase in raw material cost, but they may not be able to pass that on

to buyers in the current market situation. “a big importer of steel and iron products, technical

construction equipment as well as plastic and fibre elements from China. With production in

China going down, the prices of these materials may rise, increasing costs and reducing profit

margins for developers," said Vikas Jain, CEO, Labdhi Lifestyle, based real estate developer.

Meanwhile, the commercial space may suffer for a while. According to a press release by

ICRA on the impact of coronavirus, the retail commercial space comprising mainly of mall

operators will be impacted in a major way, as a result of closures across the country, but the

repercussions on office spaces are likely to be marginal.

There may be outliers though. “There is always the possibility that a few cash-starved

developers with high unsold stock may sweeten deals for buyers. But this was happening

even before the pandemic," said Puri.

The recovery path

A study by Savills, a property consulting firm, expects global businesses to see a surge once

the pandemic dies down. “will witness a slowdown in the current and coming quarter,

however, it stands to benefit post recovery," it stated.

If you were planning to buy a house before this pandemic, revisit your budget. Check

whether your investments that you were planning to redeem for down payment are intact or

if they have suffered a setback. Ideally, you should wait for things to settle down since the

prices and inventory are unlikely to change.

Here you will find some information related to Lawnton.

Lawnton (4501) is a suburb of Brisbane, Outer Northern Suburbs, Queensland. It is about 21

kms from QLD's capital city of Brisbane. Lawnton is in the federal electorate of Dickson.

In the 2011 census the population of Lawnton was 5,356 and is comprised of approximately

50.9% females and 49.1% males.

The median/average age of the population of Lawnton is 36 years of age.

78.2% of people living in the suburb of Lawnton were born in Australia. The other top

responses for country of birth were 5.0% New Zealand, 4.0% England, 1.0% Philippines, 0.9%

India, 0.7% South Africa, 0.5% Papua New Guinea, 0.5% Scotland, 0.4% Fiji, 0.4% Netherlands,

0.4% Germany, 0.3% Ireland, 0.3% United States of America, 0.3% Malaysia, 0.2% Samoa.

90.7% of people living in Lawnton speak English only. The other top languages spoken are

3.6% Language spoken at home not stated, 1.1% Other, 0.8% Hindi, 0.6% Tagalog, 0.3%

Italian, 0.3% Other, 0.3% German, 0.2% Dutch, 0.2% Spanish.

The religious makeup of Lawnton is 25.0% No religion, 22.5% Catholic, 18.0% Anglican, 7.9%

Religious affiliation not stated, 6.4% Uniting Church, 3.9% Presbyterian and Reformed, 3.3%

Christian, nfd, 2.4% Baptist, 2.0% Pentecostal, 1.3% Other religious affiliation .

42.2% of people are married, 36.8% have never married and 11.6% are divorced and 4.0% are

separated. There are 233 widowed people living in Lawnton.

61.0% of the people living in Lawnton over the age of 15 and who identify as being in the

labour force are employed full time, 25.3% are working on a part time basis. Lawnton has an

unemployment rate of 8.3%.

The main occupations of people living in Lawnton are 19.2% Clerical & administrative

workers, 16.6% Technicians & trades workers, 14.9% Professionals, 12.5% Labourers, 9.8%

Community & personal service workers, 9.6% Machinery operators & drivers, 9.1% Sales

workers, 6.7% Managers, 1.6% Occupation inadequately described/ Not stated.

The main industries people from Lawnton work in are 13.2% Health care and social

assistance, 11.6% Manufacturing, 10.7% Retail trade, 8.4% Construction, 7.6% Public

administration and safety, 7.1% Transport, postal and warehousing, 6.5% Education and

training, 5.6% Professional, scientific and technical services, 5.3% Accommodation and food

services.

24.4% of homes are fully owned, and 38.3% are in the process of being purchased by home

loan mortgage. 34.3% of homes are rented.

The median individual income is $559 per week and the median household income is $1081

per week.

The median rent in Lawnton is $270 per week and the median mortgage repayment is $1733

per month.

(Source: https://localstats.com.au/demographics/qld/brisbane/outer-northern-suburbs/lawnton)

III. Australian commercial property market sentiment falls in Q1 2020

Australian commercial property market sentiment fell 8 points to a below average 0 in the

March quarter, according to The NAB Commercial Property Index survey.

While the coronavirus is likely to have played some role in pulling sentiment down, the

survey was conducted between 25 February and 23 March and pre-dates the impact to the

economy and business confidence from stricter containment measures.

Sentiment around Office (down 3 to +26), Industrial (down 7 to +7) and Retail (down 2 to -27)

property fell modestly during the quarter, but CBD Hotels were hit hard (down 55 to -38).

According to NAB Chief Economist Alan Oster; “Travel restrictions and quarantine measures

appear to have impacted this market immediately, with the survey estimating hotel

occupancy rates plunged to 68% in the March quarter, from 83% in the previous quarter”.

The hit to overall confidence in commercial property markets from the coronavirus has so far

been relatively muted. The 12-month measure was down 4 to +9, and the 2-year measure

down 1 to +17.

“But if the coronavirus impact on the broader economy is sustained, it is likely to feed

through into much lower commercial property market confidence in the future” warned Mr

Oster.

Average capital growth expectations for the next 12 months moderated for Office (0.9%) and

Industrial (0.9%) property but remain positive. Retail property values are expected to fall

harder (-1.4%), with values lower in all states, Capital growth expectations are weakest for

CBD Hotel property (-2.8%).

The national Office vacancy fell rate slightly in Q1 (7.5%) and is expected to hold steady at 8%

over the next 1-2 years, as modest rises in NSW and VIC (to still low levels) are offset by falls

in QLD, SA/NT and WA. Retail vacancy however climbed noticeably to a survey high 6.9% in

Q1, and it is expected to increase further in the next 12 months (8.0%), likely reflecting

coronavirus-related shutdowns and business failures.

With many tenants reportedly struggling due to the coronavirus-led economic downturn, the

rental outlook for the next year is noticeably weaker for Retail property (-2.5%), with bigger

falls expected in all states. In contrast, rental expectations for Office (1.0%) and Industrial

(0.5%) property are broadly unchanged.

“As it becomes increasingly clear that efforts to contain the coronavirus are having a very

sharp impact on the economy, the true impact on commercial property capital values, rents

and vacancy will depend on how long the virus takes to get under control, the extent of the

containment measures and the timing of the phasing back to normal” said Mr Oster.

In other key survey findings, there was a substantial increase in the number of property

developers that pushed out their timings for starting new work, also suggesting growing

uncertainty over the outlook for construction.

The survey did reveal a further improvement in debt funding conditions in Q1, but property

professionals said it was harder to obtain equity funding in the wake of heavy falls in the

share market following the coronavirus outbreak.

Looking ahead, the outlook for debt and equity funding conditions in the next 3-6 months is

now also weaker than predicted in the previous survey.

Around 320 property professionals participated in the Q1 2020 survey.

IV. Property values fall slightly in parts of Queensland in April but steady

overall

New data shows property values fell slightly in some parts of regional Queensland in April but

rose in others amid a sharp drop in sales due to the COVID-19 pandemic.

Figures compiled by property analytics firm CoreLogic show falls of 0.4 per cent in Cairns and

Toowoomba, 0.7 per cent in the Darling Downs-Maranoa, and 0.1 per cent in Wide Bay.

But on average, property values rose 0.2 per cent across regional Queensland and 0.3 per

cent in Brisbane and nationally for the month.

Real Estate Institute of Queensland's Far North Queensland representative Tom Quaid said

he did not expect to see any significant reduction in Cairns property prices in the short term,

but the number of sales had halved over the past six weeks.

"Ordinarily we would have expected to see April and May as being some of our busiest

months in the Cairns property market," he said.

"Then we had COVID-19 come in, we had our restrictions start to come through including the

banning of open homes. We just had restaurants and bars close, we had mass unemployment

starting to come through.

But he said Queensland's success in reducing COVID-19 cases, the introduction of stimulus

measures such as the JobKeeper wage subsidy, and low interest rates had helped consumer

sentiment.

"There are still people in the market. For those properties that are on the market we are still

seeing transactions occur, just at a lower rate," he said.

"Now that we've got a bit more confidence going on we would expect to see people return to

the market.

"Certainly not in the numbers we would see in a normal year, but I think we'll still see

business moving forward over these next few months at least."

Rents could fall

CoreLogic also warned rents could go down due to a rise in vacancies driven by job losses, a

lack of tourists, migrants and international students, and Airbnb properties flooding into the

rental market.

It expected inner-city Sydney and Melbourne would be hardest hit with rental listings

increasing by more than 30 per cent between March 22 to April 26.

The Gold Coast had the highest increase in listings in Queensland at 12.5 per cent over the

period.

It also identified regions in Australia that were more vulnerable to COVID-19-related job

losses, namely those with high proportion of workers in accommodation, food, arts and

recreation sectors.

The Gold and Sunshine Coasts were among the most at risk with 13-15 per cent of workers in

affected industries, compared to 2-5 per cent in Toowoomba and outback Queensland which

were among the least vulnerable.

Longreach real estate agent Matthew Strong said he had two properties vacated by tenants

who had recently lost jobs, but rent was generally affordable and able to be covered by

government subsidies.

"We're not seeing or haven't seen as yet [many] tenants needing rents to be reduced under

the new COVID-19 situation," he said.

"We've been through drought. Owners and tenants are resilient and we've been working

through tough times for some time."

Woodgate real estate agent Michelle Cocking said while holiday rentals had taken a hit in the

Wide Bay hamlet, many landlords had successfully converted them to longer term

accommodation for essential workers.

"Permanent rentals are still going really strong, if not the strongest we've seen this year," she

said.

"Holiday rental properties have gone into a semi-permanent situation where we've got a four

to a 12-week type booking.

"The income for those landlords is still coming in, just in a different way."

Commercial property market expected to take hit

Uni SA property lecturer Peter Koulizos said residential property prices may experience a

"short and sharp" drop but would start recovering even before the end of the year.

"Generally speaking, property values will drop by 5-10 per cent on average. Rents on average

will drop a little bit more than that," he said.

"There is no need to panic. If this thing was going to last much longer than six months then,

alright, we might be worried. But for now, stay calm, don't panic."

But he expected the commercial property market would be hit harder by the pandemic due

to some businesses closing and others deciding to reduce office space.

Mr Koulizos said the continued rise of online shopping could also reduce the need for

shopfronts.

"Except for groceries from the supermarket — where it looks like Australians have an

obsession, where they still want to go out to buy their groceries — they're happy to buy

almost anything else online," he said.

"So there will be less need for retail bricks-and-mortar but more need for warehousing."

V. Relief for commercial tenants

The Government has announced a range of measures to help renters. This includes a

temporary hold on evictions and a mandatory code of conduct for commercial tenancies to

support small and medium sized enterprises (SMEs) affected by coronavirus.

Hold on evictions for renters

Evictions will be put on hold over the next 6 months for commercial and residential tenants in

financial distress, who are unable to meet their commitments due to the impact of the

coronavirus.

Code of conduct for commercial tenancies

A mandatory code of conduct outlines a set of good faith leasing principles for commercial

tenancies including:

retail

office

industrial

between:

owners

operators

other landlords

tenants

This code applies to tenants that are:

a small to medium sized business with an annual turnover of up to $50 million

eligible for the JobKeeper Payment

Rent reductions will be based on the tenant’s decline in turnover to ensure that the burden is

shared between landlords and tenants.

The policy will include a mutual obligation requirement on the small and medium sized

businesses and not-for-profit tenants to continue to engage their employees through the

JobKeeper Payment where eligible, and if applicable, provide rent relief to their subtenants.

Australian and foreign banks, along with other financial institutions operating in Australia, are

expected to support landlords and tenants with appropriate flexibility as they work to

implement the mandatory Code.

The Government is also waiving rents for all its small and medium enterprises and not-for-

profit tenants within its owned and leased property across Australia.

The code and its principles will be implemented and regulated by your relevant state or

territory.

Principles of the code

The code includes a common set of 14 principles. These include that:

landlords must not terminate leases for non-payment of rent during the COVID-19

pandemic (or reasonable recovery period)

tenants must stay committed to their lease terms (subject to amendments)

landlords must offer reductions in rent (as waivers or deferrals) based on the tenant’s

reduction in trade during COVID-19

benefits that owners get for their properties (e.g. reduced charges, land tax, deferred

loan payments) should be passed on to the tenant (in the appropriate proportion)

Check with your state or territory

These measures will be implemented by your State or Territory Government. You can find

out how to access this assistance through your relevant state or territory below.

The Queensland Government has committed over $400 million to support landlords and

tenants, both commercial and residential, impacted by the COVID-19 disaster.

Initiatives include up to $400 million in land tax relief for eligible landlords, which must be

passed onto tenants, and a crisis payment of $500 per week for up to four weeks in rent

relief for residential tenants who are homeless, or at imminent risk of becoming homeless

and have exhausted other options.

Temporary legislative changes will be made to protect eligible tenants, including eviction

moratoriums and rent freezes. Landlords, tenants and banks, which are also offering

concessions to landlords, should continue to engage in constructive discussions around

appropriate rental arrangements for those impacted by COVID-19.

$400 million land tax relief

Eligible landowners can apply for up to three months waiver and three months deferral of

land tax if either of the following circumstances apply.

1. You are a landowner who leases all or part of a property to one or more tenants and all the

following apply:

the ability of one or more tenants to pay their normal rent is affected by the COVID-

19 pandemic;

you will provide rent relief to the affected tenant(s) of an amount at least

commensurate with the land tax relief; and

you will comply with the leasing principles even if the relevant lease is not regulated.

2. You are a landowner and all the following apply:

all or part of your property is available for lease;

your ability to secure a tenant(s) has been affected by the COVID-19 pandemic;

you require relief to meet your financial obligations; and

you will comply with the leasing principles even if the relevant lease is not regulated.

Leasing principles

To be eligible for land tax relief, a landowner must commit to comply with the principles set

out below. These principles will also be introduced into Queensland law.

If you are a residential landowner, the principles are as follows:

You will negotiate in good faith with your tenant to seek a mutually agreeable

resolution if their ability to pay is impacted by COVID-19;

You will not evict your tenant if they are in financial distress and unable to meet their

commitments due to the impact of COVID-19;

You will not end a tenancy for any reason other than on an approved ground; this

does not include the tenant’s inability to pay rent or the end of a fixed term lease;

You will not charge break lease fees for tenants who need to end a fixed term tenancy

early due to the financial, health or personal safety impacts of COVID-19; and

You will allow a tenant to refuse entry for non- essential reasons, including routine

repairs and inspections, particularly if a member of the household has a higher risk

profile if exposed to COVID-19.

If you are a commercial landowner, the principles are as follows:

You will negotiate in good faith with your tenant to seek a mutually agreeable

resolution if their ability to pay is impacted by COVID-19;

You will not evict your tenant if they are in financial distress and unable to meet their

commitments due to the impact of COVID-19;

You will not increase rent, except where rent is linked to increased turnover;

You will not penalise a tenant who stops trading or reduces opening hours;

You will not charge any interest on unpaid or deferred rent; and

You will not make a claim on a bank guarantee or security deposit for non-payment of

rent.

In addition to these principles, the Prime Minister announced a mandatory code of conduct

for small and medium enterprise commercial tenancies on 7 April 2020. The Palaszczuk

Government will consult with stakeholders on the development of systems and

implementation of the code in Queensland.

Compliance with this code is not a requirement to receive land tax relief, but landowners

with small and medium enterprise commercial tenancies are advised to familiarise

themselves with the code. Visit www.australia.gov.au for further information.

Here is an example of commercial property for lease in Lawton.

Ex: Industrial Warehouse for Lease/Rent in Lawnton, QLD

Property Description

- 158m2 total space

- Classic industrial or storage unit

- Tilt panel construction

- 140m2 warehouse space

- Air conditioned office

- 18m2 office area

- 18m2 mezzanine over office

- Modern complex

- Private amenities

- Large private kitchenette

- Cooktop, fridge, washing machine, dishwasher + storage included

- Disabled toilet (including shower)

- Good internal racking height

- Clear internal height 7.2m-8.1m

- High bay lighting

- 3 phase power

- Natural light in warehouse

- Roller door access

- Electric roller door

- Personnel entry door

- Light industry zoning

- Awnings over roller doors

- Ample onsite parking

- Easy parking in complex

- Pole sign in complex

- Strategic Northside location

- Moreton Bay Regional council is the second fastest growing area in Australia

For more information, you can visit here:

https://www.commercialproperty2sell.com.au/details/m-industrial-unit-with-office-84653.php

Relief for commercial tenants

Any land tax relief provided to commercial landlords must be passed onto eligible tenants.

The State Government is providing a range of support packages to businesses affected by

COVID-19. These should be considered alongside support being provided by the Federal

Government and private sector service providers including banks and utility companies.

Conclusion

All these strategies pay the biggest dividends during these times of crises. Remember that

profit in real estate is made at the time of buying and not selling. Historically, returns have

been highest when purchases have been made prudently at times of distress and fear. You

should be looking at various opportunities which you had lost earlier by not giving-in to

seller’s demand for high prices which you are expecting to come back cheaper now.

Successful real estate investing is about identifying asset and pricing cycles, and crystallising

the right investment thesis at the right point in the cycle.

References:

How covid-19 will impact realty sector| livemint. Retrieved from 15 May, 2020

https://www.livemint.com/money/personal-finance/how-covid-19-will-impact-realty-sector-

11586103020336.html

Australian commercial property market sentiment falls in Q1 2020| creherald. Retrieved from

15 May, 2020

https://www.creherald.com/nab-australian-commercial-property-market-sentiment-falls-in-

q1-2020/

Property values fall slightly in parts of Queensland in April but steady overall| abc.net.au.

Retrieved from 15 May, 2020

https://www.abc.net.au/news/2020-05-02/regional-qld-property-values-april-

2020/12197928

Relief for commercial tenants| business.gov.au. Retrieved from 15 May, 2020

https://www.business.gov.au/Risk-management/Emergency-management/Coronavirus-

information-and-support-for-business/Relief-for-commercial-tenancies

Support for landlords and tenants| treasury.qld.gov.au. Retrieved from 15 May, 2020

https://www.treasury.qld.gov.au/programs-and-policies/covid19-package/support-for-

landlords-and-tenants/