Real estate professionals benefit from expert projections for 2023 and beyond at the Property Council of Australia’s “2023 Outlook” event

As the real estate industry struggles to recover post-COVID, it faces the extra challenges of high construction costs, labour shortages and productivity issues. Tightening economic conditions, a relentless wave of rate hikes and escalating inflation have added to the uncertainty.

The Property Council of Australia (NSW) recently brought together a panel of industry leaders in Sydney to unpack the trends, share their visions for 2023 and offer actionable advice for the future.

Here are some of our top takeaways from the event.

Despite bumps along the way, the big picture looks promising

It’s been described as the most vigorous tightening cycle in a generation, and although interest rates (and inflation) are expected to peak this year, the RBA’s hard stand on monetary policy is understandably spooking some in the sector.

According to David Harrison, CEO of Charter Hall, we’re experiencing a climate of cost-push inflation resulting from the higher prices of wages, production, and raw materials while demand for real estate and housing remains high. Supply will continue to suffer as a result of this.

As Phil Pearce, CEO of ESR Australia pointed out, additional inflationary pressures include China opening up after COVID, increased tourism and a renewed influx of overseas students after the pandemic shutdowns.

Georgina Lynch, Chair of Cbus Property emphasised that “although there have been some changes to immigration policy, there’s still both a skilled and unskilled labour shortage which is going to keep escalating for a period of time and that goes directly to the supply of stock.”

Despite the negatives, market instability can provide opportunities, and the current economic environment is no exception.

Harrison highlighted the relatively strong position of those with long-term investments in existing assets and said the demand for housing and rental increases in some areas of the market is providing a boost to investors who can take advantage of higher returns.

And although Sydney and Melbourne are struggling with getting workers back into offices, this is being balanced by rising occupancy rates in other regions and states, especially where population levels are on the rise.

An upswing in construction activity is also happening in some areas despite steeper materials costs and labour shortages. Lynch pointed out that Queensland has “a pipeline of infrastructure coming through, not only for the Olympics but also because of demographic change with people moving to the state.”

Overcoming housing affordability and lack of supply

With ongoing higher rates and high inflation, “affordability is going to be an ongoing issue unless we can think about the problem more holistically,” according to Harrison.

A lack of stock, particularly in the areas of social and affordable housing, is compounding the crisis and will also be a huge challenge going forward.

Part of the problem lies in the profusion of councils, particularly in Sydney and Melbourne, which are creating a disproportionate amount of red tape and planning roadblocks.

“We’ve got three layers of government that aren’t working together to solve the housing supply problem,” Harrison said and added that “It’s also about getting more land where people want to live. Outer suburban land banks are one thing but people still need jobs. The housing needs to be where the jobs are.”

Pearce echoed this idea and noted that we desperately need to fast-track the planning process because “Approval is taking forever and we can’t bring on stock fast enough.”

ESG takes centre stage

With carbon emissions reduction reaching a tipping point in shaping real estate and business strategies, sustainability credentials are a top priority for investors, developers, building owners, and tenants.

As Virginia Briggs, CEO of Minter Ellison says, “Boards are asking questions,” and failure to address ESG is something you avoid at your peril, as well as being a risk to ongoing funding. “If you’ve got a net zero by 2050 commitment,” she pointed out, “you have to actually demonstrate to all of the counterparties that you’re on a path to achieving those targets.”

As well, ASIC and other regulatory bodies are more actively on the lookout for greenwashing and are likely to take action against offenders.

Office workers, too, are making more demands about working in sustainable offices. As Georgina Lynch, Chair of Cbus, said, “There are benefits in challenging us as developers to think a lot more creatively about how we meet that sort of demand.”

Harrison pointed out that capital and investment funds are increasingly focused on the “s” in “ESG” and are increasingly wanting to show their investors and government that they are engaged in socially responsible investing, as well as delivering on environmental obligations.

Embracing technology is key

Future-focused real estate businesses are constantly on the lookout for technology that will help their businesses grow and become more resilient.

Will robots replace jobs? Yes, but it will most likely be the ones that were already destined for automation, Harrison believes. He added that the property industry has always welcomed change and, as history has shown, businesses will adapt.

Both Harrison and Briggs predicted that AI will be widespread and “the winners will be the ones who know how to use it properly”. For high-level work, it’s not the robots that will replace humans, it’s other, more tech-savvy individuals and businesses who know how to leverage AI to its full advantage.

“In buildings themselves, automation is becoming more and more important,” Pearce added, and technology is there “not to replace human involvement but to do more”.

Build-to-rent, multi-family and mixed-use are major opportunities

Despite the challenges posed by 2023, the property sector is committing to innovation and pivoting to take advantage of new opportunities.

One area of opportunity is in build-to-rent, multi-family and mixed-use developments which are set to take off in Australia, following the lead from mature markets for these asset classes in Europe and the US.

Although still in its infancy here, Harrison argued that the build-to-rent sector is a great opportunity for investors, offering steady returns and diversified income sources.

As well, it will be an important way to meet the high demand for rental properties and to offer tenants a richer experience with community living and a wider range of amenities at its core.

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