Time to be positive

WITH GARETH KENT, DIRECTOR PRESTON ROWE PATERSON

In any property cycle there are opportunities. One person’s misfortune is another’s gain.

We are now 19 months into a new property cycle, and about six months into the stabilisation stage. From our peak (Q2, 2022) we have lived through a downturn of -7 per cent to -14 per cent on average since late 2023. Did you know that the long-term average house price gain over the past 42 years is 540.1 per cent? That is an average of 7.62 per cent per year.

We had some decreases in median house prices over the cooler months of winter, but the median house price movement across the region is sitting close to 0.2 per cent, with gains earlier in the year offset by the winter slowdown. The good news is we are now entering spring and already in July, listing increased by 15 per cent and participation rates across the region are slightly starting to rise. Agents have been able to adjust expectations – they cannot afford to spend time on stock listed at peak 2022 prices and will be working with vendors to be realistic. This will create greater competition and opportunities.

Our markets continue to fragment. Affordable, established inner areas, close to transport linkages, shops, schools and amenities will continue to improve. Scarcity in housing for investment and owner occupiers will not go away any time soon. Areas such as Bell Park, Hamlyn Heights and Bell Post Hill all recorded growth over the June quarter of three to four per cent. These areas, in my view, remain undervalued. Big land lots and great 1960 and 1970s homes, built to last and easy renovators.

The new estates and outer ring of Geelong are also great buying; investors and homeowners should be jumping all over established stock. Having suffered some of the largest downturn in values, these assets now represent bargains. Armstrong Creek had a median house price in Q2 2022 of $783,000 – this has decreased to $670,000, a 25 per cent drop. The area also returns average rentals of $500 per week for a standard four-bedroom home. Consider this: to buy land and build in these estates is now more expensive than buying an established house. That is a clear indication of the value in these established properties.

It has been interesting to watch the fragmentation of the commercial markets too. As the RBA cash rate increased, it was matched with an increase in the capitalisation rate (yield) – this would normally decrease the value of the assets. However, for industrial and retail property, this has been offset by increased rents, which have protected the capital values from declining too far. Sadly for retail, vacancies are now on the rise with many small businesses trying to renegotiate their leases or walking away from them. This is cyclical. These small businesses are suffering the effects of a declining economy, but the more robust businesses will emerge from the flames. In the meantime, retail properties in high-traffic locations suffering from vacancy are value buying if you have the means to hold and work through the vacancy period. In our CBD, some retail shops are now selling at or below the vacant land value. On the recovery cycle, these shops will rebound and make a great investment with a long-term view.

The industrial market is still well oversupplied, and participants should be cautious. We still have a significant advantage in the Geelong versus Melbourne values battle, so although it has been a bull market, this as a catchup period with values in industrial land to begin to stabilise over the next quarter.

Unfortunately, the commercial office market has suffered from both an increase in the capitalisation (yield) rate, and a decrease in rents. We now have more than 25,000sqm of vacant office within the Geelong CBD – nearly 5,000sqm more than pre-COVID. And if you look at all the proposed offices to be built, there is a further 42,000sqm coming. Lifestyle choice, hybrid working and a change in the way we do business has kept people out of offices and the older office buildings have suffered the most. Businesses with a return to work policy are looking for spaces that are welcoming, modern and provide amenities to encourage their workforce back. Old dank, dark offices do not fit the description. However, there is further emergence of a new office sector that may provide investors and developers some hope. “Urban Offices’’ are located where workers have easy access by either public transport or car parking, providing open, friendly environments and co-working spaces. One such building is located in Gilbert Street, Torquay, a vibrant modern office building with co-working spaces. People from all types of businesses walk from home, work alongside and collaborate with other businesses and at lunch time they all go for a surf. And there is a bar downstairs.

While there are always risks in property investment, the opportunities are there for us to embrace these current changes and look to the next phase. In so many parts of the market, it is time to invest, because the ‘’upturn’’ part of the cycle is just around the corner and following that is the “boom’’ phase. If you get in now, you can get the benefit of both.