Bernard Salt takes gives his view on the big trends, on a global, national and consumer level, shaping the property industry in this decade.
You’re a CEO or a divisional head charged with the responsibility of allocating funds and resources to secure the strategic direction of a national property business over the coming decade.
What are the big trends, the big forces, the bleeding obvious things that will shape the property market over the period to, say, 2020?
What does Bernard Salt think on this? Well, I’m glad you asked.
I think there are changes at the global, national and consumer level that are profoundly shaping the outlook for commercial property in Australia.
At the global level there is a structural shift towards China, as well as a concurrent weakening of the primacy of Europe and the US. Generations of over-spending by government, pandering to an increasingly ‘entitled generation’ is weakening each market’s ability to invest in productive and military infrastructure.
China, on the other hand, continues to expand its planned economy: in US dollars the Chinese economy is equivalent to just under half the US economy; in 2000 it was closer to one-third and in 1990 it was one-tenth.
Concerned about the rise of China, the Obama administration announced last year that it will station 2500 marines in Darwin. The Australian Defence Force is also reviewing its representation in the North West. It also makes sense for the US to bolster its Indian Ocean naval presence by developing some representation in Perth’s Cockburn Sound.
Put all of this together and, progressively, there will be demand for more and better transportation, accommodation and industrial infrastructure in Darwin, probably Karratha and Port Hedland, as well as in Perth’s southern suburbs over the next decade.
At a national level, concerns about the demise of Europe, and especially Greece, is sapping consumer confidence even though the fundamentals – a low unemployment rate – remain sound.
I sometimes wonder whether the Australian market isn’t spooked by what’s happening overseas. The problem with being spooked is that the process has a limited life span. The spectre of a collapsed Europe either has to materialise by, say, the end of this calendar year or I think Australian consumers will tire of being spooked and confidence will return to the retail and property markets.
At the national level, the policy lever that I think bears most directly on the property market is the level of net overseas migration.
In the 1990s this figure averaged less than 100,000 per year. In the Big Australia scenario the average is 180,000 per year. In calendar 2009 – the year Rudd made his “I believe in a Big Australia” statement – the rate was closer to 300,000.
Currently, net overseas migration is tracking at 180,000 per year.
This single, policy-dependent figure – net overseas migration – goes to the core of household formation and demand. For the balance of this decade net overseas migration must be higher than it was in the 1990s in order to grow the economy and the tax base, but it must be less than the 2009 level that caused such angst in the electorate.
My expectation is that Australia will average 180,000 net overseas migrants each year for the balance of the decade, which is in line with ABS assumptions. This means that strategic planning, infrastructure and construction-skills development in the 2010s must be at a fundamentally higher, or more intense, level than in the 1990s.
At a sectoral level, the downturn in manufacturing is likely to continue given that it is being driven by a high Australian dollar (which will remain high while China demands our resources and commodities) and by globalisation. As long as the cost of production remains an order of magnitude cheaper in China than in Australia, the manufacturing process must continue to push offshore.
This means a diminution in demand for industrial and perhaps warehouse space in the traditional manufacturing heartland of Melbourne’s north, Sydney’s west and Adelaide’s north. But it most likely also means rising demand for warehousing and logistics facilities in areas located close to key ports including Port Melbourne and Botany.
Change in consumer behaviour works in contradictory ways. On the one hand, there are predictable slow-burn trends that lead to subtle shifts in demand. The rise of 55-69 year old lifestylers looking to downsize within their local area is one example. Another might be the increasing Asian influence in housing design and fit-out (eg feng shui); or indeed the shift away from three- to four-bedroom homes in the ‘burbs.
But there are other aspects of today’s consumer behaviour that are less predictable. For example, online retailing has been possible for more than a decade and yet it seems to have reached a tipping point just over the past two years. My view is that by say 2020 perhaps as much as 15 percent of retail sales will be done online (which effectively means no net job growth in this sector over the next eight years).
The driving forces behind this trend are convenience and value for money. But this will apply to some categories more than others, for example, books, music, travel and other high-value commoditised products. However, I am less concerned about shifts in consumer behaviour with regard to ‘experiential’ fashion retail. Part of the shopping experience for women is trying things on and discussing the various ‘looks’ with a girlfriend.
And as for the effect of these behavioural changes on discount retailers, why go online to buy underwear or tee-shirts when both can be bought in a shop for $10? The problem is that a shopping centre cannot be comprised of $10 tee-shirt shops; perhaps there needs to be some strategic thinking about deals that might need to be cut to get, not just anchor tenants, but what I would call ‘frisson tenants’ into a centre.
Sometimes it’s appropriate for CEOs and divisional heads to look at the big picture and the longer term, and to think quite broadly and laterally about property and what might be in demand at the end of the decade.
Bernard Salt is a KPMG partner and an adjunct professor at Curtin University Business School; bsalt@kpmg.com.au
