Sometimes things happen that change the world forever.

  • The bombs that dropped on Hiroshima and Nagasaki in 1945.
  • The Covid-19 pandemic that closed the economy down in 2020.

Some believed nothing would live or grow in Hiroshima for 70 years. Similarly, analysts tell us the world will be different post-Covid. For example, the way we use and value property, especially retail property has changed forever.

 

Covid has misshapen the housing market even when the economic numbers seem dire

 

The second quarter of 2020 saw US GDP fall (on an annualised basis) by nearly a third. A wartime-like shock.

The unemployment rate climbed as high as 15%.

Yet, in one area, the property market is defying the gloom. And we’re seeing it from America to Britain to Australasia.

 

The new ‘space race’

 

Covid taught us a lot about the essentiality of property. At least certain types of property.

Many have realised the government can lock us in our homes.

Much of what you need in your home can be delivered by a contactless courier. From a logistics centre. There’s no need to go to the mall.

You can work from home. It’s not always ideal. But more home time and less office time breaks up the monotony of the commute. Eases transport congestion. And lets the world breathe.

The housing market has a new thrust.

Realtors report that buyers are looking for more space, home offices, or an extra room. They’re also looking for a pool, larger gardens, or suburban spreads outside of the city.

In the US, a surge boosted the median home price in July to $304,100. Up 8.5% from last year. And hitting a record — the first time home prices have exceeded $300,000.

America is seeing a homebuilding boom. Lennar [NYSE: LEN], the second-largest homebuilder by market cap, reported 16% more home orders in Q3 from the same quarter a year ago.

Britain and Australasia do not appear to have seen resurgent homebuilding yet. Instead, inelastic demand pushing up home prices to record levels. Exacerbating affordability problems for those at the lower end of the wealth pyramid.

 

A dangerous gilded age

 

In the 1930s, the lead-up to war, societies were nervously unequal. A small capital-owning class held most of the wealth. The majority of people had little — and less than half owned their own home.

Could we be heading there again?

Most areas of human achievement resemble a pyramid shape. Lots of people around the bottom and middle. Few at the top.

For those toward the top of the wealth pyramid, Covid provided a boon.

They could not travel abroad. Shop very much. Or wine and dine.

Meanwhile, the money kept piling up. The Fed and other central banks cranked up the quantitative easing machine. This had worked in 2009. Though pundits said it could’ve been run sooner and bigger then.

Now is the time. Interest rates have fallen to record lows.

The rich — who tend to be older — do not like to see their funds passively erode in a bank account. While the very wealthy tend toward financial assets like stocks, those further down the upper part of the pyramid like rental houses.

The wealthy are most in range of and adept at accessing the Covid money pile. As they buy more housing, property, and other assets, this brings us closer to the gilded conditions of the 1930s.

Since the GFC, rates of home ownership have fallen rapidly in the US, UK, and Australia. In New Zealand, at least one politician sees home ownership today as ‘the privilege of the wealthy’.

Covid could see a further slide in home ownership. And a concentration of housing and other assets in the hands of the wealthy.

 

 

Opportunity

 

Of course, not all property has seen the housing boost — which may be topping out.

Industrial and logistics property has showed signs of steadiness. But commercial – especially retail and office — has seen plunging values. As Covid-scared shoppers abandon physical stores. And many work from home.

Some analysts say this could be the end of the shopping mall. That Main Street is in for a permafrost.

Yet the mainstream financial media can at times mistake a shadow for a tunnel. Read some headlines, and you may think the lights are about to go off in stores, malls, and offices forever.

In our Lifetime Wealth Investor research service, we took a careful look at several property companies we felt had been oversold. Certain stock market valuations saw discounts on the book value of their properties of 40% or more. When it was clear that in the open market it would be near impossible to buy land and buildings at these sorts of discounts.

One of our portfolio positions under monitoring increased around 80% from March to September. As others investors began to realise this.

We do not see the long-run demise of Main Street, the mall, or offices.

Despite the inroads e-commerce has made, before the pandemic, it only represented 15% of retail sales in America.

Yet brick-and-mortar stores provide Americans with 17 million jobs. And pay much more tax — including property taxes.

The pandemic may have driven more people to e-commerce. But some headlines — and overselling of certain property businesses on the stock market — appears to have gone too far.

 

What the future looks like

 

Brick-and-mortar stores may still have some tailwinds.

Not only are they important to communities, humans are social creatures. They like to experience the products and services they’re buying. We saw early signs of this when lockdowns ended and people returned to malls in droves.

The biggest tailwind could come from retail and other property developers as they pivot to new market conditions. In particular, we see a new focus on developing mixed-use property. This serves to create communities where people live, work, and play. Apartments above malls. Malls which are more focused on leisure facilities, hospitality, and services such as childcare.

Pushback to the digital revolution is also coming. Conducting too much life behind screen could be the psychological equivalent of climate change.

A 2018 NCBI paper by Twenge and Campbell abstracted that ‘after 1 h/day of use, more hours of daily screen time were associated with lower psychological well-being, including less curiosity, lower self-control, more distractibility, more difficulty making friends, less emotional stability and other negative factors.’

These days, I find myself ‘Zoom fatigued’. And will avoid such meetings where I can, in favour of real life and coffee.

Not all is what it seems. Housing is moving in an unequal direction. Lack of affordability points to market failure. Market failure can be ripe for government intervention.

Perhaps many listed property companies in the retail and commercial space could offer longer-run potential for investors.

The world reverts to the mean. Things go back to normal. And we are social consumers.

Just before the outbreak, I visited Hiroshima. The city that was once said to be dead for 70 years is today a thriving, modern, and characterful place to visit. The streets were full, and so were the stores.

 

Regards,

Simon Angelo

Editor, Wealth Morning