Building for the future: Opportunities and challenges in residential real estate

In the second article of our new real estate and construction series, Building for the Future, our experts dive into the opportunities and challenges in residential real estate.

The state of play

Australian real estate has boomed over the course of the pandemic, with residential value growth rates hitting double digits for most regions, and national residential values rising 28.6 per cent at the peak. As a result, the industry has experienced average annual revenue growth of 1.5 per cent between 2017-22, with a high of 17.2 per cent in 2021.

Reduced supply in the early lockdown stages of the pandemic was certainly an issue for the industry but qualified buyers effectively eliminated ‘tyre kickers’. As competition for properties began to drive the prices up, only serious buyers were prepared to navigate the market as well as the restrictions to attend open inspections.

As we emerged from lockdowns, this momentum continued to build. This was combined with historically low interest rates which in turn generated an emotion-charged and highly competitive market that lent itself perfectly to auction conditions, as well as resulted in record sale prices.

Many investors have capitalised on this and sold their properties – generating sales for agents, but also contributing to a further decline in stock in an already restricted rental market and increased competition among agents to re-build dwindling rent rolls.

While industry revenue is healthy at approximately $32.2bn, revenue growth declined to 6.7 per cent this year after peaking in 2021, and is predicted to decline further, before levelling to an average of 0.6 per cent over the next five years (source: IBISWorld).

The Reserve Bank of Australia’s (RBA) cash rate increases will further limit revenue growth as residential housing loan rates increase, limiting the number of buyers in the market and their purchase budgets. Further, consumer sentiment is expected to decline over the next year which in turn will impact growth in house prices, residential housing purchases and industry revenue (source: IbisWorld Consumer Sentiment Index).

The latest CoreLogic Home Value Index shows a mixed bag around the nation with values holding up and even continuing to grow in some metro and many regional areas, but a month-on-month decline continuing in others – particularly where the market has been overpriced.

Opportunity is still abundant in the industry, particularly for the rental market and operators in the rental or leasing space. While this is still a highly competitive market, a healthy rent roll remains one of the best avenues to consistent agency revenue and to building a pipeline of potential sales clients.

The changing landscape

Australia’s regional areas are experiencing a residential real estate renaissance – outstripping value growth of the capital cities in most states when comparing July 2022 figures to the same month last year (source: CoreLogic). There are several factors contributing to this shift in demand:

  • Population growth is contributing to increased demand and limited supply for rental properties in metro areas, making regional and suburban properties more desirable and in many cases, more realistic options.
  • Improvements to regional infrastructure and decreased commute times are making once undesirable locations a more viable option.
  • The increase in working from home / remote working has opened the possibility of living greater distances from workplaces, allowing purchasers to prioritise lifestyle over proximity when deciding where to live.
  • Value for money in outer urban and regional areas is greater than metro areas, making them an appealing prospect for buyers who may have been priced out of city markets or desire more house and land for their budget.

Some of these factors are also driving the ongoing growth in non-major cities, such as Adelaide, Darwin, and Hobart, which offer better value for money and desirable lifestyles when compared to Sydney and Melbourne, for example.

The gentrification of previously undesirable suburbs will also drive-up house prices in non-metro areas but will largely be dependent on the right quantity, mix and quality of community features in the surrounding area.

However, this is a long-term expectation as the current market conditions foresee an inevitable drop of property prices in many markets, particularly those on the eastern seaboard that have been overpriced during the pandemic boom. It is important to note that prices are not expected to drop to below pre-COVID levels, nor will the drop be uniform across Australia. A drop to pre-COVID levels would involve a fall of approximately 30 per cent but most experts are predicting an average fall of 10 to 13 per cent. This would go some way towards ‘normalising’ the market and provide opportunities for those previously priced out of it, for example first home buyers, to re-enter. 

The impact of delays in the construction industry on rental stocks should not be underestimated. Tenants who are waiting on the construction of new homes would usually have vacated properties much sooner, contributing to low vacancy rates, and investors building to rent are unable to get their delayed properties into the market. These impacts may take a couple of years to ease, as the construction industry works its way through the existing pipeline of contracted builds while dealing with skills shortages and supply chain issues.

Navigating challenging times

The competition in the real estate space is high as firms compete on similar service offerings. Coupled with a rental crisis where national vacancy rates are down to 1 per cent, the lowest level in 16 years (source: SQM), and a market slowdown with reduced buyer demand, the property market is becoming an increasingly competitive space.

Real estate agents who embrace technology, and ensure they are consistently getting the basics right, are in the best position to thrive. Word of mouth is still your most valuable source of business, but in our experience, agencies that are getting good results are also doing the following:

Getting social

Engaging social media content that rings true for your target market is one of the quickest and most effective ways to reach them. Regular posts that include not only your available listings but provide content that is of value to your audience and demonstrate your knowledge are critical to profile-building. Consumers researching a product or service with the intention of purchasing are almost certainly including social media in their research resources. For some, it may be the primary or only source of research. If you’re not active on socials or your posts are intermittent and unengaging, you’re out of contention before the race has even started.

Leverage your database

Investment in technology is increasingly crucial for any business, but in a highly competitive industry such as real estate, it can give you a critical edge. Agencies employing state of the art database systems with AI capabilities are consistently performing well, targeting clients and contacts at crucial times – often before they even know they’re looking for services themselves. An example is the use of AI to identify clients who have entered the ‘turnover window’ and may be ready to sell – having owned their property for seven to ten years. This may trigger a reminder for an agent to touch base, an automated email program, or both – depending on the client and your approach.  

Know your market and nail the basics

Customers prefer to work with real estate firms and operators in the locale or suburb that they are interested in. Likewise, sellers will also look for agents who understand their area and are experienced in selling nearby properties. Agents know this, and those who are successful know their region and make sure they are doing the basics consistently and well. Signboards, letter drops, making calls and offering appraisals are all essential – as is putting the effort into building good relationships, getting in front of people regularly and offering an outstanding client experience.

Questions? Contact us for more information

BDO’s Real Estate and Construction team can prepare your real estate business for what's next - through consulting, tax, and advisory services. For more information, please get in touch with our team.