Renovations In A Post-COVID Market

It’s been quite a month with too many things being turned upside down in very short shrift.

I personally subscribe to the view that long-term investing is normally the best course of action for investors. The majority of clients I deal with are approaching their investment plans with the perspective that wealth will be built over the course of years (or decades), not weeks or months.

It’s with this as a foundation that I’d like to step into the world post-Coronavirus (frankly, wouldn’t we all).

While every indication is that we are in for a hard road to clear this challenge, there’s also little doubt we will eventually get there– and the return to form could be akin to Elvis circa 1968.

So when all this is said and done what can we expect our markets to look like?

Well, one way to predict what might happen in the future is to look to the past – and fortunately, my company has just completed a ready reference guide.

MCG’s 1000 Assets Report, is a rolling study of the information we collect in the course of completing depreciation schedules for our clients. The report collates a wide range of data such as building costs, property types, locational variations, owner behaviour and so on. It’s a unique and incredibly interesting collection of information that tells us plenty about property investor habits and their mindset. The study was started in 2016 and it’s revealing progressive shifts in the Australian investor landscape while also capturing ‘moment in time’ information.

One of the most compelling sections of our recent report was trends in property renovation and the way that might play out after we break through the pandemic.

Renovation results

Our recent study looked chronologically at 4000 jobs worth of data from January 2016 to December 2019 broken into 1000 job lots for comparison purposes. Some of the more revealing renovation findings included:

· There was a 63 per cent drop in the number of post-purchase renovations in QLD over the four year period.

· During the same period there was a rise in renovation spending in NSW.

· Interestingly, Victorian numbers showed there was a rise in post-purchase renovations overall, but owners were spending less on them.

The most recent 1000 jobs in the report were completed between April 2019 and December 2019 and revealed during this period:

· Almost half of all investments are renovated after purchase, with an average spend of approximately $37,500

· Owners in NSW were spending twice as much (approx. $50,500) on renovations than their counterparts in Victoria (approx. $25,000) and QLD (approx. $23,000)

So, what does that say about a market on the return once the pandemic is under control?

Well, first let’s put this in context. As an overall observation, property prices across our most traded regions – i.e. Sydney and Melbourne – swung from price contraction from 2016 to 2018 to slow recovery in 2019. This gives a backdrop on how people viewed investment throughout the study period.

When we are once again in the market recovery post-COVID-19, my expectation is you’ll see investors look to the fastest ways possible to boost their rental income so as to make up for losses during the downturn.

Based on our analysis, don’t be surprised if there is a material rise in the number of properties undergoing renovation. It would also be fair to expect that relative expenditure will increase as the market returns to form – admittedly off a low base given the abrupt way our economy was stalled.

Why? Because it is simpler to boost your rental income by improving your existing holdings than it is to buy new property in most instances. Not only because getting purchasing finance approval from a bank is more of a struggle, but also because you can get more return-per-dollar-spent if you are thoughtful about what renovations you do.

The observation is that markets with potential to rise the strongest in recovery - such as Sydney - will probably see more money spent on renovation per property than other centres, such as Brisbane.

Of course, there will be variables come into play, particularly around access to finance and the ability to quickly make up for lost economic ground, but if all else remains equal, we could be in for a strong bounce back in the property investment sector led in part by landlords looking to take on renovation work.

So if you start spotting more tradie utes in established suburbs around our major centres, you can feel a bit more confident were back on track and heading in the right direction.

Take care everyone.