2021: The Unexpected Is Expected

OPINION

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For savvy investors, including property and mortgage investors, the new year traditionally starts by reading bold economic and property predictions penned by favourite fund managers and economists attempting to predict what lies ahead.

If 2020 taught us anything, it was to expect the unexpected. And while 2021 will be a continuation of the emotional roller coaster ride experienced the past 12 months, the difference is that the unexpected is now the expected.

It took me over a decade to truly appreciate and understand a quote from an old economics professor: “Economic forecasting is like trying to predict tomorrow’s weather whilst taking into account how people will collectively feel on that day”. There’s a big difference between economic forecasting and commentating, and those who are bold enough to forecast are (sadly) rarely right.

Despite uncertainty, Australia continues to earn its title as the The Lucky Country via leading virus control and a stable economy. The IMF’s latest predictions claim our economy will be powering towards 5.2% GDP growth this year and 4.1% GDP in 2022, much to the envy for the rest of the world. Despite what can be seen as one of the most significant trade wars in Australia’s history, the ongoing stoush with China, our aggregate exports are steadily growing, predominately off the back of mining.

Remarkably, there’s been no government support for continuing immigration during the pandemic — which traditionally is a significant economic driver— and my mind truly boggles as to how this is playing out.

When it comes to the Australian property market, we need to remember it was less than eight months ago that the general consensus of most respected economists and property commentators was that property would fall in excess of 10% – 20%. Some banks even predicted declines of up to 30%. Today, the RBA believes house values could increase by up to 30% over the next three years (so much for expert economic commentators).

Despite the overall positive property euphoria, we must not become complacent with the apparent advent of continued unabated growth and unwittingly underestimate the ‘iceberg effect’ – because we still don’t know what else could be lurking below the surface.

Iceberg Effect

No one can be quite sure of the quantum of zombie companies still feeding off the Government’s life support which is due to abruptly end this March. Moreover, once the bank moratorium is over, banks will surely begin recovering on delinquent loans. And we are yet to see the full ramifications of both of these unfolding events.

We believe that the possible negative aspects of the aforementioned events have been significantly mitigated due to the Government’s generous support measures and swift actions enabling us to enjoy our current and favourable set of economic circumstances.

Prime Minister Scott Morrison last week announced that 90% of the jobs lost during the darkest hour of the pandemic have been clawed back — thus allowing our free markets to take over the economic recovery without further government support. Interestingly, we are now experiencing a tsunami of capital flow through our financial markets.

Despite current rhetoric, as a commercial mortgage fund manager, we need to look deeper than the high-level property headlines. For commercial mortgage funds managers to engage longterm success, they need to be consistent and disciplined in their risk and credit assessments.This ensures maximisation of capital preservation can be maintained and our investors (including SMSF trustees) can rely upon the consistency of regular stable monthly income distributions.

And so to some quick fire market insights …

Regional Property

Despite a large spike in local migration from Sydney and Melbourne to regional areas, our view has not changed on the risk in lending in regional areas. Just as quickly as the prices and demand have gone up, they can as easily revert due to an exodus of people back to the metropo areas once the COVID-19 crisis abates and the physiological desire to work face-to-face, rather than through Zoom, may once again prevail. The second reason is linked to regional areas having lower restrictions on creating new housing supply. In regional areas, undersupply of properties could turn to oversupply in a relatively short period of time as it doesn’t have the same land constrains as the metro areas of Sydney, Melbourne and Brisbane.

Commercial and Industrial

According to this week’s data, the inner-city vacancy rates are 8.6% — essentially double last quarter’s figures with the delivery of further supply expected in 2021. This was not unexpected due to the additional restrictions on both businesses and landlords as well as the weakening, but still prevailing, negative stigma of working in the city. To add insult to injury, many multi-national corporations have loosened work from home policies and are slowly giving up commercial space in the city. Despite this negative trend, we remain optimistic that this will reverse over time, however as it might take years, investors should be prudent on the gearing of investments secured against this asset class.

House v Unit

Most of the positive property headlines focus on houses prices rather than the entire residential property market, which prompts a question about price trends for units? Corelogic recently published that the difference between house and unit prices has never been wider with this gap only continuing to expand.

In saying this, there are a number of contributing factors to consider:

Most units are concentrated in close proximity to the city and highly populated areas, which proved to be less desirable during COVID-19.

Investors make up the largest segment of unit purchases as they favour apartments over houses, due to ease of management and cost. Property Investment activity is at one of the lowest levels for over 10 years.

Due to Covid-19 we’re short approximately 500,000 people who are normally short to medium term renters — a direct correlation to the lack of overseas students and tourists.

Owner-occupiers are the predominate buyers in the current market and their requirements are different to those of the investor set, that is, they want larger apartments. Due to the lack of supply of this specific product, owner-occupier buyers are turning to houses as an alternative.

The Federal Government’s current $2billion Home Builder scheme is artificially increasing demand for houses through generous incentives on offer, the take up of which has far exceeded expectations.

Despite all the odds, including decreasing demand, unit prices remain resilient. We believe that unit prices, which normally lag behind house prices, will catch up in the long term and eventually the gap will shorten.

Mortgage Investment Opportunity

Msquared Capital has identified a number of emerging gaps in the commercial lending market which has enabled us to introduce investors to unique opportunities.

Business owners who’ve been temporally impacted by COVID-19 are now requiring commercial funding and banks have been slow to adapt and are still trying to wrap their heads around how to provide businesses with the right access to cashflow during COVID-19. These business operators typically have quality real estate to offer as security and this creates a specific opportunity for our investors right now.

With the RBA recently making a strong public commitment that interest rates will remain unchanged until 2024, both business and consumer confidence around obtaining appropriate finance is high. On the flip side, those investors who have historically relied upon bank term deposits to provide them with a good regular income stream are losing out with TD rates hovering around a meagre 0.75%pa.. Accordingly, it’s a great time for those investors to look at alternate investments, including a registered first mortgage loan to a small business borrower (with target rates of return currently between 6.50%p.a. and 8.00% p.a).

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

msqcapital.com

Greenwich, Connecticut, is in New England (just barely), but that doesn’t mean it’s a quaint, sleepy small town with covered bridges and white churches on the green.

It’s leafy, certainly, but it’s also a luxury-minded power centre close to New York City, with many celebrity residents (director Ron Howard, singer Diana Ross, actor Meryl Streep and, at one time, Australia’s own Mel Gibson).

The main shopping street, Greenwich Avenue, is home to brand stores such as Hermès, Kate Spade, Saks Fifth Avenue, and Tiffany & Co.

And Greenwich, particularly in the “back country” north of the Merritt Parkway, is host to some of the most exclusive real estate in the world.

The average price for a single-family home in the second quarter of 2025 was USD $3.25 million (AUD $4.9 million). But that’s merely an entry point, buying a smaller home in one of the town’s less desirable neighbourhoods.

What does USD $43 million (AUD $66 million) buy in Greenwich?

Last autumn’s most expensive listing offered a 1,068-square-metre waterfront home with eight bedrooms and 11 bathrooms, plus “Gatsby-like lawns”, a gym, games room, party room, wine cellar, fruit orchard, pool and spa. The front and side porches have heated floors.

Prefer something more traditional and secluded? For USD $33 million (AUD $50 million), buyers could close on an 11,760-square-metre Georgian manor on 3.2 hectares, featuring eight fireplaces, an elevator, and a dumbwaiter.

The first floor features a three-storey cascading chandelier. For bibliophiles, there’s a two-storey mahogany library. If bocce is more your pace, a similar USD $25 million compound on 7.5 hectares, built for a liquor magnate in 2009, may appeal. Fourteen bathrooms should suffice.

The Greenwich market is strong, but not without challenges.

“The big problem is that there’s no inventory,” said Evangela Brock, an agent with Douglas Elliman. “It’s extremely low at all price points.”

In November, just 15 properties under USD $1 million (AUD $1.52 million) were listed without contracts, compared with 23 above USD $10 million (AUD $15.2 million). Of those, six had contracts pending. Greenwich has more than 17,000 single-family homes.

Kanebridge Quarterly toured two mid-priced houses in Greenwich. “You don’t lose money in Greenwich real estate,” said Beth MacGillivray, a realtor with the Higgins Group. “This is the hot spot.”

MacGillivray opened the door to a 733.9-square-metre Georgian colonial in the Sherwood Farms Association development her family built in 2005. The house was expected to sell for about USD $5 million (AUD $7,743,535).

The six-bedroom, four-level house is move-in ready, with staged furniture showing its potential and many of the amenities that buyers in this range expect.

Visitors enter through a two-storey foyer with a marble floor. A circular staircase leads to an airy living room with double-height ceilings.

There’s a main bedroom with his-and-hers bathrooms, a cherry-panelled library with cigar-smoke venting, five fireplaces, and a state-of-the-art kitchen with a breakfast nook by Greenwich-based designer Christopher Peacock.

Most rooms have huge walk-in wardrobes. Even the laundry room has granite countertops. Custom millwork, cabinetry and fixtures are evident throughout.

The drawbacks? A smaller yard and no pool. Still, refugees from the city would marvel at the abundant interior space.

Not far away, an entirely different house was on the market for USD $2.66 million.

The imposing 696.7-square-metre, nine-bedroom, seven-bath Georgian/Federal home on Shady Lane in the Glenville neighbourhood was built in 1900. Its good bones and inherent grandeur were apparent, as was a clear need for updating.

“It’s a good project for someone,” said realtor Kaori Higgins. “It needs the right buyer, someone who is looking to return it to its stately original condition.”

Given the hot market, some buyers may be tempted to tear it down and build anew.

But the house is filled with charming period details, including hand-built stone fireplaces, reading nooks, pocket doors, leaded windows and beautiful original millwork.

The second floor offers a vast veranda with views of Long Island Sound and a built-in swimming pool.

The drawbacks? Bathrooms that were awkwardly redesigned in the 1970s, unsightly flooring on the upper levels, and crumbling exterior elements.

Higgins noted that a nearby sister property, fully renovated, sold for USD $11 million (AUD $17 million). Any buyer of Shady Lane’s faded elegance would need both imagination and deep pockets.

For contrast, Kanebridge Quarterly left Greenwich for nearby Fairfield’s upscale Greenfield Hill neighbourhood to visit Lion’s Gate, a 595 square metre Tudor Revival home built as a modest dwelling in the 1920s but extensively expanded and remodelled in 2000.

With three acres of land, a guest cottage, an artist’s studio and a pool house, the asking price is USD $3.3 million (AUD $5 million). Like the Sherwood home, Lion’s Gate is flawlessly move-in ready, with designer touches throughout.

The entire second floor was added during the renovation and features parquet flooring, a massive main suite, arched doorways and 2.74-metre ceilings.

Many rooms include walk-in wardrobes, extensive carved millwork and built-ins. The wood-panelled library (on the site of the former stable) is warm and inviting.

The expansive kitchen includes a window seat with a hand-painted ceiling, a wine cooler and a butler’s pantry.

Realtor Lorelei Atwood said Fairfield faces the same inventory shortage as Greenwich.

“Demand is growing as more New York-based executives are being told they have to report to the office,” she said. “Fairfield has always been a commuter town.”

Why is this home USD $3.3 million (AUD $5 million), and the Sherwood property around USD $5 million (AUD $7,743,535)?

Location. Greenfield Hill is lovely, but Greenwich real estate occupies a rarefied class of its own.

Note: Thanks to realtor Sherri Steeneck for chaperoning.

This story appeared in the Autumn issue of Kanebridge Quarterly, which you can buy here.