2021: The Unexpected Is Expected

OPINION

—

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

On a recent morning in Georgetown—Washington, D.C.’s oldest neighborhood—real-estate agent Jamie Peva strode down leafy N Street, brimming with historical tidbits.

Jackie Kennedy once lived on the street, he said. So did Ben Bradlee, former executive editor of the Washington Post, along with a former Miss America and a powerful U.S. Senator. Bradlee’s widow, author Sally Quinn, and Eric Schmidt, former CEO of Google, own stately homes there.

“I’ve seen a picture of Lyndon Johnson coming out of this house,” said Peva, passing a Federal-style brick mansion. “Also, the Beatles went to a lawn party here.”

Peva, a 60-year-old agent with Washington Fine Properties, has sold Georgetown real estate for over three decades, often traversing the neighborhood by bicycle. Of the roughly 2,500 houses in the historic neighborhood, he has been involved in the sale of 460, he estimated. A self-styled historian of the neighborhood, he knows stories behind its houses and their owners going back generations.

With a knack for lively storytelling, he shares his knowledge with some 37,500 Instagram followers, who have made Peva—sporting the bow ties he has worn since boarding school—an unlikely social-media influencer. Many of his followers are locals, and most have no plans to buy or sell real estate—until they do. It is then, according to Peva, that his spirited reels bring him to mind.

“It’s the digital version of a refrigerator magnet,” he said.

After Peva’s first video in November 2023, his eponymous Instagram account sparked a 10% increase in sales volume in the first year, and another 20% the next, he estimated. “It’s been very good for business, there is no question about it,” he said.

But Peva’s posts have also made him a local celebrity. As he walked down N street, the driver of a Mercedes station wagon slowed down to honk and wave. A lady walking a large dark gray dog stopped to ask what he was filming that day (a reel about a Colonial-era bottling plant.) Peva knew the dog from walking his two springers, Jumpy and Peggy-O, in the neighborhood.

“I need to make a video about the pooches of Georgetown,” he mused.

Jamie Peva shooting an upcoming Instagram reel on a historic house on P Street in Georgetown.

A growing number of real-estate agents now use social media to sell, and some have millions of followers with reels featuring ultraluxury pads, selling tips or reality TV-style reports on their daily lives. While Peva posts about his listings—and sometimes those of other agents—he mostly focuses on Georgetown history, local businesses and community events, saying his goal is to benefit both his business and the neighborhood.

“If we don’t find something genuinely interesting and worth sharing, we won’t do it,” said Peva’s daughter, Violet Peva, a New York social-media strategist who films, edits and posts his reels. “We cover many topics, not just real-estate information.”

Peva is originally from Connecticut, but has lived in Georgetown for over 30 years, currently in a cottage-style house with a white picket fence. Over the years, Georgetown has changed. The Georgetown Set, a powerful group of Cold War-era residents whose Sunday-night potluck dinners are said to have swayed U.S. policy, has long faded away. The community is still home to high-profile Washingtonians, including a Republican senator and several cabinet members. But it increasingly also attracts technology and finance executives, according to Peva. He now routinely signs nondisclosure agreements, ensuring privacy for wealthy clients. The shift has made him rethink his marketing approach.

“For years, a big part of our Georgetown business was made up of people who maintained a low profile,” he said. Real-estate agents were similarly low-key. Today, curb appeal is more important, he said, and agents are promoting themselves more. “As this change was underfoot, I was thinking that I needed to evolve myself too,” he said.

A street of colorful row houses in Georgetown.

Though his own social-media use is mostly limited to following sailing accounts, he asked his daughter to help him post his listings online. Violet, now 26, started coming to D.C. once a month to film his reels. After an early video, on a condominium building called the Elliott, her sister Fern called her to report: “Daddy’s blowing up on Instagram,” Violet recalled. The reel got over 50,000 views. The next two each drew over 300,000. Peva’s most popular post ever, with over 838,000 views, was about the Grateful Dead playing in Georgetown. Sometimes, Peva interviews Georgetowners such as Quinn, the author, or Jamie Stachowski, the owner of a local butcher shop.

Peva’s daughter, Violet Peva, shoots, edits and posts his reels.

Peva, who majored in history in college, now spends up to two hours a day on research, usually in the morning while on his stationery bike. Online, he pores over old newspapers or the Library of Congress website, and he has a collection of articles and books—in and out of print—about Georgetown.

Companies often approach Peva for promotional posts, he said, but he turns them down, feeling that followers would lose interest in constant commercials. One exception is a recent paid post on Mount Vernon, the former home of George Washington. Peva wanted to share its history, he said, and didn’t want to lose the opportunity to another Instagrammer.

Anthony Arend, a professor at Georgetown University, has lived in his current home for 19 years without any plans to sell or buy real estate. But he follows Peva and often likes his posts.

Peva at one of his listings, a 1870s house on Prospect Street.

“He is very charismatic, he is energetic, and he obviously knows a lot about the community,” said Arend, who has referred house-hunting friends to Peva.

One of Peva’s biggest deals—the $10.5 million sale of a 19th-century Italianate mansion—came after he made two 2024 reels featuring the property. In March, he sold the longtime O Street home of Tim and Jane Matz for $5.8 million after featuring it on his Instagram. Peva had showed them the home 25 years earlier, with Violet in a baby carrier on his back.

Last year, Kate Watts, 49, a digital consultant, called Peva to sell her late father’s three-bedroom house on Q Street; her husband had seen Peva on Instagram. In an October reel, Peva praised the architecture of the house, designed by modernist Hugh Newell Jacobsen. Halfway through, he mentioned an open house the next day, ending with an upbeat: “Did I also mention this house is for sale? $3.75 million!” The reel got 27,000 views, the open house was packed, and the buyers made an offer at the list price on the same day.

Peva often travels around Georgetown by bicycle.