What impact will Melbourne's Retail Lockdown have on Commercial Property?

The Stage 4 lockdown has been in place in Melbourne since 2 August and it is planned to last for six weeks. Restaurants and cafes can only trade for takeaways and deliveries, and general retail stores are closed. Essential retail such as grocery stores, pharmacies, petrol station, etc, remain open. These restrictions have been implemented after cases of Covid-19 remained stubbornly high in the greater Melbourne area along with concern about increasing case numbers in regional areas. We discuss the impact this will have on commercial investments with The University of Queensland Business School’s Frank Finn Professor of Finance in the Department of Finance, Shaun Bond. 

Q. How will Melbourne’s retail lockdown affect other states? 

A. The impact of Melbourne’s retail shutdown will present additional challenges to many struggling local and national retailers. Where possible, businesses are moving to boost online sales although by doing this they are competing directly with established internet giants like Amazon and Aliexpress. The impact on supply chains by the Melbourne shut down are limited for now. However, supply chain risk may increase if the shutdown is prolonged and more businesses are forced to close. 

The most pressing impact on other states is through the border closures and quarantine requirements that limit the movement of people into and out of the state. Sydney is likely to feel the immediate impact of these restrictions along with major winter tourist destinations, particularly in Queensland. 

Q. What is the wider impact on commercial property as a whole? 

A. Investors and bankers are watching the commercial market closely and will be assessing which properties and clients to support through this downturn. The shutdown is yet another hurdle for investors and developers in the retail sector on top of the long-term sectoral challenges they faced with the trend towards internet shopping. While hospitality had been a recent bright spot for investors, the Covid crisis has sharply exposed the risks of this segment. Good retail locations will survive this crisis but secondary locations will take a long time to recover, if at all. The benefits of a strong tenant and a focus on grocery and other essential retailing is now more important than ever. 

What’s been bad news for retail has been a boon for the logistics market. The current crisis has reinforced the importance of internet retailing and will only hasten the demise of many traditional retailers while boosting demand for distribution facilities. It may even make sense for some failing retail locations to convert to logistics to support ‘last mile’ delivery. 

In my view, the demise of the office has been greatly exaggerated. Only time will tell how lasting the working from home trend becomes and whether this is a significant threat for the office sector. Yes, workers are likely to demand more flexibility when it comes to working remotely and office design trends will need to respond to the lessons from this crisis. Some reduction in demand may be offset by companies increasing the space allowance per worker. It is also possible that demand may decline in CBD locations if there is a long-term shift in preferences towards smaller offices in suburban or regional locations.  

Q. Will this sector recover quickly post lockdown? 

A. Current evidence suggests that any economic recovery will be fragile until a vaccine or other medical solution is found to Covid-19. Most commentators anticipate that we will be well into 2021 before we see any significant developments in this area. Well-targeted government support for businesses and households to remain solvent until this time is essential to hasten the subsequent recovery. A worst-case scenario for investors is that an effective vaccine remains elusive and we have to live with restrictions and various forms of lockdown over the next few years.   

Q. How can investors mitigate their portfolio risk during this time and moving forward?

A. In this environment asset management is key. Investors need to carefully assess their property in light of changed market conditions. Does it make sense to work to keep an existing tenant in place? And realistically, if you do lose your tenant how likely is it that you can find another in the current market? If you are faced with a vacancy, it might make sense to improve or redevelop the property to take advantage of the upswing when it occurs. Consider if there is a higher valued use for the site. Also important is your own capital position. Is your lender prepared to support you if faced with a lengthy vacancy period and do you have the ability to access capital to make any improvements? Be realistic in these assessments, as in some cases the best course of action might be to exit the investment.

An interesting development in the US at the moment is the mall owner Simon Property Group buying up key bankrupt retail chains to keep them trading. This strategy will be watched with interest by many shopping center owners around the world to assess its impact.

Q. Can you estimate how long the impact of this retail lockdown will be felt? 

A. There is a lot of uncertainty about the path towards recovery. The Stage 4 lockdown is due to end on September 13, if the situation improves. However, any lifting of restrictions after this will be gradual.  As a result, the impact of the shutdown will continue to be felt for many more months. 

Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below displays some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.


Prof. Bond profile image About Shaun Bond
Shaun Bond is the Frank Finn Professor of Finance in the Department of Finance at The University of Queensland Business School. Shaun has research interests in the areas of real estate finance and financial economics.

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