Real estate has been estimated to represent 40- 50 percent of the world’s total economic wealth. It is also viewed as an important symbol of strength, stability and independence. Real estate is the single largest component of wealth in a society Because of the magnitude it plays a key role in shaping the economic condition of individuals, families and firms.
Real Estate Market
Real estate market is a group of people or companies that are in contact with one another for the purpose of conducting real estate transactions. Generally, the actions of market participants are prompted by their expectations about the use or uses of property and the benefits it will afford its users. To identify a specific real estate market, it is important to investigate the customer base that is the most probable users. This would require investigating on population, employment, and income and activity pattern. In case of residential properties, the important issues are profile of the property owners or tenants. For commercial property markets data are segmented according to the likely users of the space. On retail market the clientele that prospective tenants will draw represents the customer base and for office market the customer base reflects the space needs of prospective companies leasing office space.
Real Estate Demand
Demand reflects the needs, material desires, purchasing power and preferences of consumers. Under the current situation we will focus on only certain important factors such as income level, employment and unemployment and financial considerations such as savings levels and lending requirement, interest rates on mortgages and loan to value ratios. For retail market the significant factors are per capita and household income, percentage of household income spent on retail purchases and percentage of disposable income, rates of sales retention in the trade areas, required volume of sales for a retail facility to operate profitably and existing sales volume. For office space the market is created by use of office space and estimated future staffing needs
In the real estate sector over a short period of time the supply of real estate is relatively fixed, and the prices are responsive to demand. If the demand is high, prices and rentals will start to rise before new construction can begin. The completion of a building may delay considerably behind in relation to demand. Thus, disequilibrium characterize markets over the short term. The supply of and demand for real estate move toward equilibrium over a long term but this point is seldom achieved.
The activity of real estate market is cyclical. Like the business cycle the real estate cycle is characterized by successive periods of expansion, weak, construction and trough. Real estate activity is responds to two sets of stimuli one of which operates over the long term and the other over the short term. Short -term indicators reflect only the immediate future.
Current Trend and Development
In view of the above characteristics in the real estate sector it is difficult to predict whether real estate industry and in particular commercial sector will bounce back strongly in short period after the COVID 19 is subdued. Looking at the economic conditions and phases of the real estate cycle are different in the current situation. The general view is that Covid-19 will cause a sharp shock to the global economy in the next six months followed by bounce back. It is likely that capital flows from developed countries will continue and the impact on the real estate market in other countries will generally be slow to recover.
Looking at China, where Covid-19 originated, considering the fact that this country has the World’s second-largest economy and it also has a worldwide supply chain. Limits on that supply chain impact businesses around the world. This can slow down development even further as developers will need to wait longer than usual to get the supplies necessary to build infrastructures.
In Fiji currently the most affects has been evident in the retail, hospitality and manufacturing sectors, while office properties have also been negatively affected as corporate expansion and relocation plans are on hold. On the other hand, logistics facilities supplying e-commerce retailers and third-party logistics companies likely to remain resilient in the face of increased warehousing demand for fresh food, medical supplies and the delivery of online purchases. It is also likely that foreign investors may invest on distressed properties on individual basis or forming investment platforms with others.
Many researchers believe that real estate is generally considered a safer asset class in a market downturn. In the current volatile climate, investors would be wise to act with extra prudence when locating assets and assessing valuations, particularly as cap rates could be further compressed in the coming months.
The real estate markets in Fiji look set to endure a sharp but hopefully short-lived shock as a result of the Covid-19 outbreak. As activity levels return to normal, investments into properties will present opportunities for investors, who would continue to invest in the this sector.
REALB do not have figures on commercial rentals but due to the huge drop in the tourist arrivals and tourism activities as highlighted in the Supplement to the COVID-19 Response Budget there has been slowdown in the business activity including layoffs and unemployment. As a result the level of rental market will drop simultaneously. The effect of these factors is becoming visible in the Suva City as several retail shops and restaurants are closing or scaling down their operations to reduce costs and stay afloat in the future.
How has COVID-19 affected the commercial rental sector and Real Estate sector as a whole?
It is projected that the Fijian economy will reduce by 4.3 percent this year and this decline can be much severe depending on the duration of the pandemic. The economic impact can increase if border closures by key trade partners are extended. The construction sector is expected to shrink on account of major projects halted or delayed due to the shortages of raw materials and other resources. As a result the real estate sector will remain dormant for some time.
The incentives provided under the Supplement to the COVID-19 Response Budget where all commercial banks will provide loan repayment holidays on principal and interest for up to six months for businesses and individual customers facing hardship with mortgages and servicing of loan. Having such measures will save many property owners from losing their properties due to non-payment of loans. Investors and developers are likely to suspend investments in real estate which is expected to affect labour force and other activities associated with the building industry. To mitigate the effect, stamp duty on mortgages has been reduced to support new investments in the real estate. Also, the government has introduced tax deduction for reduction of commercial rent. The tax deduction will be allowed to landlords for the reduction of commercial rent. This in my view is an incentive to the landlords to reduce the rental and save the tenants from closing down their business operations.
Fijian Government has decided to bring down the Fiji National Provident Fund contribution from eight percent to five percent which has come into an effect from April 1, 2020. The employers are also given benefits for the same period where they can pay five percent contribution from the initial rate of 10 percent. It is a win-win situation for everybody and through this, the companies will be able to retain the services of their workers instead of making them redundant or lay them off from work. Everyone has commitment towards their families, employees, employers and their clients. On the other measures, the Government in collaboration with the banks have arranged for the rearrangement of the loan repayment for those Fijians affected by the COVID-19 for the next six months.
Due to rent reduction on commercial properties many businesses would survive since this would reduce the expenses or allow them to divert the funds for other business Investigations reveals that several businesses in real estate has dropped and the agents are not very active in terms of listing the properties for sale in the newspapers. They are opting to advertise on social media to mitigate the cost.
The workers who have lost their jobs or had their working hours reduced will be assisted by the through funding and FNPF. Other arrangements have been made with lending institutions for loan repayments. The landlords of commercial buildings will receive tax deduction for reducing rental on office and retail areas. If a real estate company is paying $1000 rent and it reduced to $500 then landlord can claim tax rebate on this amount.
Real Estate sector heavily contributes towards the Fijian economy and currently is achieving high GDP. The real estate sector contribution is heavily affected by the COVID-19 pandemic. Under the prevailing situation the property prices would be stagnant for some time or might drop. Affordability is a vital factor in the real estate sector that is paying ability of the prospective property buyers becoming difficult. Many people are working on the reduced hours or even laid off therefore, it would be difficult to invest in properties in the near future. The low-income earners will be reluctant to buy or invest in housing due to job security and the financial constraints. It is likely that many lending institutions will be hesitant on lending due to the uncertainty of economic climate after the COVID-19 pandemic.
In the Economic and Fiscal Update Supplement to the Covid-19 Response Budget, the real estate sector has revised figures of $268.1 million for 2016 and $291.3 million for 2017. The provisional figures for 2018 shows $298.6 million. For last year the estimated figure stood at $300.6 million while for the year 2020 it was forecasted at $293.3 million would be contributed towards the economy, but now it is uncertain for the first four months of the year which has been affected by the COVID-19 pandemic. For 2021, the forecast is $295.3 million and expected to increase to $297.2 million the following year (2022). Under the current situation the figures forecasted would be difficult to achieve.
Real Estate Agents Licensing Board and Fiji Revenue and Customs Services have signed a Memorandum of Understanding and this would enable the two organizations to work together to deliver better, efficient and effective customer service in future.
The REALB is willing to work closely with FRCS through interaction and regular meeting on matters of common interests to boost the real sector and generate revenue. This is possible through close monitoring the activities of the real estate agents and other stakeholders linked to this sector. Also it is vital that real estate agents be given certain incentives as proposed the Government in the Supplement to the COVID-19 Response Budget.