Property - a barometer for your business
The property industry impacts most businesses in some way. David Butcher discusses how to make it work for you.
An understanding of the property industry can provide valuable insight into micro- and macro-economic conditions that may affect your business.
Economic indicators such as GDP often take an economics degree to understand, but the property market provides a tangible economic roadmap that can be easier to understand. New building construction, old buildings being refurbished, and real estate placards are all valuable economic indicators.
The importance of the property industry can be seen in its role in the overall Australian economy. Building and construction alone accounts for around 6% of GDP and almost 8% of Australia's total employment.
However, the property industry is more than simply construction. By its very nature, it generates economic activity in a host of other businesses and services – architects, quantity surveyors, finance, interior design, telecommunications, transport, maintenance, entertainment, office supplies, groceries, restaurants and, of course, real estate agents.
A booming industry
Real estate services are a good example of the economic flow-on effect from building and construction activities. In the most recent Australian Bureau of Statistics survey of real estate services between June 1999 and June 2003, the number of real estate businesses increased by over 30% and the number of employees by more than 46%.
This dramatic growth was in response to a period of rapidly rising property values, relatively low interest rates, and increased construction activity. The income generated by real estate services in 2003 was over $7.5 billion.
The property industry offers a reliable guide to the economy on a national, regional and even suburban basis. So how can you use the property industry to help your business? There are three important points you should keep in mind.
Indicators for your business
The first is that the property industry represents a number of sectors of the economy such as commercial, office, retail, industrial, hotel and tourism, and residential. Economic conditions may not affect all these sectors at the same time. For instance, after the September 11 terrorist attacks, hotel and tourism development collapsed, whereas the commercial sector grew. Similarly, the commercial sector is currently more buoyant than domestic retail property.
Secondly, property – particularly construction activity – is very sensitive to fluctuations in interest rates and consumer or business confidence. Rather than reacting to the doom and gloom of media reports of interest rate increases, take note of published construction activity and vacancy rate figures.
Construction activity will respond relatively quickly to interest rate fluctuations and is a good test of the impact of interest rates on affordability. The rapid growth of real estate agents during the property boom period is a good example of this. Interest rates are currently at low levels, and if there is another rate increase over the coming months as some economists are predicting, it may have little impact on your business. Keep in mind that the Reserve Bank also watches the property industry closely as a barometer of economic activity.
Thirdly, property development generally follows demographic and economic trends. For example, the recent surge in inner city residential developments and suburban office complexes is not accidental. While property developers have been known to make mistakes, the huge capital cost involved in construction is generally based on meeting changing social and business trends.
An understanding of what the property industry is doing, and why it is doing it, could save your business a lot of time and expense, and open additional opportunities for expansion.
David Butcher is former chief executive of the Financial Planning Association of Australia and now runs his own property consultancy.