You should all now be getting a sense that the world that we know is about to change. A Revolution is underway and it is being driven by a myriad of “dreamers” who see no limits to where the World can go. Examples include autonomous vehicles, electric motors, digitisation and Artificial Intelligence. But here’s the rub. Many leaders of commercial enterprises have got their heads in the sand in the hope that the challenges to come will be solved by someone else. Before they know it, the tide will go out and they will be caught swimming naked. Again.
The UK has legislated that by 2040 all vehicles will be powered by electric motors. But Norway have legislated the same thing to occur by 2025. The Volvo Motor Company has already announced that they will only be producing electric/hybrid motored vehicles from the start of 2019. You would hardly think that they would be doing it to lose market share and go broke. The message is clear that change is going to occur much quicker than people think.
Let’s look at an example that will impact on our real estate industry. In any process that requires matching of data currently done by humans can now be done quicker, more accurately and at a significantly lower price by Artificial Intelligence (AI). The National Australia Bank (NAB) is the forerunner in the use of AI in its back-office work associated with loan approvals. NAB is shedding a net 4000 staff over the next 4 years as they take on 2000 highly qualified AI experts and be rid of 6000 back office workers and managers. An application now available to Banks has reduced the loan approval time from 22 days to 28 minutes. NAB has captured the benefits of AI with a significant reduction in costs (labour) and a superior service to the customer. Other users of AI must include insurance companies with claims and you cannot exclude real estate agents in matching off the interests of buyers and sellers.
a significant reduction in costs (labour) and a superior service to the customer
The invention of the electric motor has tentacles that will stretch into every realm of our daily life, covering the environment and economics and if you add in autonomous motor vehicles then you are talking about a serious dose of disruption. The environment will benefit from less noise and carbon emissions and the economics of running a vehicle will be safer and less costly. More broadly, however, the advent of the electric motor will dramatically cut demand for oil production and carbon emitting petrols. The subsequent drop in the price of a barrel of oil will have deflationary effects on the unit cost of production wherever it is currently used. The deflationary effect could see interest rates go to zero.
the deflationary effect could see interest rates go to zero
This Revolution will reduce the unit cost of production in the most effective way by reducing labour inputs by the use of AI. In addition, full-time work contracts will be substituted by casual contracts so that the average working week will reduce from 35 hours to 25 hours. This will mean that workers cannot register as being unemployed but will be underemployed. If your salary is reduced by 40% then you will only be earning a subsistence salary. Goodbye to discretionary spending.
workers cannot register as being unemployed but will be underemployed
This Revolution will bring about a change in the way that we undertake contemporary tasks at home. Let’s have a “Jules Verne” moment. You’re at home and you’ve decided to have McDonalds for dinner so you call up the app on your i-phone and order. You track the delivery and when it is 2 minutes away you set the table, take delivery, serve the food and eat. Unbeknown to you, McDonalds have set up a several large kitchen facilities throughout the suburbs putting an end to the high cost, high exposure main road outlets. The delivery was via an autonomous delivery vehicle (ADV) which has no human input costs.
With the explosion of the Amazon effect in online retailing, the future of the Shopping Mall is doomed and so too an investment in a McDonalds outlet in a local shopping centre.
Until the ADV becomes the accepted norm, there will be plenty of “fill-in” jobs via Uber for deliveries of people, food and merchandise which will at least reinstate some of the hours lost in the Revolution.
The summary of my contemplations are defined as follows. AI will significantly reduce the cost and improve the efficiency of functions that involve matching of data. The electric motor will reduce emissions and the cost of oil through less demand. Both of these elements of the Revolution will see a significant change even by 2020. Both of these elements have a deflationary effect in the economy through the lower cost of production and that will keep downward pressure on interest rates. Certain elements of real estate will lose favour, particularly as it relates to food and merchandise outlets. The local petrol station’s future is doomed. If you own one, sell it, immediately. All apartment buildings will be fitted with electric motor charging bays. With Uber and car sharing becoming a more accepted mode of transport, the ratio of car parks per apartment will reduce. Autonomous buses running at double the current frequency will become cheaper and the preferred method of transport for a lot of suburban dwellers. More buses mean less cars on the road.
The world is going to be a very different place. Bring on 2025.
IT’S BEEN A GOOD YEAR
As we bring 2017 to a close, we can report that we set new milestones in the history of Jackman & Treloar. This year we celebrated our 116th year and we are now the oldest operating real estate agency in Adelaide. This year we recorded the highest priced property sold in our history. The property is situated at 142-144 Fullarton Road, Rose Park on the corner of Watson Avenue and occupied by Gerard Private. Peter O’Neil from our office was retained by his client, Weber, to find a suitable site to develop a new office. We approached GP as their building seemed to tick most of the boxes and after 3 ½ months of negotiations, a deal was struck at $18m. On a personal note, I achieved sales of $5.6m in 5 contracts in one week during the month of August. At my age, I should not be doing things like that but I love it.
after 3 ½ months of negotiations, a deal was struck at $18m
Our greatest success, however, has been in the upgrading of units and flats from our Rent Roll. We have completed 15 this year and the market has confirmed our formula. And that is:
2 X Upgrade Cost + Pre-upgrade Valuation = Sale Price
Example – A 2 bedroom unit in Glenunga
2 X $19,400 + $380,000 = $418,800
We actually sold it for $426,000.
If you are upgrading but not selling then you can add 10% to the market rental and lease it in half the normal time. Winners all round.
Apart from the rental market that is still doing it tough due to a serious lack of demand from a depleted workforce, the residential market in Adelaide is starting to show signs of recovery. The best supported sectors at the moment are the second-time home buyer seeking 3-4 bedroom homes in the price range of $600,000-$950,000. This is always the most reliable, hard core element of the market, however, we have achieved prices this year that in some instances are 10% above my valuations which shows an expression of anxiety in a market that is undersupplied. Character cottages near to the centre of the City are in demand due to the completion of infrastructure projects including the Adelaide Oval, nRAH and the streetside cafes etc. A neglected sector of the market is the home units/flats and apartments in the lower price brackets. In the last decade, there has been less than 10% growth in this sector. The old saying of buying your straw hats in the winter time will once again prove to be a good way of making some money. I see a major pickup in this sector before 2020. With mortgage rates remaining at sub 4%, and all of the bad news in this State now behind us (except TAFE), I feel confident that we can see our way clear for a better real estate market in 2018 and beyond. I declare the end of the second lost decade since 1989.
I declare the end of the second lost decade since 1989
For those of you who couldn’t attend our Christmas drinks (the 30th in succession) I want to thank you sincerely for your support and loyalty to Jackman & Treloar throughout the past 12 months. All of the staff have worked diligently to produce the best outcomes in what has been a challenging year. We look forward to continuing our relationship in the future and remember the invitation is always there that if you want to discuss matters relating to real estate then Trevor Dunsford has a very ready ear.
Merry Christmas & Happy New Year to you all!