2024 Story So Far…

Investors remain cautious about the commercial office sector, where transaction volumes are low, making it difficult to gauge true market values. Owners, largely unaffected by the need for revaluations for refinancing, are holding onto their properties despite substantial vacancies and market prices roughly 20% below peak COVID-19 levels.

From my perspective, current market conditions are less volatile than the post-GFC period of 2008-2011. Owners and decision-makers in commercial properties are either inactive or cautiously exploring sales, generally unsatisfied with the offers from active buyers. The Non Bank Lending Sector is having a huge impact on the more stable nature of the current commercial property market landscape and the lack of visibility provided to the market by the players within the sector make it both appealing and nerve wracking depending which side of the fence one is playing.

Some large property owners of commercial office buildings have started to divest, acting on divestment of properties with short WALES or non-core locations. Whilst not highly liquid, transactions have occurred in Brisbane, and a few in Sydney with less in Melbourne. There has been widespread press about some assets trading at 20-30% below book value however based on my analysis and the prices paid this raises questions about the accuracy of book values at the time of sale (and more so retrospectively) and screams out the need for further and ongoing investor vigilance.

Sellers:

The market has seen scattered sales, primarily forced by financial needs or fund structuring. Claims of widespread asset sell-offs are inaccurate. As noted in our last edition, disciplined major institutions have managed their gearing well, which has prevented a significant market downturn and allowed for strategic asset sales. There have been a few good buys occur however to analyse those prices paid for specific assets as being ‘market’ would be incorrect.

Where developers for example are selling income producing assets it is likely that it’s for reasons, they see to deploy capital into development opportunities and drive better returns over the next five years than simply sitting on an asset whereby they are collecting rent (I.E Cedar Woods & Williams Landing). Other assets that have been appealing to buyers have been situations where an owner of that asset (often a syndicate) is not willing to put further capital into the asset to either stabilise, improve or enhance and therefore have opted to meet the market and divest (I.E Brandsmart, Nunawading)

Buyers

Buyers are capable and researching, but broad improvements in buying conditions are uncertain. Sectors like Industrial, Hotels, and strong Retail Shopping Centres continue to perform well. Pricing in these sectors is more affected by rising debt costs than by fundamental market weaknesses which could make them of more appeal in the medium term.

Remainder of 2024 Outlook

I don’t foresee a surge in market activity soon. Capital available for commercial property is becoming more selective, which may limit transaction volumes. While emerging Japanese investment at the cycle’s end is intriguing, the presence of Mainland Chinese buyers is overstated, with many being local investors of Chinese descent who’ve been here since between 2009 and 2017.

We may see an uptick of properties publicly come to the market in the office sector, look out for further LFR assets to come to market that are not in a position to benefit form much rental growth but that need refinancing at a higher cost than previous finance arrangements.

Conclusion

Transaction volumes will likely remain subdued. Current property owners are not under significant financial pressure, and developers face challenges due to regulatory changes. For those waiting for a market collapse, it appears unlikely. The most successful buyers will be those ready to invest significantly in repositioning assets. Assets that are of a passive nature will find it difficult to provide potential buyers with much of a growth story as many assets, especially those that have been managed by better asset managers over the past 15 years will have experienced very high rental rates across the board with not much room for tenants to move. Owners of these assets may decide to divest potentially at yields in excess of 8% purely to get themselves more liquid with uncertainty likely to remain with us for at least a couple of years to come.

Best Bets

- Post-2000 built Industrial
- Healthcare
- Childcare
- Neighbourhood Shopping Centres
- Large Format Retail Centres

Worst Bets

- Small Retail
- Commercial Office
- Industrial Needing Capital Expenditure

Until next time.