Asset Valuations to Feel Pain from CV1924 March 2020
The pain being felt across the property market will very quickly hit the pockets of landlords as rental payments come under pressure from business closures.
We have already seen major deals collapse, including the pubic take overs of the National Storage REIT and the Australian Unity Office Fund.
Individual asset sales have also been affected. One of the largest on market transactions at present is the sale of 50 Ann Street Brisbane with ESR and Goldman Sachs attempting to sell the asset with an Expression of Interest campaign closing last week.
ESR had hoped to sell the asset for $275m and whilst the building is fully leased to the QLD State Government and has a WALE of 4.7yrs, the risk of softening cap rates may challenge the minds of some investors. CBRE chose not to respond to our enquires about the market feedback on this campaign.
We are aware of several large offshore investment groups who have already scaled back plans to invest capital in Australia, preferring instead to wait and see how the economy responds after the virus has been dealt with whilst others will preserve their capital for other markets.
This retraction of capital is also evident in bank and non bank sectors where financing positions are being re-assessed, new loans terms are being re-cut and LVR and ICR covenants tightened.
As this behaviour is repeated across the market there will be few sources of capital for a growing list of available assets, leading to a natural softening of yields.
The triple whammy for property will then come as rents drop, incentives and vacancies increase and cap rates soften. The subsequent drop in valuations will be painful.
It is quite feasible for rents in prime markets to drop -15%, incentives to blow out to 35%+ and for cap rates to soften by >150bps as the corona virus impacts businesses across the market. For an average prime asset that would have sold last year for a 5.25% yield with an average rent of c.$900/psqm pa, the potential change in value would be -34%.
By comparison, the value of the ASX AREIT Index has fallen -40% so far since the COVID19 outbreak, with potential for further falls to come.
Australian Super and UniSuper, who price Members portfolios on a daily basis, have cut unlisted real estate valuations by -10% and -7.5% respectively in anticipation of these changes.
There is no evidence yet to support dramatic cuts in rents and cap rates, so valuers will find the June 2020 valuations difficult to prepare under the current circumstances.
The second half of 2020 will begin to paint a clearer picture as to how deep and painful the cuts will be and who will be feel the pain most with 2021 setting itself up for a new starting point for the industry.