Analysts are forecasting commercial real estate values in Australia could fall by 20 per cent. We explain what is happening in the market, and what the repercussions could be for everyday investors, and super savers.
Property values have come under renewed attention in the past week after
The gap between office property yields and bond yields has been closing and is now the smallest it has been in 15 years.To date, commercial real estate has been considered a safe and stable investment, because of assumed rental growth. In fact, it is often described as a “bond proxy”, which means that in theoryit performs similarly to government bonds in terms of reliability as an investment while offering higher returns.
“It’s quite wide at the moment – it’s between 10 and 20 per cent,” says Hillier. “So if it’s a 20 per cent spread, for example, you’re offering me 20 per cent less than what I think it’s worth. Then there’s no transaction, which is what we’re seeing a lot of currently.” “With the capitalisation approach, it’s about working out what all the net income is from that property, including all components: office, retail, carpark, storage, signage, the whole thing,” Hillier says.“And then you basically calculate that in perpetuity, if it’s a freehold property, at a selected ‘capitalisation rate’. And that’s derived from [sales in] the market,” Hillier says.
However, if property valuations are overcooked then investors potentially have a lot to lose because they may be making large investment decisions assuming a REIT, or a wholesale fund or a super fund, is performing better than it actually is. “And that’s the question. How far can these values fall? And in reality no one knows, except traditionally as interest rates increase, the value of those assets should decrease.”
“Technically, a whole portfolio may have been valued, but perhaps only around a third has been valued independently, the other two thirds aren’t. So technically [an owner] can say that they’ve valued it every year, but that’s not really the case,” says Sammut. If the covenants with their banks breach certain gearing levels, they would have to pay back the $30 million, and if they can’t afford it, they might have to sell the building.
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