Early days yet in commercial property value cycle

Company share prices may be updated every few minutes on the ASX website, but commercial property values can take years to unravel. In times of uncertainty, trading activity in commercial property, be it sales or leasing, reduces rapidly, leaving stakeholders with little evidence of where values and prices are really at.

That’s exactly what’s happening now during the period of COVID-19.

Trading activity in commercial property had just come through its most active period ever recorded, with sales over $30 billion per annum for 6 consecutive years to 2019. But preliminary data to Q2 2020, shows the calendar year a third down on sales volume, compared to the same time in the previous year.

Potential buyers are now bidding lower in the hope of acquiring assets at a reduced price, while sellers are holding while they can. It’s not clear how long this stand-off will continue, but history points to the time it can take for commercial property values to move from peak to trough.

As an example, the chart below compares the number of quarters various office sub-sectors in Australia have taken to move through a downward value cycle following the GFC, the Tech Bust of the early 2000’s and the recession of the early 1990’s. The cycle triggered by COVID-19 has only just begun.

In the absence of sufficient evidence, experienced property professionals, such as valuers, sales and leasing agents, and asset managers work together to make a quarterly quote of what key indicators and ultimately, the value, is likely to be. To do this, they use a consistent basket of properties as a guide in each submarket, any evidence which might exist and even experience from failed transactions becomes important.

Yields, rents and capital values will be monitored this way until the volume of turnover offers up sufficient market-generated evidence across the various types of commercial property and locations. It’s not perfect, but it does provide the best indication of where the market is at. 

History suggests this is a conservative approach and it tends to stretch the downward cycle longer by increments, rather than produce large declines in a short period. Every cycle is different but this one is highly unpredictable in magnitude and length, further supporting a conservative, incremental approach.

We’ll continue to keep you up-to-date through the Observations as more quotes are made on values through this cycle, as activity exposes more evidence and the outlook becomes clearer.

Source: CommbankBrokers