The Valuers' View - Office
A survey of m3property Valuers
The Valuer’s View
In times of uncertainty where transactions are limited and new trends establishing, industry participants place even more reliance on Valuers to provide market guidance.
To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current state of the property markets and where they expect those markets to head over the next 12 months.
This series of papers starts with the Australian Office market and will examine each of the major property sectors to provide an informed opinion on the markets.
Key Office Sector Insights
- Yield softening is expected in late 2020/early 2021 as transaction activity re-commences in a weaker growth environment.
- The spread between prime and secondary yields is expected to widen as risk is re-priced.
- Expect minor movement in face rents, with stronger movement in incentives.
Value Comparison by Sector
Stages of the COVID-19 recession
The COVID-19 crisis is likely to have three distinct stages:
“Expect the yield spread between prime and secondary to widen as risk is re-priced.”
- Yield softening will become more apparent in late 2020 and the first half of 2021 as transaction activity re-commences in a weaker growth environment. Expect the yield spread between prime and secondary assets to widen as risk is re-priced.
- Prime property does not often come onto the market and therefore demand, locally and internationally, for these assets, is likely to be maintained. Yields on property with secure cash flows are likely to hold. Lower quality prime assets with weaker cash flows may see a softening of 25bp or more over the next year.
- Short-term, Brisbane and Melbourne yields could soften by slightly more than other markets. The only prime transaction in Melbourne since the start of COVID-19 conditions, Rialto, indicated a 14bp softening in equated market yield. Prime assets in Melbourne are, therefore, reflecting a 10-20bp softening in valuations at current.
- Office buildings with a higher proportion of SMEs are considered to be at elevated risk.
- Secondary sales have been minimal, we consider a 50bp softening realistic at this point. Assets in secondary locations with high vacancy may soften by over 100bp.
- The majority of Valuers indicated stable prime IRRs at current, however, the risk is on the downside.
- The range of responses for movement in secondary IRRs is wide with stabilisation to a 100bp softening indicated. This range is likely to reflect the wide scope of secondary stock across the markets.
- Secondary assets will see upward movement in the terminal yield, which affects 30-40% of the cash flow. The risk will be mitigated by cash flow allowances, such as lower rent growth rates, higher leasing incentives and longer letting up periods.
- Rent risks are also on the downside with some Valuers predicting a reduction in face rents. Secondary buildings are likely to see larger face rent decline.
- Overall, the Valuers expect incentives to be adjusted more than face rents resulting in effective rent decline.
- Incentives are rising across most markets.
- With office markets factors that could come into play include:
- return to work changes to office layouts to accommodate staff safely;
- vacancy levels due to the loss of some businesses and increasing sublease space;
- likely backfill space created by pre-COVID-19 projects reaching completion; and
- impact of delayed developments in a time of decreasing demand.
- Higher vacancy levels and longer downtimes will result in incentives increasing.
- Prime assets with strong income security are likely to maintain their value.
- Secondary values are expected to decrease moderately. Assets with poor tenant profiles and in secondary locations are likely to experience larger declines in value.