Retail Property Valuations in a Growing Market
Prominent property investors, including global giants Blackstone and Brookfield, along with Australian leaders Charter Hall, Dexus, Mirvac, and Lendlease, are optimistic about Australia's real estate market despite a global bear market expected to last another two years.
They attribute this optimism to Australia's robust population growth and a shortage of key property sectors. Although interest rates are nearing their peak and property valuations are anticipated to decline, especially for second-tier office properties, these landlords believe they can navigate the challenges and remain resilient in the market.
Lendlease, Dexus, and Blackstone are emphasizing the importance of focusing on operating cash flow to provide value to investors, even in the face of potential declines in property valuations. Institutional investors are targeting undersupplied sectors like data centers, student accommodation, build-to-rent housing, and industrial properties known as "sheds and beds." Some experts, such as Kylie Rampa from QIC, believe that interest rates have peaked, but investors require confidence in reduced inflation before deploying more capital. Property valuations are expected to remain under pressure, with high-quality assets possibly falling by up to 5% and second-tier assets facing potential drops of 10 to 20%. In the US, valuation declines could be more substantial, with top-tier office properties possibly dropping by as much as 25%. Blackstone and others are prepared for this environment, focusing on assets that generate cash flow to create value. The industry remains divided on whether property assets still need to adjust further to account for rising discount rates, a weaker consumer environment, and evolving work habits.
Mirvac's CEO, Campbell Hanan, believes that more real estate deals are necessary to accurately assess property valuations. He emphasizes the importance of sales in cities as a basis for determining valuations but notes that challenges persist in areas with limited sales, particularly in suburban and urban fringe locations. Nikki Panagopoulos, a fund manager at Australian Unity, is closely monitoring transaction volumes in the office market, anticipating potential valuation adjustments if pricing deviates from current book values. Darren Steinberg highlights the potential pressure on investors who bought at the market's peak, suggesting the possibility of distress, although such situations have been rare in Australia over the past two decades.
Real estate industry leaders are recognizing a shift in market dynamics, with tenants gaining more influence after a decade of low-interest rates and strong rental growth for landlords. Despite this, some experts remain optimistic about property investments. Andrew Pridham sees properties still trading at discounts to their replacement value, which he considers a value anchor. He believes that high construction costs leading to lower supply will drive rent increases and property values in various sectors.
Stuart Laundy believes that pub valuations have stabilized, bringing a sense of security to the sector, even though it's not back to boom times. Vanessa Orth from Lendlease sees attractive valuations in retail properties, especially due to limited supply and population growth. Charter Hall's Sean McMahon identifies industrial and logistics as a promising sector, with a long-term strategy focused on "sheds and beds." He anticipates a decade of undersupply and robust demand driven by population growth.
Source: https://www.afr.com/property/commercial/property-giants-say-they-can-weather-valuation-storm-20230911-p5e3mm