This article is from the Australian Property Journal archive
DIRECT commercial property values have plunged by as much as 13.3% for the year to June – the largest decline in asset values since the trough of the last property crash in 1991, according to the Property Council/IPD Property Index.
IPD in Australia and New Zealand director John Garimort said the June valuations saw some of the biggest write downs in values on record with over 1100 assets showing a decline of approximately $6 billion.
According to IPD, a combination of softer cap rates and income levels set to weaken in the near future has seen an acceleration in the rate of capital decline over the last six months from the -6.4% recorded in December 2008.
But income returns have continued to offset these capital losses, and have risen slightly to 7.0% for the year to June.
However, the combination of these large falls in capital values, and the current stability of income has resulted a total return for the commercial property market of -7.2%.
The retail sector continues to prove the most resilient to downward pressure, as it did in the previous cycle in the early 1990’s, with a total return of -4.5% for the year to June 2009.
Garimort said larger, higher quality shopping centres in particular have not experienced the same degree of declines in values as other retail asset types.
The office sector has been hardest hit to date, with a sharp correction in cap rates producing an annual total return of -9.6% to June and a dramatic -15.5% reduction in capital returns.
“Without the chronic over supply that plagued the market downturn of the early 1990s, the drivers of asset values are now the financial markets and investors’ appetite for risk and the underlying asset’s cashflow.
“The repricing of cap rates continues with a softening by around 100 basis points over the past year. Give the return data, it is not surprising to note that the office sector has seen an average cap rate increase of 140bps since June 2008,” Garimort said.
The industrial sector continues to sit in the middle with a total return of -7.4%.
Garimort said there is evidence that secondary quality assets across all sectors are under pressure, as investors show a distinct preference for quality assets in a prime location.
IPD Australia non executive chairman Adrian Harrington said in the current climate, fund managers have generally been quicker to mark the value of assets down.
Nearly 80% of assets in the IPD database had revaluations completed in June compared to around 60% for both June 2007 and June 2008.
“There is a clear move by the industry towards stronger governance and reporting, with many more organisations now valuing all of their assets each quarter,” Harrington said.
Garimort said the June round of valuations saw the market take a big step towards getting to the end of value declines.
“While there are expectations within the industry that we are not yet at the bottom of the cycle, we are certainly getting closer.
“The true test will be with the transactions of larger assets that are starting to occur and what differences still remain between value and price,” Garimort concluded.
Australian Property Journal
