commercial property market

Commercial property market to get better
30/12/2009 7:47:01 PM

The commercial real estate market is set to experience some improvement in 2010 as conditions stabilise in a sector that suffered huge losses during the global downturn.

Listed property companies had a horror year in 2009, when their balance sheets were savaged by falling asset values and rising vacancy rates.

But analysts and company chief executives are looking forward to improved economic conditions in 2010, signalling the worst of the decline in property values is over.

Austock Securities property analyst Thomas Hodson said that in 2009 heavy debt burdens and falling asset values was the sector's biggest concerns.

"Their major problems were dealing with the legacy issues that affected many of their balance sheets by having too much debt at the wrong time in the market," he said.

"Also dealing with the fallout of lower asset values both from capitalisation rate perspective and pressure on rental income via a tick up in office and in particular commercial vacancies."

But despite swinging to big losses in the 2009/10 financial year, the country's biggest property developer Lend Lease says it has strong liquidity and is well capitalised to take advantage of improving market conditions.

Australia's biggest shopping centre owner Westfield Group says economic conditions are stabilising after it also suffered multi-billion dollar property write-downs.

And property giant Mirvac is even more optimistic, predicting less or no asset revaluations in 2009/10 after reporting a massive 2008/9 statutory net loss of $1.08 billion.

CB Richard Ellis executive director of research Kevin Stanley says the round of declines in commercial property values came to an end in last two quarters of 2009 as the tough economic conditions eased.

He said the office sector had hit a bottom in the December quarter while the industrial and retail property sector had stabilised in the September quarter.

"We're noticing a lot more interest from investors both domestic and foreign to get back into the market and we think that pressure will start to push prices up over the next 12 months," Mr Stanley said.

"The revaluation of commercial real estate has taken about two years.

"It's taken roughly 20 per cent off prime capital values, so what that does is, it sets us up for 2010 where the next direction for the market is an improvement, an increase in capital values."

Vacancy rates had also starting to improve, Mr Stanley said.

"That's the other part [of the sector] that seems to be turning around quite quickly now, employment has not deteriorated as first thought," he said.

"The deterioration in employment has now stopped and it looks as though we're ready for vacancy rates to stabilise, probably in the first half of next year."

Austocks' Mr Hodson said the property market recovery may be different in each state.

"In somewhere like Perth, where there's been a resumption in the energy and resource sector, there's some hope that markets may firm a little," he said .

"In the larger markets of Sydney and Melbourne, it's still fair to say that there's still reason to be cautious."

Some analysts have pointed to the sale of Aurora Place, a premium Sydney office building owned by Colonial First State Global Asset Management, for about $685 million in November, as a strong turnaround signal.

The Commonwealth Bank managed Colonial fund sold the building to South Korea's National Pension Service in the biggest office sale since the onset of the global downturn.

"The Aurora Place sale occurred at a price which the market felt was pretty fair," CB Richard Ellis' Mr Stanley said.

"That sort of represented to the market that it is time to go back in - it represented fair pricing between the buyer and seller.

"We think based on that, buyer interests are coming back."

However, Mr Stanley said buyers will remain selective about their purchases.

"There could be a lot of companies looking, we know they're looking but they won't buy until the right property comes along."

"Buyers are selective about their assets, they'll want to buy as higher quality as they can in the short term - for example, buying office buildings that are newer that have good long-term lease expiry, have quality tenants and strong locations," he said.

"It's still very much back to the basics in terms of selecting assets, so I think investors will be selective in the short term."

But Mr Stanley said 2010 can only get better.

"It will be busy both on the leasing side and on the sales sides, certainly busier than this year that's for sure."
AAP