Yesterday, our Quick Bite looked at some trends in the work from home (WFH) trend from the perspective of staff attitudes. Today we ask the question what this might mean from the perspective of office property values.
The sale of a Sydney building at a large discount gave shudders to commercial property investors. In early June, Dexus sold an A grade building on 44 Market Street for $393 million, a 17.2% discount to an independent December 2022 valuation of $507 million. Given the lack of major sales since the RBA started to increase interest rates, the deal is seen as providing an insight into trends for the office real estate sector.
The CBRE chart below shows CBD vacancies rising from a pre-pandemic 8% and heading towards 13%. These figures are nation-wide with large differences existing between the capital cities, and also between prime grade and secondary grade buildings. For example, vacancy in Perth secondary buildings is as high as 20%, and in Canberra prime grade is as low as 7.5%.
Source: CBRE
Much higher interest rates than a year ago, remote office working, and lower discretionary spending have hurt ASX-listed property securities but have not yet led to a big hit to recorded commercial property values. Opinions vary as to degree, but it seems confirmed that commercial office asset values are coming under pressure, with estimates of values falling around 10-20%. Obviously, the specifics matter, and it depends on location, quality of the building, tenant quality, the leasing profile, and many other factors too. For better quality office towers, with exceptional tenants and leases, perhaps valuations are off only 5-10%.
Source: Macquarie Research
Higher interest rates mean higher funding costs and lower asset prices due to the higher discount used when calculating the present value of the expected cash flowing from those properties in the future.
The listed equity market is already factoring in the downside risk to valuations as some workers prefer not to go back to the office full time and interest rates continue to increase, which hurts consumer spending. Most Australian real estate investment trusts (REITs) with office exposure are trading at around 25-45% discounts to their net tangible assets. Macquarie Research suggests that some of these discounts may be overdone.
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