Watching Commercial Property
The potential for financial strains in the commercial property market remains a key macro risk. Property valuations are falling, and some owners will struggle with the higher cost and more limited availability of credit over the coming years.
The surge in interest rates has prompted a reassessment of commercial property valuations. In the US, prices have fallen 4-5% from their peak in mid-2022, with further falls on the horizon. There are also likely to be wide divergences by sector, with the office sector expected to fall by around 30%. The office sector has been affected by the trend towards remote working, particularly in the US.
Another important question will be whether property owners can cope with large increases in the cost of debt. Many firms locked in cheap debt when rates were low, so this effect will be delayed, but it may prove hard and costly to refinance this debt when it falls due. This is particularly the case in the US, where smaller banks have traditionally been major providers of funds, but these banks are now liquidity constrained.
Though these pressures are most acute in the US, they are also playing out in Australia to a lesser extent. Australian Real Estate Investment Trusts (REITs) have announced downgrades in asset values of around 3-6%, with Dexus being at the high end of that range, given its greater office exposure. Several large superannuation funds have also downgraded office tower valuations by 10-15%, while in other sectors, valuation changes have been small. The better news is that most listed REITs are trading at 20-30% discounts to current asset valuations, meaning this risk is comfortably priced into current share prices.
Australian REITs face the greater risk of their cost of funding rising over time. This would affect cash flows and the size of future distributions. The risk will vary by the REIT depending on the level and maturity of its debt. The extent to which rents are linked to inflation will also be an important factor for the size of future dividends. Overall, however, we need to be aware of the potential for lower dividends from the sector over time.
This information was prepared by Evans and Partners Pty Ltd (ABN 85 125 338 785, AFSL 318075) (“Evans and Partners”). Evans and Partners is a wholly owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457) (E&P Financial Group).
The information may contain general advice or is factual information and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where a particular financial product has been referred to, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the financial product. Past performance is not a reliable indicator of future performance.
The information may contain statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. E&P, its related entities, officers, employees, agents, advisors nor any other person make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. While the information provided is believed to be accurate E&P takes no responsibility in reliance upon this information.
The Financial Services Guide of Evans and Partners contains important information about the services we offer, how we and our associates are paid, and any potential conflicts of interest that we may have. A copy of the Financial Services Guide can be found at www.eandp.com.au. Please let us know if you would like to receive a hard copy free of charge.
Help me find an adviser
Begin a conversation with an adviser who will help you achieve your wealth goals.
Subscribe to insights
Subscribe to get Insights and Ideas about trends shaping markets, industries and the economy delivered to your inbox.
Start a conversation
Reach out and start a conversation with one of our experienced team.
Connect to adviser
Begin a conversation with one of our advisers who will help you achieve your wealth goals.
You can search for an adviser by location or name. Alternatively contact us and we will help you find an adviser to realise your goals.