‘Move quickly, think long-term’ – the spaces to watch in commercial property investment
Friday 5th June 2020
Insights from Shane Quinn, Executive Chairman & Co-founder, Quintessential Equity on the spaces to watch in commercial property investment.
Take advantage of changing market conditions
It is clear that in light of Covid-19, we’re going to see price adjustments on commercial properties across the board. While a recalibration of prices undoubtedly throws up many challenges for the commercial property sector, it will also likely lead to opportunities for investors who are cashed up and ready to make prudent acquisitions to achieve commensurate risk-reward.
Over the previous three years we’ve seen investors paying prices for assets on the assumption that rents would ‘hockey- stick’ up, particularly in Sydney and to a lesser extent Melbourne. Evidently, this illusion has now been shattered.
Following our analysis at Quintessential Equity, we predict the market will start to overprice rather than under-price risk, in contrast to recent years. This is likely to cause demand for value-add or secondary office property to drop substantially, due to increased cashflow risk.
Investors that move on these investment opportunities will be able to take advantage of lower carrying costs, providing them a competitive edge to offer the most attractive leasing conditions in the changing property market.
Office is here to stay: go hard and go fast to attract tenants
It’s no secret that leasing space in the coming years is going to be tough and there is a lot of speculation on the future of office spaces, but we believe office is here to stay.
Post Covid-19, our workplaces will undoubtedly be more flexible and mobile. It is likely that offices will need to adapt, however it will be difficult for businesses to justify the costs saved in reducing office space for a remote workforce if it leads to a drop in productivity.
Rather than shift away from the office market, now is the time for investors and landlords to think strategically in how they attract and retain tenants. With the economy beginning to move again and tenants transitioning back into the office it will be the early movers – who are able to offer the most competitive rent and attractive leasing – that will be positioned to lead rather than chase the market down in rent prices. If you don’t act early, it might be like trying to catch a falling knife following rents down.
Think long-term and look nationally
While it’s hard to predict accurately what will happen over the next two years, the property and construction industry are likely to return to ‘normal’ in three to five years’ time. It is important to look through the uncertainty and take a long-term view to make informed investment decisions.
Given that Covid-19 will affect each state in different ways, and to varying degrees of severity, investors should stick to strong buying fundamentals when looking for opportunities. At Quintessential Equity, we believe that capital value trend lines over the past thirty years will be the best indicators of recovery.
Based on our experience and predictions across the country, investment opportunities going forward will be found in Canberra, Perth and Adelaide. Supported predominantly by government tenants, the office market in Canberra will be a stable investment option, particularly with cash flow becoming more crucial in the post Covid-19 landscape. Patient investors can likewise find opportunities in Perth and Adelaide, where recovery is predicted to be faster than other capital cities. With the Perth market coming off a low base, impacts on the city’s office market are likely to only affect prices in the short term before kicking back into recovery. Adelaide also offers Stamp Duty concessions – making investment returns substantially better over a five-year period, with savings of approximately 1% per year amortised over 5 years. That would mean on a 6% net yielding asset you would have an additional 1% saving, which is about 17% more net income per year compared with investing in other states. We think the investors will catch on to this and prices will increase.
While pockets of Melbourne will continue to offer investment opportunities, Sydney presents the biggest risk for investors. After extraordinary growth in the past three years, Sydney has deviated substantially from capital value trend lines. In the fall-out from Covid-19, we will likely see significant price drops as the Sydney market recalibrates.Industrial property has been heralded as the asset class to come out of Covid-19 the strongest, however investors run the risk of finding themselves exposed down the track by taking the view that this is a ‘bullet proof’ investment. More than ever, it is important to take a long-term view of properties. When purchasing an asset, investors must consider whether the property has a desirable location and layout, can provide a competitive cost advantage to win or retain a tenant, and if they are comfortable with the carrying cost, even when vacant.
Embrace lessons from Covid-19
While Covid-19 presents complex and ongoing challenges on both a business and industry scale, there are also opportunities to instil a positive legacy – in terms of how we conduct business and connect to our staff, tenants, investors and wider ecosystem.
It has been incredible to see how quickly Australian businesses have been able to pivot, and the experience has really shown how dynamic, agile and innovative we can be. The companies and investors that will emerge the strongest from this period of uncertainty will be those who embrace the changes we’re seeing in workplace design, efficiency and market conditions, and those who can use this time to strengthen their ecosystem network.
Office is here to stay
As we come out of Covid-19, landlords will need to reinvent office buildings to be even more desirable places for people to come together to build culture, trust and collaborate so people/workers can be the best they can be. We need to offer three key things when we think about the modern buildings. These will be;
- Green buildings that are very low carbon created buildings like CLT construction.
- Healthy buildings that are Platinum WELL rated like 1 Malop Street in Geelong.
- Smart buildings, which will drive All-Access outcomes i.e. disability compliant and this will lead to touchless surfaces which will be relevant in a post Covid world.
We have to make office buildings so attractive, healthy and engaging that no one will want to work from home and they will want to make the trip to work as it is easier to be the best they can been in the office environment.
I also think personally that all good business that I know are built on exceptional culture, trust and collaboration. Culture and Trust in most businesses are currently sustaining as it was built from face-to face meetings and interactions before the lockdown. The longer we are apart I can only see these key strengths to success weakening and being harder to maintain. Collaboration is currently being forced in 1 hour Zoom meetings that would otherwise happen over a passing conversation around the coffee machine. This will take time to play out but it will in my opinion play out.
Also if an employee wishes to work from home full time and their employer allows them to, they should in my opinion be careful what they wish for as there is now 20 million people all over the world that will be competing for their job! This may be a bit sobering to those that want to stay home and not make the trip to the office to enjoy the company culture, trust and collaboration that will make other businesses more successful than theirs.