Falling rental income, higher vacancy rates and fewer buyers are driving down commercial property values with recent sales campaigns showing price discounts of up to 10 per cent, according to valuer Sam Tamblyn.
Mr Tamblyn, whose advisory firm Urban Property Australia carries out more than 3000 commercial and residential valuations a year, said hotels, retail property and student accommodation were the asset classes most susceptible to valuation falls due to their direct exposure to the virus.
By contrast, he said industrial property would likely be more resilient as it was underpinned by e-commerce and strong investor and tenant demand.
“Cap rates will certainly soften through this crisis while net effective rents will fall due to reduced tenant demand, and likely increased incentive levels in the short term,” Mr Tamblyn said.
As an example of how some values had softened he pointed to his firm’s recent valuation of an office building in a Melbourne fringe suburb which sold in April following an expressions of interest campaign.
“The property was fully occupied to a single national tenant with the lease expiring within two years.
“The buyer interest was not as deep as previously anticipated and it sold approximately 7 per cent lower than expected,” said Mr Tamblyn.
In another example, a retail asset within a popular metropolitan strip, leased to a local food and beverage operator was withdrawn from sale after its value fell by around 10 per cent.
“While the current lease expiry was approximately three years, as a result of the current social distancing provisions, turnover had reduced markedly at the time of the valuation,” Mr Tamblyn said.
Urban Property Australia was also involved in the sale of a regional Victoria fast food outlet leased to a national tenant on a five-year lease.
“The transaction eventually proceeded with the vendor accepting an 8 per cent discount to the original agreed price due to subdued investor demand compared with appetite for similar offerings last year,” Mr Tamblyn said.
Sales of vacant building are showing even steeper valuations falls.
The heritage-listed Sands & McDougall building complex in West Melbourne is expected to generate total sales of about $58 million, 22 per cent below the expected selling price of $75 million.
Sydney funder manager Avari Capital, which paid $38.5 million for the main Sands & McDougall building at 355 Spencer Street said valuations of vacant commercial buildings have fallen “quite dramatically” since the outbreak of COVID-19.
In another example of falling retail property values, ASX-listed fund manager GPT reported hefty writedowns of its destination malls as part of its March 31 quarterly valuations.
With transactions becoming scarce and financing tightening, Mr Tamblyn said determining property values in the COVID-19 era was becoming a lot harder.
Transactions concluded prior to the outbreak carried less weight in assessing current values, he said.
“Valuers now need to undertake additional analysis to establish the strength of cashflow for a property and perform additional research on the current and future continuity of each tenant to value the potential impact on cap rates as a result of COVID-19,” Mr Tamblyn said.
He added that valuers also needed to consider the performance of specific industries that tenants were operating in, especially tourism, hospitality, education and retail which have been “adversely affected in extreme ways”.
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