The slide in commercial real estate values will come to an end by June, marking a 10 per cent peak-to-trough decline over the past two years and leading to a pick-up in transactions, a new sector analysis by JPMorgan says.
Sentiment would improve around office – a sector fully reflecting the challenges of both changing workplace culture and higher bond yields, against which their return is often compared – and the outlook for retail was also positive, JPMorgan analyst Richard Jones wrote in a note published this week.
Sun shining on it: 1 Bligh Street, Sydney owner Dexus is JPMorgan’s preferred office stock right now.  Lee Besford
Listed real estate investment trusts were trading at levels that implied a 16 per cent write-down to their June 2023 book values – equivalent to an implied 6.4 per cent cap rate, or yield – which went deeper than the 7 per cent write-down JPMorgan had estimated for the year, Mr Jones said.
“With the bulk of bond yield compression likely behind us and the interest rate set-up less favourable than a few months ago, is the sector still an attractive place to allocate capital? We think so,” Mr Jones said.
“We expect commercial real estate capital values to bottom in June 2024, experiencing a peak-to-trough fall of about 10 per cent over 24 months. This compares to our estimate of market implied devaluations, which are pricing in a 19 per cent peak-to-trough correction.”
It is a positive sign for an office sector still adjusting to the growth of working-from-home practices. Mirvac’s flagship MWOF wholesale office fund suffered a 14.5 per cent decline in total return last calendar year and a separate Colliers analysis suggests a further 10-15 per cent fall in value for top CBD office towers this year.
But the JPMorgan analysis cites a positive turn under way – driven in part by higher unemployment, which would strengthen the hand of employers to enforce return-to-office mandates – and says Dexus is its preferred stock.
“Labour market tightness is easing, physical office attendance is improving and an increasing number of corporates are enforcing stricter return-to office policies,” Mr Jones said.
“We continue to expect top-quality office portfolios to perform well, given tenant demand for high-quality space remains robust.”
The JPMorgan analysts were also optimistic in their outlook for retail assets – “particularly the large malls” – as continued population growth would offset an expected decline in per-capita discretionary spending.
Consumption spending would be further boosted by implementation of the federal government’s stage three tax cuts and strong household balance sheets, and “negligible” new supply of shopping centres would support valuations at a time when the collective vacancy rate was 1 per cent, they said, flagging Westfield owner Scentre Group and HomeCo Daily Needs REIT as preferred companies.
The tide was turning for industrial property after a strong two years of “exceptional” rent growth, however. While the Australian industrial market had so far avoided the global slowdown in the industrial sector that started early last year, the outlook was changing, the JPMorgan analysts said.
“With meaningful supply expected to come online in 2024-25 (particularly in Melbourne and Brisbane), and demand signals looking lacklustre, we turn slightly more cautious on the sector into 2024,” they said.
Direct property transactions were also likely to pick up in the second half after values troughed mid-year, they said.
“We expect that as property values trough in 2024, transaction volumes will modestly edge higher as the bid-ask spread narrows.”
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