Declining office values that hit listed property have finally caught up with the unlisted sector, as a key report shows the $7.2 billion Mirvac Wholesale Office Fund was the worst performer last year, suffering a 14.5 per cent decline in total return.
The MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index for December shows the unlisted office sector suffered a 10.6 per cent decline in total return for the calendar year – the result of a 13.9 per cent decline in capital value and a 3.7 per cent income return.
Sydney’s Quay Quarter Tower is one of the assets in Mirvac’s MWOF fund, which declined 14.5 per cent last year. James Brickwood
Wholesale office funds accounted for the five worst-performing of 16 funds scrutinised in the report, with MWOF followed by ISPT’s 50 Lonsdale Street Property Trust (-13 per cent), Charter Hall’s CPOF (-11.9 per cent), Lendlease’s Australian Prime Property Fund Commercial (-11.6 per cent), and Investa’s IPG office fund (-10.5 per cent).
“The first annual results for 2023 are in, and they make for sobering reading as economic pressures seem to have finally hit the commercial property market in a significant way,” said data company MSCI’s Pacific head of real assets research, Ben Martin-Henry.
“Overall annual results are the worst since the months immediately following the GFC, as all funds recorded a total return of -7.2 per cent, well off the positive 6.4 per cent recorded just 12 months ago,” he said.
The figures are a crucial first indicator of how some of the country’s largest office portfolios performed last year.
A lack of transactions has clouded the picture for office valuations as the sector – with a performance measured against long-dated bonds – is buffeted by the cyclical factor of rising interest rates as well as structural moves triggered by the COVID-19 pandemic towards more flexible work and working from home practices.
Some large super funds say their assets have seen the worst and they will not have to cut values further this year, but industry figures say the downturn has further to go.
And while investors have already cut the value of listed REITs, the valuations and performance of unlisted funds have been harder to measure.
The gap between what sellers were asking and buyers were willing to pay for office assets – which MSCI last year put at a 30 per cent spread for buildings in Sydney and Melbourne – remained historically high, Mr Martin-Henry said on Friday.
“Buyers don’t want to pay what sellers want for these assets,” he said. “We track that gap. For Australia, it’s one of the largest globally.”
Mirvac, at its last quarterly update in October, said the $7.2 billion MWOF – which owns Sydney’s landmark Quay Quarter Tower – had outperformed MSCI’s wholesale fund index over two-, three-, and five-year periods. The company declined to comment.
But while the weak performance of office assets was widely expected, the weakness of the industrial sector exposed in the report was more surprising over the December quarter, Mr Martin-Henry said.
The total return index fell 2.9 per cent in the final three months of the year, and while office fund capital values shed 4.5 per cent and retail funds slipped 2.3 per cent in capital value, they were outpaced by a drop in value of industrial funds.
“Surprisingly for many, it was industrial funds who were the main protagonists, as they recorded a 5.8 per cent fall in capital growth as values start to see some significant adjustments,” he said.
There are already signs of a slowdown in the online retail- and logistics-driven boom in industrial property. Vacancy rates rose for the first time in five years in the second half of last year due to a combination of weaker demand and more warehouse supply completing.
In a tough year, industrial funds were the best performers in the index, with a negative 2.1 per cent return – the sector’s worst performance in 13 years – which included a fall in capital values of 5.4 per cent.
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