A shorter pathway back to pre-COVID-19 commercial property sale volumes
An unprecedented policy response from mature and emerging economies has supported global equity markets. In the Australian recovery, a clear hierarchy is emerging, as industrial & logistics and commercial office prove to be the most resilient sectors.
AUSTRALIA, 30 JUNE 2020 – A new JLL report examining the COVID-19 economic outlook and the implications for capital markets in Australia foresees the potential for an earlier pathway back towards pre-crisis transaction volumes for commercial property than experienced in the GFC.
According to the report - ‘Australia and New Zealand take their first steps towards the next normal’, the unprecedented policy response in Australia has provided some downside protection to the economy.
JLL’s Head of Capital Markets – Australia, Fergal Harris said, “While transaction volumes are likely to fall sharply in 2020, the unprecedented policy measures have provided support to global equity markets, limiting the denominator effect relative to the GFC in 2008/09.
“The pace of the economic recovery will have significant implications for commercial property. Transaction volumes in 2021 and 2022 will be highly dependent on the economic recovery and the performance of other asset classes.
“Across Australia’s commercial real estate investment assets, a clear hierarchy is emerging, with prime grade industrial & logistics and commercial office proving to be the most resilient sectors. The greatest income risk is in the retail sector, while secondary grade assets across all sectors are expected to experience higher vacancy and income challenges.
“The main shift we are likely to see in pricing relates to secondary assets. Lending criteria is expected to become more onerous with financiers easing back loan-to-value ratios (LVR) and seeking higher interest coverage ratios for secondary grade assets.
“Credit market conditions will also play an important part for liquidity of real estate markets going forward. Private debt markets are continuing to operate for well-rated borrowers. For core assets, we have only seen a 10 to 25 basis point movement in post COVID-19 pricing for a 5 year loan.
“Pricing margins have moved out more significantly for assets with income risk and development finance. Non-bank lenders are reviewing this part of the market closely as there will still be good lending opportunities and the potential to make attractive risk-adjusted returns,” said Mr Harris.
The pathway back to commercial property volumes:
JLL has reviewed the GFC impact on Australian commercial property transaction volumes to plot a pathway for the 2020 to 2022 period.
In 2008, Australian commerial property transaction volumes were only 41% of the level recorded in 2007. If we experienced a similar observation for 2020, then Australian transaction volumes would be approximately $12.5 to $16.5 billion. (Australian commercial volumes reached an all-time record high in 2019 at $36 billion)
Based on the current pipeline and a few potential mega-deals which inflated the 2019 figure, JLL estimates transation volumes for 2020 are likely to be lower and in the range of $10 - $12 billion.
JLL’s Head of Research – Australia, Andrew Ballantyne said, “Post the financial crisis, it took until 2012 for transaction volumes to recapture 2007 levels. Part of the explanation was the denominator effect – a correction in equities leading to an overweight position in real assets.
“Interestingly, the recovery in direct property transaction volumes followed a similar trajectory to the S&P 500, which captured its 2007 peak in April 2013.
“While equity markets have remained volatile, the rebound post the March correction has happened relatively quickly. As a result, the denominator effect is less relevant this time and we may have a shorter pathway back to pre-crisis transaction volume levels,” said Mr Ballantyne.
The JLL Report states that two investment themes are likely to endure as we emerge from the health crisis – higher allocations to real assets and a portfolio tilt towards the Asia Pacific region.
Mr Ballantyne said, “Offshore investors will continue to be attracted to Australia due to potential GDP growth, low volatility of returns and our real estate transparency.
“As foreign exchange risk is one of the key considerations for cross-border real estate investors, we have assessed the AUD/NZD against a number of currencies over the past 20 years.
“The depreciation of the AUD/NZD against a number of major currencies makes the entry point, from a foreign exchange perspective, attractive for offshore capital sources,” said Mr Ballantyne.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion, operations in over 80 countries and a global workforce of more than 94,000 as of March 31, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.