The commercial property market: The good, the bad or the ugly?

Since Primewest commenced investing in Australian commercial property in 1993 we have witnessed three tough periods. When we bought our first property (a neighbourhood shopping centre in Perth which we still own) a huge proportion of vendors were receivers or at least forced sellers.  

Banks were desperately unloading property to save themselves. The mid 90s were the best years to buy real estate in my memory. Around 2002 things got tough again as the economy slowed but this was really quite minor compared to the mid 90s and the GFC from 2008 till 2012.  

The GFC has been our next greatest buy period and for the same reasons as the 90s. Nervousness, even panic and many forced sellers presents countercyclical investors with the opportunity for out-performance and so it has transpired as property prices once again recover and in some instances rise sharply.    

Where to from here?

Right now there is a, for some, a worrying disconnect between market fundamentals on the one hand and rising prices on the other hand.  

In almost every commercial office market across Australia leasing has become tougher – exemplified by rising incentives on the one hand but lower or flat rents on the other. Continuing sluggish economies in Europe and the US and a somewhat unclear outlook in China has lead to cut backs in the mining services sector and a general lack of confidence by tenants. Industrial properties and neighbourhood shopping centres have fared better as there is generally not the same level of volatility in these sectors.  

So what is driving prices up?

At it’s simplest, it appears to be a weight of money argument. Both international and domestic investors are literally awash with cash to invest. Interest rates worldwide are at historic lows and as a result both the stock markets and real estate markets are seeing rising levels of investment. Investors are putting their money into relatively safe haven, transparent markets which can produce better than stagnant returns.    

Have investors got it wrong in the face of weak fundamentals?

I don’t believe so. I believe that the property market is operating in the same way as equities markets always do. It has been said that stock markets are invariable 12-18 months ahead of the actual economy. That is to say, investors buy shares ahead of company earnings recoveries or growth.  I think precisely the same phenomenon is at play in the commercial property market. Investors are predicting a recovery in market fundamentals over the next two to three years. That makes sense to me and therefore I remain confident that values will continue to rise as market fundamentals improve to justify these prices.    

My verdict – Good, not bad and not ugly.