When you think about the words ‘property’ or ‘real estate’, what comes to mind? Your house? Your mortgage? Or maybe your rental property? Probably one of those, and probably not commercial property, such as shops and offices. You might not have a direct stake in commercial real estate, but you are likely being affected by its current value. You’ll soon see how.
When it comes to property news, for most people, it hasn’t exactly been good of late. If you have a mortgage, rates are going up almost monthly. If you’re a tenant, you probably haven’t escaped a rental increase. And if you’re a landlord, your rising mortgage might be the reason you’ve raised rents.
And still, property prices continue to rise. Well, residential prices do, but the commercial property landscape is very different at the moment. And that is having an impact on ordinary Australians who rarely give commercial real estate a second thought.
How might the commercial property market be affecting you?
Basically, through your pension or superannuation fund. And right now, the impact of falling commercial property prices is significant. This week, Australia’s second-largest pension fund, Australian Retirement Trust (ART), revealed just how significant.
The trust, which manages assets valued at $240 billion (US$159 billion), announced that it had slashed the value of its local office assets by as much as 20 per cent. And we’re not talking about small commercial properties here. The value of some of ART’s CBD office towers was cut by 15 per cent, with warnings that another five percentage-point drop is imminent.
Why is this happening?
ART investment chief Ian Patrick cited “structural and cyclical changes” for the material writedowns, along with “capital market disruption and decline in occupancy”.
It is the latter of those two quotes that perhaps holds the key. “Market disruptions” have been myriad since the onset of the panic, of course. And one of the results of those disruptions has been employees being either forced to work from home, or retrenched.
What comes next is not hard to work out. Empty offices. In CBD areas, in particular, empty offices mean fewer people, and fewer people mean fewer lunches and coffees. Before you know it, not only are many of the office block desks empty, so is the café downstairs.
Commercial property is largely the domain of large investors, and pension and super funds make up a sizeable proportion of those.
As bad as all that sounds, there’s no need for pensioners and superannuation account holders to panic. Despite its writedowns, ART’s default pension fund posted a 10 per cent return for the year through June.
Andrew Fisher, ART’s head of investment strategy, said this week that not all sectors of the commercial real estate market had suffered. “It’s been second tier office buildings where you’ve seen the most meaningful downward valuations,” he said. “Industrial property is still holding up quite strongly at the moment, so that’s been one of the bright spots in the property portfolio.”
The rider in Mr Fisher’s statement is “at the moment”. No-one knows exactly how the next phase of the commercial property climate will pan out.
It’s a basically a matter of ‘watch this space’ – which is hopefully not an empty commercial one.
Has the commercial property market ‘bust’ affected you? Are you aware of what proportion of your super or pension is invested in commercial property? Let us know in the comments section below.
Also read: How will abolishing the commercial property stamp duty tax affect property investors?
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