A further $15 billion could be written off from the future values of Australia’s office and shopping centres assets, despite recent revaluations by Australia’s listed REITs.
Compared to asset write downs in the US and Europe, Australian listed property trusts posted only modest changes to capitalisation rates in the year to August 2023. Over the past 12 months, listed property owners have increased the cap rate of their office assets by 0.38% while, for shopping centres, cap rates have risen by 0.24%. As a result of these changes to cap rates, listed property owners have wiped off just under $2.5 billion from the book values of their portfolios.
This equates to a 5% reduction in the value of office asset values and 1.1% reduction in the value of shopping centre assets. These modest valuation changes are in stark contrast to the sample of actual transactions which have taken place over the same period. These show asset values dropped by an average of 18.8% for office assets and 17.3% for large retail assets.
With many AREITs indicating further asset divestments, increases to capitalisation rates and lower valuations seem inevitable and, based on recent actual sales, could result in a further $15bn in write-downs.
These results for the future direction of property values are part of a PAR Group analysis undertaken by Damian Stone of Y Research and Rob Ellis of The Data App. The analysis reviewed the book values and capitalisation rates across 12 listed Australia Real Estate Investment Trusts (AREITs) which reported during August 2023. The findings from August 2023 were compared to the corresponding outcomes from August 2022.
Summary Key Findings
- This study reviewed 12 listed AREITs office and shopping centre property portfolios. In total, 345 commercial (shopping centres and office) properties were reviewed.
- Owners have increased the capitalisation rate of their office properties by an average of 0.38%. As a result, the value of the 120 office assets reviewed fell by $1.7bn in the 12 months to August 2023.
- The most dramatic changes for office properties were for B and C grade buildings which recorded over twice the rise in cap rates compared to premium grade buildings; 0.61% for B grade and 0.66% for C grade, compared to 0.3% for premium grade buildings.
- Non city centre office assets (suburban and regional assets) recorded a 0.46% increase in cap rates, compared to a 0.36% increase for city centre office assets; a differential of ten basis points.
- The AREITs increased the capitalisation rate of their shopping centre properties by an average of 0.24%. As a result, the value of the 225 shopping centre assets reviewed fell by $719.7 million in the 12 months to August 2023.
- Similar to office assets, there was minimal change in the capitalisation rate for super regional centres; an increase of 0.07%. Neighbourhood centres recorded the biggest change in capitalisation rates – an increase of 0.34% – four times the rate of super regional centres.
Findings in Detail
Office
Across the 120 office properties owned by the 12 listed AREITs reviewed, owners have increased the capitalisation rate of their office properties by an average of 0.38%. As a result, the value of these office assets reviewed fell by $1.7 bn in the 12 months to August 2023. This equates to a 5% reduction in office asset values of the 12 listed AREITs.
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In terms of building grades – the flight to quality evident in leasing markets is reflected in the relative asset values for office properties by grade. Lower grade properties (B and C grade buildings) recorded over twice the rise in cap rates compared to premium grade buildings. The valuation spread between premium and A grade buildings was 0.13%, reflecting the expectations the highest rated properties are better positioned to retain their value in the post-COVID usage trends.
By location, non-city centre office assets (suburban and regional assets) recorded a higher increase in cap rates compared to city centre office assets. This is reflective of both a higher proportion of lower grade stock typically found outside city centres as well as the relative market depth, for tenants and owners, in suburban and regional office markets.
Across all states the AREITs posted increases in office property cap rates. The largest rise in cap rates was posted in SA, which is potentially due to its lower concentration of high-quality office properties and relatively market size compared to other states. At the other extreme, Victoria and Queensland recorded the smallest increase in cap rates.
Retail
An analysis of 226 shopping centre shows the ARITs, in aggregate, increased the cap rate by 23 basis points between FY22 to FY23. With this total there was a significant variation, both by type of shopping centre and by location.
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By type of shopping centre, the largest increase in cap rates was by neighbourhood centres. The extent of this increase is, in part, due to cap rates coming off a very low base for this asset type. At the other extreme, the cap rates for super regionals, due to their dominant market position, were hardly increased at all.
For all the states the AREITs posted increases in shopping centre cap rates. The largest rise in cap rates was posted in WA, which may be due to its lower concentration of super regional shopping centres. At the other extreme, Victoria recorded the smallest increase in cap rates. |
There was very little difference in the change in the cap rates for suburban and city centre shopping centres between FY22 and FY23. The largest change was posted for country shopping centres due to the higher incidence of neighbourhood centres and the low proportion of large shopping centres. |
Implications
In stark contrast to actual asset transactions for major office and shopping centres assets in 2022/23, the listed AREITs made minimal changes to the capitalisation rates and hence values of their assets.
In spite of the small change in capitalisation rates (less than half a percent) applied to the AREIT portfolios, over $2.5 billion dollars of value was wiped from office and shopping centre assets. Furthermore, if actual sale values from transactions are applied across the listed assets a further $4.8 billion dollars of value could be wiped from office assets and $10.5bn from shopping centre assets in future reporting periods.
The average value drops (18.8% for office assets and 17.3% for large shopping centres) are based on a limited sample of transactions. This lack of sales becomes challenging for valuers, with limited comparable deals available to undertake independent valuations.
The low rate of transactions through 2022/23 is the result of the ongoing stand-off between sellers and buyers. Buyers are still holding onto previous or current book values, whilst buyers are seeking asset prices more in line with the rate of recent transactions (value falls circa 15-20%). The price expectation gap has remained steady in recent months, with few AREITs transacting, despite previously reporting an intention to divest assets. So, a widespread resetting of benchmark pricing of office and shopping centre assets, which has occurred in the United States and Europe, has yet to materialise in Australia.
Another issue facing the AREITs looking to divest, is a lack of potential purchasers. In recent years, listed and unlisted AREITs have been acquiring properties. Now, with many not seeking further office or shopping centre exposure, the question becomes who are the likely purchasers? For smaller assets, syndicates and high net worth individuals continue to seek opportunities. For larger assets, sovereign wealth funds and international capital are active, although clearly there are different price expectations. For regional or mid-priced assets there is a limited pool of potential purchasers, which is also likely to impact on future pricing and transaction activity.
It is likely the divergence between and within asset classes such as the difference between prime and secondary stock will expand in the months ahead, with high-quality, well-located assets retaining their value more than secondary assets in a higher cost of funding environment. In spite of this further revaluations and significantly lower asset prices for office and shopping centre owners are likely during the 2024 reporting periods.
For further information, please contact:
Rob Ellis, Director of the Data App. Mob: 0417 195 352 or email: rob@thedataapp.com
Damian Stone, Principal and Chief Problem Solver of Y Research. M: 0433 525 414 or email: damian.stone@yresearch.com.au
About PAR Group
Real Investment Analytics (RIA), The Data App (TDA) and Y Research are partners in PAR Group, an independent research collective offering a comprehensive range of property research and analytical services. The team is experienced in economics, property research, transactional and corporate strategy; all with extensive industry involvement in both the property and finance sectors. Visit: http://par.group/ for more information.
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