Omicron, inflation, rates, election, weigh on investors

A combination of factors including Omicron, signs of inflation, talk of interest rate rises, and looming federal and state elections, is weighing on the minds of commercial property investors with the potential to slow what has been a remarkably strong Covid era market, according to Advise Transact Asia Pacific managing director, Mark Wizel.

``The Covid era commercial property market has been quite extraordinary and one which few could have predicted. While there have been winners and losers, generally speaking, investors have shown a remarkable level of resilience and, in the view of Advise Transact, are likely to continue to accentuate the positive.

``However there are a number of potential hurdles in 2022 which will see some investors take a more cautious approach including the manner in which Omicron plays out, and the potential rise in the cost of debt on the back of a mooted rise in official interest rates.

``And then there’s the looming federal election as well as the state election later in the year. We have seen over and over again that when elections are called momentum pretty much comes to a halt in the commercial market. To have two elections in the same year, some six months apart, will be a big challenge for everyone to navigate,’’ Mr Wizel said. 

The Advise Transact team, which also includes former AFL coach Ross Lyon, acted for a range of vendors on transactions worth more than $520 million in the latter half of 2021 including the Deague family’s $204 million sale of 101 Moray St, South Melbourne, and Nicole Chow’s (UAG) $48 million disposal of a Racecourse Road, Kensington property.

The team is now working with vendors on the sale of several $30 million to $50 million plus properties including 141 Flinders Lane, a major North Melbourne land holding owned by Pace Development Group, and the iconic Tait’s Hardware Store in Glen Iris with expectations of more than $25million.

In a brief 2022 forecast Mr Wizel, the former national CBRE director, said there were a number of elements and trends to watch including:

• Non-bank lending

Will non-bank lending continue on its incredible growth path? How are the non-bank lenders capitalized and how would any potential credit squeeze impact the commercial property industry? 

• Build to rent

What will the take up of BTR product be? Will we see several assets completed and call for tenants? Has it all been hype or is the demand real? 

• Rent relief

There is a danger that an inflation driven higher cost of debt may put pressure on owners who may not have the capacity to be as lenient with rent relief over and above their legal obligations.

``There are also some question marks around the larger shopping Centre space and the genuine returns that are being collected from rental, while there is the potential for Omicron to break the back of a lot of the non-national chain retailers. Bakers Delight might survive but what about the local baker?’’  

Absence of mainland Chinese investors

Mr Wizel said the absence of mainland Chinese investors in recent times had mostly impacted the development site market.

``As most of the reported transactions between 2011 and 2017 to this cohort were of development sites in Australian capital cities it has been the development site market that has suffered the most. 

``However the Chinese void has been easily absorbed by locally based non-Asian capital as well as locally based Asian capital many of whom were, at one point in the last decade, citizens in China who now call Australia home.  We have also seen this in the high end residential market,’’ Mr Wizel said. 

He said development site values may not have dropped enormously as owners had been in a position to hold their sites, as opposed to selling or developing, due to the reasonably cheap cost of debt.

``However if the cost of debt rises and owners of sites are sitting on properties with no income and a depreciating asset value this will bring pressure to their LVR with financiers and activity into the negative will emerge which without doubt will see an increased number of development sites hit the market.

``The big question will be who will buy them given so much current government legislation that has negatively impacted selling conditions for developers,’’ Mr Wizel said.