CORONAVIRUS COVID-19 PANDEMICRESEARCH

Retail worsens, office adapting to workplace changes

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SENTIMENT among real estate investors and occupiers worsened as the macro-economic impact of COVID-19 weighs on demand and drives structural change and conditions deteriorate in Australia.

The latest RICS’ global sentiment indicator fell by 9 points in last three months to -37 from -28, according to the Q2 2020 RICS Global Commercial Property Monitor. However, it remains above the record low reached during Global Financial Crisis.

The fall was most pronounced in Europe, falling from a relatively firm reading of -14 in Q1 to -36.

In Asia Pacific, the indicator fell from -31 to -38, for the Americas from -37 to -38 and in the Middle East and Africa from -26 to -39. As a result, two-thirds of investors and occupiers now view the commercial property market as in downturn phase of its cycle.

Investors expect further falls in capital values and rents globally over the next 12 months. Net balances of -36% and -37% of respondents see rents and capital values declining respectively. The figure does hide significant regional and national dispersion. Expectations are slightly higher within Asia Pacific, for instance, and more downbeat for the Americas.

In Australia, RICS Asia Pacific senior economist Sean Ellison said conditions continued to deteriorate across Australia during the second quarter, as both the occupier and investment Sentiment Indices moved further into negative territory (-62 and -38 respectively in Q2 vs -39 and -22 in Q1).

Ellison said that the declines were consistent across the four largest cities in Australia, though sentiment in Brisbane is modestly less negative than that in Sydney, Melbourne and Perth.
“Supply and demand fundamentals in both occupier and investment markets remain skewed to the downside.

“Occupier demand continued to fall sharply in Q2 while space available for renting and inducements to rent continue to rise at a brisk pace (in net balance terms).

“Contributors also note a pullback in demand in the investment market, particularly amongst foreign investors. The supply of properties available for sale was seen to be more stable,” he added.

Across Asia Pacific respondents reported a continued decline in demand during Q1. In net balance terms, the pullback in demand from occupiers and investors quickened from Q1.

Although foreign investment demand also broadly contracted, contributors reported particularly sharp drops in Australia, China and New Zealand relative to the pullback in overall demand.

“Anecdotal evidence suggests that this may be transitory as asset managers are interested in these markets but are waiting on uncertainties to clear before deploying capital,”

With the exceptions of industrial property in Japan and New Zealand, rents and capital values are expected to fall over the next quarter. In Australia and India, the expected fall is the largest since the GFC.

In Australia, India and Singapore respondents noted a tighter supply of industrial properties for sale.

Ellison said in Sydney and Melbourne, the survey results indicate sizeable variations between asset classes. In Melbourne, while capital values are expected to decline 3.6% over the next 12 months, prime industrial properties are expected to rise 3.2%.

“Prime industrial properties are one of the rare market classes looking at an increase,”

Headline rent expectations are also dampened, with Melbourne respondents expecting a 6.5% decline over the next 12 months, with a 5.5% decline expected in Sydney.

Secondary retail rents are expected to decline by 14.5% in Sydney.

“This reduction is a conservative estimate, with prime retail rents also expected to fall over the next 12 months,”

Meanwhile, when asked whether businesses would scale back their footprint over the next two years, 93.8% of Australian respondents said yes, compared with the 85.5% globally. When asked whether companies will rotate into suburban instead of urban offices 33% of Australian respondents said no, with only 9% responding yes (strongly) and 58% yes (somewhat).

In Australia, 94%  of tenants expect higher demands for health and wellbeing within workplaces over the next two years – while only 29% thought higher rent could be charged for such services.

Retail has been the biggest casualty as the pandemic and subsequent lockdowns have exacerbated the pre-existing challenge of ecommerce.

Global demand for retail space fell sharply in Q2 (net balance of -81%) with the reading in the US reaching -98% (implying almost all respondents saw retail tenants reducing demand for space over the period).

Looking ahead, rent expectations for the next 12 months will continue to weigh particularly heavily on retail, with a deteriorating outlook for offices’ rental property values too. By contrast, expectations for industrials/logistics have returned to positive territory, albeit masking significant differences at a country level, pointing to the rising popularity of ecommerce and changing supply chains.

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