Media Release

API Opteon Commercial Market Outlook

Is it worth the investment

Key dynamics of Australia’s commercial property market will be tied to interest rates movements from the second half of 2017, according to the Australian Property Institute – Opteon Commercial Market Outlook report.

 

 

Opteon Associate Director – Commercial and API Spokesperson, Nick O’Brien said that the increments of any increases would dictate the quantum of the property market adjustment.

“If it’s gradual then it should be managed, but if there is a succession of quick increases then it could be a concern,” he said.

“An upward movement in the cash rate would translate into a general readjustment through the property market – no sector would be unscathed.”

O’Brien said it would create an increasing debt service rate and cause a repricing of assets, and the equity wedge the investor had will be squeezed from two directions – the higher debt servicing and the price readjustment, which would in turn put pressure on rental growth to make up part of that gulf.”

He said initial movement would be in the development sector, including vacant land, and felt by those investors who have acquired commercial properties at low yields of sub-4%, which we are translating as surrogate yields for underlying development sites.

“They are last to move in a rising market and first to fall in a market downturn. Development properties with some form of improvements, previously considered an underutilisation of the site in the hotter market, at least have a contingency income potential, whereby they can be ‘parked’ with some form of holding income and a tenant paying the rates and utilities, and in some cases the land tax,” he said.

“Since the GFC, we’ve had an influx of offshore investment, and we’ve also had the ever-growing superannuation base – both categories trying to find a home for their money as equities are no longer delivering the returns, nor are the bank deposit rates.”

He said the result has been marked decrease in yields – inner-CBD areas are seeing retail shop and dwelling premises consistently selling at yields of 3% to 3.5% – large growth in prices, and a growing disconnect between the yield and rental rates for these properties.

“That disconnect is a bit of a concern, because the rental growth isn’t the same rate as the growth in capital value. The inference is that there is an underlying development value that’s growing behind the scenes.”

“The climate of low interest rates is far more dangerous than high interest rates.  Every incremental upward increase to the cash rate is magnified, coming off a low base.”

“It would be unlikely that the income returns would be an appropriate rate of return for the asset base, which value we would expect to also adjust downwards with increasing financing costs.

Owners that had taken high loan-to-value ratios at the onset, would be at a heightened risk of asset repricing that would cause them to go into LV breach, meaning their loan-to-value ratio will exceed the bank’s agreed rate, and they will be called upon to tip in more equity, or tip out of the property.

“One logical interpretation is that in a down turning market caused by increasing interest rates, disposable income will be reduced, dragging down discretionary spending. Sectors feeding off discretionary spending will feel the full effect, i.e. retailing and bulky goods retail, which generally align with a prosperous economy and property market.”

The owner-occupier market, which is strong at in the sub-$1 million range, would also be impacted with higher debt servicing costs.

“If the rise were significant we should see a corresponding improve in leasing activity – it has always been a seesaw relationship.”

He said there would be a return to property fundamentals, with assets with secure leases weathering the period more strongly.

“At the onset of the market rise, investment properties with strong lease covenants and long lease terms realised a noticeably sharper yield differential, which broadly ranged from 100 to 200 basis points. However, as the market activity intensified and competition for that product increased, some investors dropped their buying parameters and whereas those yield premiums reflected 7-to-10 year lease terms, 5-year terms became the new norm and in the later stages of this current cycle some investors are now gambling on shorter terms,” he said.

Properties with long leases will be better equipped to handle a transitioning property cycle. One of the categories with typically longer-term leases is that of childcare, which O’Brien said has been a perplexing sector of the market, particularly in the later stages.

“As an investment medium it offers long-term leases, often from 10 to 15 years, with CPI or fixed annual increases, and with several listed tenancies. The yields in that sector have plummeted to levels of 5%, and in some cases less, from the traditional 8% to 9% in 2010-2011. Investors have scrambled for these assets and developers have focused on that sector uptake,” he said.

“There is a real disconnect developing in this sector, and a proliferation of developments to the point that some localities are being saturated and over developed. We have been seeing 30%-plus profit margins in the development of these facilities i.e. where the sales of the finished products are yielding 30%-plus profit on the total cost base. In one case in the outer western metropolitan area a new facility sold for around $6 million, on a cost base of circa $3 million. That profit margin has been the catalyst for the overheated development frenzy of childcare. It will self-regulate soon, because we are seeing these new centres failing to reach appropriate occupancy thresholds to justify their business models.

“There is a lag effect but it will come to the fore in time.”

Venture Into Valuation – What does a property Valuer do?

We asked one of our Valuers to summarise the property valuation process and what they did as a Valuer. The article was written by Jack Gibson (RPV), a Residential Valuer from Adelaide. We have also produced a 2 part short video series – Venture Into Valuation – documenting the valuation process and starring another one of our Valuers, Henry Pinto (CPV), a Managing Valuer from Sydney. 

In my everyday dealings with clients I have noticed that there are a number of people who are not familiar with property valuation or what I do as Valuer. This is not a complete shock, as obtaining a valuation is not something you do every day, but most of us will require a valuation at some point in our lives.

The following is a brief explanation of property valuation, how the valuation process works and the importance of attaining valuation advice from a qualified professional.

When do you need a property valuation?

There are several reasons for obtaining a property valuation, here are the most common reasons:

  1. Applying for a Mortgage
    When purchasing a property or refinancing, your bank may require a valuation of your property to ensure the security value of the property adequately covers the loan.
  2. Pre-Sale Advice
    When you are contemplating selling your property so you can set an informed asking price for the property.
  3. Pre-Purchase Advice
    Before you make an offer to buy a property, so you pay a market price for a property and you are comprehensively aware of exactly what you are purchasing.
  4. Capital Gains Purposes
    Capital Gains Tax (CGT) is the tax payable on the capital gains from the sale of an investment property. A valuation will need to be conducted and provided as evidence to the Australian Tax Office to determine the change in value of your investment and in turn determine if you are liable to pay (CGT).
  5. Legal Proceedings
    An independent property valuation might be required to aid in the settlement and litigation of legal proceedings between parties with a legal interest in property for example divorces, business venture splits and joint investments.
  6. Insurance
    Commonly required to either determine the amount of insurance required for the purpose of establishing insurance cover or to determine the sum to be paid following loss or damage.

Did you know?

The lending institutions (your bank) will typically use an independent or third party property Valuer, who will often be appointed by a panel management company to ensure an un-biased and transparent valuation.

What does a property Valuer do?

A Valuer will conduct a detailed inspection of the property internally and externally;

  • Measuring the building and make notes on any significant improvements
  • Examining and taking note of the buildings details and its condition
  • Noting any obvious or major structural faults
  • Identifying the number of rooms (bed/bath/living), the layout, the presentation, the fit out, fixtures and fittings, and any other ancillary improvements such as car accommodation, sheds, verandahs, decking and landscaping
  • Taking note of the property’s topography, street frontage, allotment shape, size, underlying zoning and location
  • The Valuer will take Photos that are date stamped to be included in the report

Once the inspection has concluded, the Valuer will examine all relevant data applicable to the property such as zoning and planning restrictions, and check for any risk ratings. The Valuer will then compare the attributes of your property to recent comparable sales in the surrounding area to determine a market value.

Watch the video below “Venture Into Valuation – Part 1 The Property Inspection”

What is the end product?

A property valuation report is a legal document which includes a legal description/Title Reference of the subject property, along with land, location and improvement characteristics. Property valuation reports will comprise a number of ‘comparable’ sales evidence to support/justify the valuation figure. It is common for a valuation report to include a rundown of recent economic activity, including the current status of the cash rate and other data that is likely to affect the local/national property market.

Watch the video below “Venture Into Valuation – Part 2 The Valuation Report Process”

Thanks again to Jack and Henry for taking us through what they do every day as Valuers. We hope that this has given you a better understanding of the valuation process. Please contact us if you would like to find out more about our services.

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Building Sustainability Starts with Aspect

Building Sustainability Starts with Aspect

The value of being green has become more evident in recent times as property developers and owners choose to build sustainable and energy efficient homes. Things that come to mind when thinking about building a sustainable home are solar panels and rain water tanks, with most of us over looking what could be the most important factor – the orientation of the property on the block of land, otherwise known as ‘aspect’.

Watch our video “Building Sustainability Starts with Aspect” below.

 

Optimal property orientation will help harness the power of the environment to keep your home cool in summer and warm in winter.

Correctly orientated residential dwellings have main living area windows facing towards the north. The building design will allow cool easterly breezes through the property in summer and will soak up sun in winter.

In the future, sustainable and energy efficient properties will have greater market appeal, and will likely gain a premium over those properties that are not correctly orientated.

A special thank you goes out to Mark Hopcraft from Opteon, based in Orange – Central West NSW, for sharing his personal passion for sustainable design and architecture in the property industry.