How Melbourne’s commercial market has fared during the coronavirus pandemic: HTW
The full effects of the COVID19 pandemic on the Melbourne commercial sector will not be known for many months to come, according to the latest report from valuation form Herron Todd White.
“Today’s sales are not truly indicative as they are the result of three to six months marketing, negotiation, due diligence and financing. In the coming months, the volume of sales is likely to slow as prospective purchasers consider their positions and the likely market and economic uncertainty over the coming months (potentially longer),” the firm said in their April Month-in-Review report.
“Vendors will be reluctant to list properties, particularly in light of the government’s economic support packages and rental assistance program.”
The report found that yields for industrial investment properties are likely to remain tight in the current low interest rate environment.
Properties with a long lease expiry profile, strong tenancy covenant and low maintenance improvements are likely to remain in strong demand for this reason.
This is particularly so for prime properties according to the report.
“For example, a listed company tenant on a seven year plus lease could well achieve a premium result as invested capital seeks a flight to quality. For city fringe and inner suburban industrial properties where there is a high underlying land value and redevelopment potential, demand and pricing is more likely to hold up.”
“Conversely, more dated industrial properties with a short lease and small business tenancy profile will be seen as at risk and will be priced accordingly. We are seeing a widening of the yield gap between prime and secondary industrial investments.”
“Properties offered with vacant possession will remain in favour, again as a result of low interest rates, however potential owner-occupiers will need to understand the impact of the virus pandemic on their business before committing to a purchase.”
The report suggested that, even if a business can withstand the economic pressures of a prolonged downturn, competitive tension is unlikely to be in place to support prices to the extent of the pre-pandemic market.
As the number of potential buyers decreases, so too does the likely realisation.
As with many owner-occupier purchases, the buyer is often an adjoining owner or a business in the immediate area.
The report predicted an increase in the number of off-market sales as cash-strong and opportunistic buyers with strong businesses look past the pandemic and position themselves for longer-term growth.
“The extent of rental decline, if any, will be a function of the length and severity of the economic downturn and it is too early to make a call on future pricing at this time,” the report concluded.