Making sense of property values is a challenging proposition in the midst of this coronavirus crisis. The COVID-19 pandemic has impacted many areas of the economy, not least the process of valuation of property assets.

Melbourne, Australia – April 20, 2020

Making sense of property values is a challenging proposition in the midst of this coronavirus crisis. The COVID-19 pandemic has impacted many areas of the economy, not least the process of valuation of property assets.

Urban Property Australia Founder and Managing Director, Sam Tamblyn said that with transactions becoming scarce and financing tightening, valuers will have to attach less weight to market evidence which transacted prior to the emergence of COVID-19 in March and instead heavily evaluate transactions which do occur post the outbreak of the virus.

Mr Tamblyn added, “valuers now need to undertake additional analysis to establish the strength of cashflow for a property and perform additional research on the current and future continuity of each tenant to value the potential impact on cap rates as a result of COVID-19.”

While the effect of every economic downturn is different, this coronavirus has already resulted in unemployment rising, businesses closing, travel bans, business confidence levels falling to record lows, tenants requesting rent-free periods and mortgage holders applying for a payment holiday.

In response to the COVID-19 pandemic, restrictions on population movement, public gatherings and social/leisure activities have forced many businesses to close leading to some tenants unable to continue to pay rent as a result of the government’s “hibernation strategy”.

Mr Tamblyn said, “cap rates will certainly soften through this crisis with the value of property determined by the stability and strength of the current income of assets.”

“The outlook of cap rates softening reflects Urban Property Australia’s assumptions of lower market rental growth in the future, restricted trading conditions and vacancy downtime increasing compared to the conditions prior to the outbreak of the virus,” he said.

Mr Tamblyn added, “detailed analysis must be undertaken to establish the cashflow outlook for all properties, with the risk of vacant space substantial in today’s market in light of reduced future tenant demand.”

“Valuers now also need to consider the performance of specific industries of tenants in assets with tourism, hospitality, education and retail generally having been adversely affected in extreme ways, for example. In light of reduced tenant demand, and likely increased incentive levels in the short term, net effective rents will fall.”

The likely market impact of the COVID-19 disease varies distinctly across sectors, and there is a distinction between the expected short-term effects and potential longer-term implications.

Cap rates for hotels, retail and student accommodation property are most susceptible to the direct impacts from the ongoing spread of the virus.

Whereas cap rates for industrial property for example are likely to be more resilient, underpinned by the structural demand changes of e-commerce which have seen investor and tenant demand for warehouses significantly increase in recent years.

Mr Tamblyn added, “for the industrial property sector, COVID-19 and its associated quarantines are creating new online consumers, which will fuel the need for warehouse and distribution facilities close to dense inner city areas with e-commerce already underpinning growth in the industrial sector.”

Mr Tamblyn said, “looking ahead, cap rates of prime and secondary assets of all property sectors are likely to diverge in light of COVID-19. For instance, with competition fierce for all property assets in recent years, Urban Property Australia recorded the spread between prime and secondary Melbourne CBD office yields to narrow to 50 basis points in late 2019 compared to a 150-basis point spread observed in 2014.

Cap rates for prime properties which are leased to government-backed tenants or properties with long leases in place with secure cashflows are likely to remain of interest for investors particularly given the volatility of other asset classes with interest rates to remain low for the foreseeable future.

Mr Tamblyn concluded, “so what is “market” for commercial properties in this environment? Values of property will be difficult to determine in the current conditions; however the answer is more than just a cap rate, coupled with the quality and duration of the income stream, rents and existing vacancy will determine market values of properties in this crisis”.