Talk of opportunistic investment in commercial property markets has picked up as the previously strong office sector starts to sour.
The unexpected slowdown from Covid-19 came towards the end of a frothy marketāwith cap rates and yields at record lows, offshore interest in Australian commercial property had begun to wane pre-Covid.
The market shift has created deal flow in areas that werenāt anticipated, according to Jameson Capital director Nick Browne, who says that heās seen a significant increase in interest from offshore investors.
Browne recently launched a special situations fund targeting assets impacted by Covid-19. The fund is targeting 20 per cent IRR.
āThe level of demand has really surprised us, from the 200-plus investors weāve approached there is a consensus that assets in Australia are overpriced on a relative basis to the rest of Asia,ā Browne said.
āOur shared view is that unemployment will exceed 10 per cent, mortgage delinquencies will increase, investment in rental apartments will stall and there will be a decline in demand for fringe office space.
Browne said that as risk premiums skyrocket, the cost of accessing capital may become harder for someātriggering a wave of distressed assets.
āOur view is that the market is going to get materially worse in the next three to nine months and weāve had a huge amount of interest in this fund from offshore investors that share this view.ā
Jamesonās special situations fund has a hard cap of $100 million, which Browne expects to close at the end of September.
Related: Lower Valuations a Challenge for Developers
The number of developers set to kick off new commercial projects in the next 18 months has fallen to new lows, according to NABās quarterly commercial sentiment survey.
The result suggests that the property industry is not expecting markets to improve any time soon.
āThe disruption caused by the pandemic has not only had an immediate impact on the building construction industry, but will continue to impact over the next few years,ā NAB chief economist Alan Oster said.
āThe hit to confidence was also severe, with the 2-year measure [falling] to -29āits first ever negative read.ā
Slower leasing volumes and tenant renewals, along with firmsā ability to continue operating and pay rent has negatively affected sentiment in retail and office markets.
A surfeit of supply has hit all commercial property sectors, save for industrial, with office vacancy hitting a 2-year high of 8.5 per cent in the second quarter.
The number of tenants putting office leasing requirements on hold sits at around 32 per cent, with all CBD office markets recording negative net absorption over the second quarter.
āNew research also shows Covid-19 had a big impact on rent collections across all retail property formats,ā Oster said.
āBulky goods retail and large format have held up best with 30 per cent and 21 per cent of experts reporting no change in collections.
āAt the other extreme, rent collections were [between] 30 per cent to 50 per cent lower from strip retailers.ā
Industrial property remains largely well-insulated, with vacancy falling to 5.8 per cent.
Of the 370 property professionals surveyed by NAB only 2 per cent said that conditions will return to pre-Covid-19 patterns.