Produced in partnership with Charter Hall.
Property investment and funds management group, Charter Hall is anticipating the end of the decline in commercial property valuations that has challenged the market for the past two and a half years.
At the group’s half year results in February, group chief executive, David Harrison, said the market had reached an “inflection point”.
“Looking 10 years ahead, Australia is forecast to see its population grow by 3.9 million people,” he told investors.
“To accommodate this growth, Australia will need to build additional supply across all real estate sectors, the size of Brisbane and Adelaide combined. Our tenant customers will need solutions to cater for this growth in the economy and our investor customers will see attractive investment opportunities.”
According to Steve Bennett, CEO of Charter Hall’s direct property business, the recent results also marked the end of a prolonged period of subdued commercial property valuations for the industrial, logistics and convenience retail property sectors, which had minor valuation uplifts in the December quarter.
“Commercial property investors want to know when [the market] is going to turn,” he tells Professional Planner.
“They’re asking about the right entry point and for long-term investors seeking stable income and exposure to a quality commercial property, increasingly that answer is now. It is also about understanding that unlisted commercial property should have a medium to long term investment horizon.”
Bennett says this can be likened to investing in residential investment property where people typically hold an asset for long periods of time.
“They usually don’t sell out after 6-12 months and the same applies to commercial property,” he says.
“The property market moves in cycles and, as we move into the growth cycle, investors who come in at the right point [in the cycle] have the opportunity to achieve outsized returns.”
With over $83.4 billion in funds under management, Charter Hall is the largest owner of real estate in Australia. The direct property business manages around $9 billion across all core property sectors, on behalf of investors and financial advisers and their clients.
While trying to pick the bottom of any asset class is difficult and can be fraught with danger, good timing can deliver excess returns.
After peaking in mid-2022, some sectors of commercial property saw valuations fall by around 25 per cent, but investors can take heart from several positive signs, Bennett says, citing forward looking supply constraints. This is the result of a lull in the building and construction of new commercial property, with sectors like office construction in particular reducing quickly.
Charter Hall estimates that it currently costs between 25-45 per cent more to build than to buy the equivalent office building but it can be significantly higher depending on the location and specifics of the property.
Similarly, in industrial and logistics, the cost of building is often around 20 per cent higher than buying stabilised stock.
“Construction risk is high because developers need to get through DA [development application] planning, financing and leasing, and find skilled labour,” Bennett says.
“The big players are finding that often it doesn’t make economic sense, and this pullback is impacting supply, which combined with the push [to get people] back to the office, is increasing demand for sectors such as office.”
This dynamic underpins commercial property’s medium-to-long term growth profile, given CBD office projects can take four to seven years from concept to building completion. It is not uncommon for the planning process alone to take a couple of years, with design competitions, tenders and contract negotiations.
Other favourable tailwinds for commercial property, include Australia’s strong economic, employment and population growth projections; thriving tertiary education sector, providing a vital path to service-based work; and public and private sector employers pushing workers back to the office full time.
“There are many businesses out there, including advice and wealth businesses, who are tired of the work from home debate because they’ve all been back in the office for years,” Bennett says.
“The trend is clear and it’s only going one way in terms of being in the office more days per week.”
Furthermore, Sydney and Melbourne’s global status as two of the best cities to live in helps attract highly skilled labour from around the globe.
“Everything’s moving in the right direction now and, unusually, at the back end of this real estate cycle, the economic fundamentals are strong,” Bennett says, pointing to Australia’s 4 per cent unemployment rate and falling inflation and interest rates.
“We’re coming out of this property downturn into a strong economy, with favourable supply and demand dynamics across all real estate sectors, which is very supportive for existing owners.”
“We’re just not going to see the supply come through and the only reason to build is if they can get high rents to justify it and, if that happens, then it pushes up rents in the other assets in that market.”
While landlords like Charter Hall stand to benefit from higher rents, the group remains focused on their customers, first and foremost.
“We always say our two clients are tenants and [fund] investors because if our tenant customers are happy then they’ll stay in our buildings, pay their rent, and stick with us through cycles,” Bennett says.
“We want to attract and retain top tier tenants for the benefit of our fund investors.”
