Turning on immigration taps a boost for commercial property market

Commercial property players have warned a tighter lending environment could hit values of lower-grade assets but are optimistic about the longer-term prospects for the sector.

Lendlease Global’s Tony Lombardo predicts the economy will pick up when borders reopen. Picture: John Feder

Commercial property players have warned that the tighter lending environment could hit values of lower-grade assets but are optimistic about the longer-term prospects for the sector as immigration returns.

With builders collapsing and residential developers deferring projects, major players have warned that a supply crunch is looming at the same time as big ticket deals are drying up.

At a Sydney property conference, RBA head of domestic markets Jonathan Kearns played down the potential impact of house price falls on the financial system, saying that commercial property had played a larger role in earlier crises.

Mr Kearns said that although the global financial crisis was often viewed as a residential property-based crisis the impact on banks had come from commercial property.

“The commercial property market has a much bigger impact on the financial system than does residential property,” he said.

“Globally if we all look at the GFC, we all think of it being a residential housing-based crisis.

“In most countries, the impact was actually greater on banks from commercial property.”

But now, he said, Australia’s banking system had “very little exposure to commercial property” with it making up about 6 per cent of the lending.

“Our banks are pretty well insulated against the commercial property market,” he said.

“We certainly wouldn’t expect to see the effects we saw in the late 1990s.”

Property chiefs are looking to a combination of rental increases in hot areas such as warehousing and also for a return by workers to offices to drive values. But in the short-term fears of rising interest rates and the difficulty of selling lower-grade properties is causing a stalemate in the market with a stand-off between vendors and purchasers.

Charter Hall chief executive David Harrison, whose property funds company has kept buying large offices and developing top-quality new stock to add to its $70bn real estate empire, says the best properties are performing, even as lower-grade assets dip.

Charter Hall chief executive David Harrison. Picture: Hollie Adams

Mr Harrison says he does not believe the best assets will fall to the extent implied by the weak real estate investment trust market. “It’s not going to fall to the level that the listed world implies,” he said.

Mr Harrison is a staunch believer that workers will return to their offices and top-quality buildings will become a drawcard for tenants. He also pointed to the widespread demand for industrial space from industrial tenants in retail, e-commerce and logistics

But he warned that some large, more speculative projects that have been mooted would not proceed, partly as costs have jumped, which would mean some developments would be pushed back to the next property cycle.

Lendlease Global CEO Tony Lombardo said monetary policy was starting to slow the environment but that once borders started to reopen to migration the economy would start to fly.

He pointed to encouraging signs of where the company’s construction unit was seeing that prices would come down.

Dexus CEO Darren Steinberg cited both global instability and macroeconomic uncertainty as contributing to the toughest operating environment he had seen.

But he said there was a lot to be positive about with Australia, citing the longer-term influence of immigration which had driven real estate sectors. “Bringing back migration goes a long way towards stimulating the real estate sector across the country,” he said.

Cushman & Wakefield CEO – Asia Pacific, Matthew Bouw, pointed to the record level of “dry powder” which investors had assembled to chase property deals, and noted the regional influences on the local market. “I think the benefit of China recovering and the India recovery and also what‘s happening in Southeast Asia, could be of longer-term benefit to Australia,” he said.

AustralianSuper head of property Bevan Towning has a global mandate and said international markets may be more attractive.

“We think offshore at the moment is looking actually more interesting than domestically but … that can also change,” he said.

Brookfield’s local managing partner, real estate, Sophie Fallman, said real estate fundamentals were strong, especially for high-quality assets, and cited the benefit of real estate as an inflation hedge.