The impact of COVID-19 is flowing through to commercial property prices, with returns down 3.4 per cent year on year, according to the latest Property Council/MSCI Australia Annual Property Index.
The index reports an annual return of 6.2 per cent to the first quarter of 2020, down from 9.6 per cent a year earlier.
The income return for Australian commercial property was 5.2 per cent, while capital growth was just 0.9 per cent.
Investment performance for the Australian commercial real estate market has softened with the all property total return 347 basis points lower than 12 months ago.
MSCI executive director Mitchell McCallum says this represents the lowest annual growth rate since the second quarter of 2010, when asset values were beginning to recover from the depths of the global financial crisis.
“The index results give us the first real insights into how Australia’s commercial real estate is being impacted by the COVID-19 pandemic,” McCallum explains.
“While total returns for Australian commercial real estate have been slowing for several years, the accelerated slowdown over the 12-months can be attributed to the COVID-19 pandemic.
“The Australia property industry remains uncertain about what the full impact of COVID-19 will look like and it will take action and conviction to navigate through this difficult time.
Retail total returns moved into negative territory, declining to -1.6 per cent from 5.0 per cent.
“The retail and hospitality sectors were already under some pressure, but the impact of social distancing and lockdown measures has compounded the difficulties and accelerated the performance trends we were already seeing.”
Seventy-three per cent of the Index was revalued in the first quarter, which means most of the assets will have registered some impact, McCallum adds.
“But the fact that the true extent of the crisis only started to become apparent towards the end of March, combined with material uncertainty about the outlook, means that the returns we have observed so far may not tell the whole story.”
Office total returns declined to 11.1 per cent (down from 13.2%), and industrial total returns declined to 11.8 per cent (down from 13.7%).
Across the major cities, Sydney outperformed other major metropolitan areas, posting a total return of 8.9 per cent. This was followed by Canberra (6.6%), Melbourne (6.5%), Brisbane (2.6%), Perth (0.7%) and Adelaide (0.4%).
One bright spot in the Australian market was the industrial sector, which posted an increase in annual growth over the quarter, moving from 11.4 per cent in December 2019 to 11.8 per cent in March 2020.
The slowdown was felt throughout international markets, with New Zealand (6.4%), the U.S. (5.2%), Canada, (4.6%) and the U.K. (-0.6%) all softening over the quarter and year to March 2020.
How can property players keep up with the market in these uncertain times?
“Not all data is created equal. There’s never been a more important time to benchmark portfolios of real estate assets to understand how they are positioned – and that requires reliable data,” McCallum says.
“The June quarter index results, released on 12 August, will provide important clarity on the potential road to pandemic recovery with an updated set of end-of-financial-year valuations. It will be particularly insightful, capturing COVID-19 full impacts and help position the industry for the next phase.”
Find out more about the Property Council/MSCI Australia Annual Property Index.