Investment performance for the Australian commercial real estate market has softened with the Property Council/MSCI Australia Annual Property Index reporting a total return of 6.2% in Q1 2020, down from 9.6% a year earlier.
This is 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 gave us the first real insight into how Australia’s commercial real estate is being impacted by the COVID-19 pandemic. 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 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 downward performance trends.
Seventy-three per cent of the Index was revalued in the first quarter, which means most of the assets will have registered some impact. However, 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.
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.