As real estate investors seek to understand how the COVID-19 crisis could affect their portfolios, several large Australian Superannuation funds recently wrote down their property portfolios by up to 10%. To understand this we need to put it in the context of more than three decades of data from the Property Council of Australia/MSCI Australia Annual Property Index examining yields under different net-operating income (NOI) growth scenarios.
Looking into the history books, there were only two times when asset values have decreased - during the early 1990s where economic recession and over-supply caused asset values to fall 32%, and during the 2008 global financial crisis when asset values fell 13%. In the context of the two past NOI and asset-value growth repricing events (measured by NOI yield increases), the current 10% write-down in assets is more comparable to the late 2000s.
According to the MSCI Research modelling, applying the 10% write-down in asset values and assuming NOI yields under the different NOI growth scenarios (similar to the early 1990s and the late 2000s) showed the NOI yields to be lower than prior to the financial crisis and past correction events.
“The full impact of COVID-19 on property portfolios will take time to understand” says Bryan Reid, Executive Director at MSCI Research. “Using historical data and scenario analysis, understanding what changes in NOI growth or yield could imply for asset values, or vice versa, may help investors gain a clearer picture of the times ahead.”