Commercial property values set to fall 40%

Commercial property prices will decline by an average 40% during the downturn and may not recover for another five years, according to an industry expert.

Brad Piltz, chief executive of commercial property consultancy firm LandMark White, says the trough in the industry will be longer than previous downturns.  

“When you look at business investment and consider market conditions, when you look at the previous troughs which have been around about three years in length, you’d expect this trough to be considerably longer.”

Piltz says that declines in business investment and downsizing by companies will prolong the property downturn. “I would expect this trough to be about five years in length,” he says.

“To put that into context, we started falling about July 2008 so we’re talking about 2012 before we see positive recovery. I think we’re moving from a liquidity crisis to an economic crisis. We’re all learning to come to grips with that, so we’ve got a way to go.”

But Piltz says that despite his predictions, no one can give an accurate prediction of when the trough will end, and that “we may never recover from this”.

“Now that’s a bit drastic, but it’s just proof of the point that we don’t know when things are going to recover.”

Piltz says that during the industry’s trough, average commercial property prices will decline by up to 40% and that rents will continue to fall.  

“Rents are contracting. In Sydney they’ll drop by 10% or more; in some of our cities such as Brisbane we’ve already seen up to 20% decline in rents.

“In an environment over the next three years where you see very limited capital growth, the market will be driven by returns on investment. I can’t see properties driving up for between two to four years, so buyers need returns,” he says.

“People won’t buy properties on a sub-7% yield. It’ll become a yield play – that’s a fundamental shift when most properties have been sold on the expectation of capital growth, and they’ll accept a low yield, but now yields are going up.”

But Piltz says that without a doubt, “every market provides opportunities”.

“If you’ve got a unique property and for some reason it’s a premium building, perhaps you have to buy it whenever it comes up. But you have to do it at the right price.”

David Green-Morgan, research director for commercial property analysis firm DTZ Research, says that while Piltz’s views are on the “pessimistic” side of the market, they deserve to be acknowledged.

“Once this downturn breaks through it’s not beyond the realms of possibility that we’ll see results like that. If you assume that the downturn has got the rest of this year to run, then maybe somewhere between 30% and 40% declines is not unrealistic.”

Green-Morgan says that there has been a pullback in future developments, which he says will eventually help the market when it recovers to prevent it from oversupply.

“I guess what we’re still not sure about is how much demand will drop off and how severe the cutbacks the firms will have to make in order to survive,” he says.

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