THE PROPERTY DEVELOPMENT REVIEW
there is an increased focus on the real estate fundamentals - the ability of an asset, when properly managed, to attract and retain tenants and opportunities to enhance income streams in the short to medium-term rather than purchasing decisions being skewed towards an asset’s current tenant covenant and/or lease tenure - like the majority of the buyer pool was during the peak of the Covid-19 pandemic.
What market sectors do you anticipate being most in demand over the next six months?
There are good buying opportunities in all sectors. Take office for example, it’s had a lot of bad press lately, and no doubt it is going through structural changes with low occupancy rates due to the ‘work from home’ phenomenon. However, if we look through the current debt cycle, we are seeing attractive counter cyclical buying opportunities for investors with access to equity, often the ability to buy below replacement cost. The bifurcation of secondary yields is also providing a value proposition for investors willing to move up the risk/ reward spectrum, particularly in the office sector. We are seeing more purchasers gravitate towards core plus and value add assets where the increased cost of capital can be offset with enhanced returns from active management initiatives. These initiatives often include refurbishment or expansion of improvements and the renegotiation of leases to capture positive rental reversion and enhance income security. With business increasingly focused on the ‘employee experience’ aiming to attract employees to the office with better amenity, high quality refurbished space remains in demand. Do you feel that associated factors like building costs, supply-chain challenges and market sentiment will improve for developers over the next 6-12 months? For instance, have building costs already peaked? While slower growth would typically not be welcomed by the market, the silver lining is that it indicates that higher interest rates are having the desired effect in cooling inflationary pressures. Headline indicators of inflation are now in decline, with the June quarter data revealing a decline to 6.0% with prices now falling from several categories. Data from overseas is also encouraging with US inflation down to 3.2% and Europe down to 5.5%. There remains concern around the risk of persistent inflation in service industries, but the US experience has provided encouragement to financial markets globally that the desired moderation in inflation is occurring, as supply chains improve and the balance between demand and supply for most goods is likely to normalise.
August / September 2023 – 97
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