Australia currently has a “two tiered” property market with the ongoing Victorian lockdown likely to have longer lasting impacts to Victorian property value and returns. However, ongoing tensions between landlords and tenants in many commercial property segments across the rest of Australia will mean they too will not be immune to downward swings in value and return.
The last month has seen most major real estate agencies report an increase in incentives offered by landlords to secure tenants in each of the office, retail and industrial markets. Further, agents have reported ongoing pressure on headline rents. Colliers International highlights that this demonstrates a recent focus by landlords on value preservation strategies.
For landlords with low vacancy rates, the leasing Code of Conduct has been extended in many jurisdictions. Ongoing “case-by-case” commercial negotiations will need to be carefully managed, particularly when it is forecast that many tenants will face a “cash squeeze” over the next six months due to the phasing out of Government support, return to normal banking repayment arrangements and generally more uncertain and volatile consumer markets.
The balance between landlord and tenant across different commercial market categories and regions has never been so contrasting and for some (e.g. inner city retail or office space), uncertain. However, the current environment means that forecasting careful, strategic financial management and scenario planning continues to remain vitally important to assist in preserving property values and return. After all, lower rents, higher vacancies and incentives leads to lower yields, which in turn leads to lower asset values that can put owners at risk of breaching LVR and interest coverage debt covenants.
It is therefore important for commercial property owners, their Directors and stakeholders to track the early warning signs and lead indicators of strain on property value and return which can cause financial distress. Early action to address distress facilitates better planning, better outcomes and also helps Directors meet their legal duties.