Office values face COVID-19 heat

August 5, 2020
Office values face COVID-19 heat

Commercial office property was on a roll before COVID-19 hit, with record growth in rental income and the lowest cap rates in 30 years. But Dion Hershan, Yarra Capital Management’s Head of Australian Equities, believes this can’t be sustained.

When The Australian Financial Review moved into brand new offices at 1 Denison Street, North Sydney, this week, it provided Chanticleer with a bird’s eye view into the nearly empty surrounding office towers.

Across the road is 100 Mount St, a 35-level tower owned by Dexus and Dexus Wholesale Property Fund. About half the building has been leased to monopoly government-owned broadband provider NBN Co.

It is eerie looking into the NBN floors full of desks and workstations and nobody in sight. About 99 per cent of the NBN workers are working from home and they won’t be back until September, at the earliest.

Out in the North Sydney streets at lunch time there is a ghost town feeling. But this is not a peaceful COVID-19 metropolis thanks to the bashing, crashing and clumping sounds from construction of new office blocks and a metro station.About 20 metres from Chanticleer’s desk on the other side of Little Spring St, a 35-storey hotel and commercial tower is being built by developer Billbergia. This building, which amalgamates 86 and 88 Walker St, will increase the gross floor area on the site four-fold to 16,000 square metres.
Out in Denison St, trucks are constantly removing rubble from the new metro station site, which is also the site of a 40-storey commercial building that will be built by Lendlease.
This provides the context and background for a bearish call on the office property market by Dion Hershan, managing director and head of Australian equities at Yarra Capital Management.

Hershan is about to do the rounds of institutional clients giving his view of the markets, including the reasoning why Yarra’s funds are heavily underweight real estate investment trusts.

“Our thesis on this is that pre-COVID – before any of the work from home impacts had been contemplated – the winds had already changed,” he says.

Read more…. (subscription to The Australian Financial Review required)