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The commercial property market is set to rebound strongly over the next five years, says BIS Shrapnel chief economist Frank Gelber, who claims property trusts have got their current asset sell-down strategy all wrong.
Gelber says property trusts should not be selling their assets and buying back shares but holding them and repositioning them for what he says will be “strongly rising” commercial property market over the next five years.
“It makes a lot of sense for investors to come back into property. This is not a market in anything like equilibrium. It's bumping around the bottom of the cycle, struggling to recover,” Gelber writes in The Australian.
“Inadequate investment and low prices have set the scene for strong returns this decade. It's not a quick-return trader's market. This is a market for investors with a medium-term horizon,” he adds.
According to Gelber, now is the time for the commercial property market to set itself up for strong returns over the next three to five years with “returns in both direct and indirect investment groups should reflect that”.
As the graph below shows, BIS Shrapnel places the Brisbane office market on the cusp of a recovery, just behind Sydney, Perth and Melbourne, which are already heading into an upswing. BIS Shrapnel says industrial property and hotels are further along in the property cycle.
In its March 2012 building industry update, BIS Shrapnel said that while the NSW office marked was currently weak, “the beginning of an upturn as a lack of new supply combined with stronger economic conditions sees the office market tighten considerably from its current level” in 2012-13.
In the case of Melbourne offices, BIS Shrapnel says the market is already “well placed to begin a pronounced uptrend” due to its low and falling vacancy rate.
In light of these upbeat forecasts, Gelber says so there is not much point in property trusts “wasting their equity in a vain attempt to raise their share price”.
“New capital raisings will, in any case, have to wait until market sentiment changes. And it will eventually,” says Gelber.
The real problem, he says, is that both retail and institutional investors are sitting on the sidelines and not investing in both listed and unlisted property trusts and the property market in general.
However, he says that once the economy improves, they will have more income to allocate to investment.
“Meanwhile, we need to keep the lines of communication open,” he says.
“The super funds do have the money. But they too are sitting on the sidelines [and]… I suspect they still regard property investment as relatively risky.
“That's not true. Property was risky in the boom that preceded the GFC – over-geared vehicles, overvalued and at risk of becoming oversupplied. But that's not true now,” he says.
This article first appeared on Property Observer.