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Opteon’s Annual Data Review 2022: Commercial market shows strong trend – headwinds ahead

Opteon’s Annual Data Review 2022: Commercial market shows strong trend – headwinds ahead

Author: Ross Turner, General Manager Commercial and Agri

The headlines

  • Opteon’s in-house data analysts have analysed more than 22,000 of our valuations (Q2-2019 – Q2-2022) with insights extrapolated for commercial (retail and office) and industrial (warehouse and manufacturing) assets in the sub $15 million asset class. The valued properties are located in NSW, Victoria, WA and Queensland.
  • Overall, in the past year, the sub $15m industrial and commercial market has continued to perform strongly across the country.
  • From our data analysis and market observations, we have also identified clear market trends regarding asset class performance and yields. We include these in our commentary.
  • For investors and financiers, these data-driven insights provide a clear picture of recent market performance in the sub $15m industrial and commercial asset classes.

Industrial

The demand for industrial assets in the sub-$15 million category, particularly warehouses and logistic properties, has continued – no doubt helped by online shopping habits formed during the pandemic. Yields in the eastern states have continued to fall more sharply still in the last 12 months than in previous years.

The industrial sector’s strong performance is reflected in the increased lettable area rates they are attracting across Australia. These have been most significant in Melbourne, Sydney, Brisbane and in regional NSW and Victoria.

In our annual review last year we wondered whether the industrial asset class would provide the best upside in 2022. We now have our answer.

The new question is whether this performance can continue given the flattening arc of median net yields against the strengthening of the Commonwealth Government 10 year bonds. Commonwealth bonds tripled between Q2 2019 and Q2 2022 to 3.8% – just 0.3% lower than industrial yields in Sydney and 0.4% lower than industrial yields in Melbourne.

Lettable area rates

Over the past year, sales analysis from the dataset has shown increased lettable area rates in Melbourne (+31%), Brisbane (+17%), Sydney (+9%) and Perth (+8%), particularly in the prime metro markets on the eastern seaboard.

Note: These figures are $/sqm and have been rounded to the nearest 100.

Sydney: $5200

In Q2 2022 | $4,800 in Q2 2021

Brisbane: $2900

In Q2 2022 | $2,500 in Q2 2021

Melbourne: $3000

In Q2 2022 | $2,300 in Q2 2021

Perth: $2000

In Q2 2022 | $1,800 in Q2 2021

Sydney lettable area rates were highest in the parts of the city around Port Jackson Bay – Eastern, Inner, Inner Western, Central Western, Canterbury-Bankstown, Lower Northern Sydney and the Northern Beaches – where rates were $6,700 in Q2 2022, compared with $5,000 across the rest of Sydney.

When contextualised within the previous two years of strong growth (+51% Sydney, +35% Brisbane, +56%, Melbourne and +24% Perth), these results indicate median lettable area rates for industrial assets within the metro areas are showing signs of stabilising.

Commercial Market Median Lettable Rates - Metro Industrial

There have also been increased lettable area rates in the past year across non-metro and regional areas in NSW (+21%) and Victoria (+9%). As with the metro industrial assets, this growth follows years of strong growth as shown by a change in median lettable area rates over the past three years of +99% in NSW and +96% in Victoria.

Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

NSW: $2900

In Q2 2022 | $2,400 in Q2 2021

VIC: $2100

In Q2 2022 | $1,900 in Q2 2021

Commercial Market Median Lettable Rates - Non-Metro & Regional Industrial

Yield

With median lettable area rates rising across the board and value and prices in some markets still rising, the falling yields we have seen for industrial assets in the sub-$15 million category are not surprising.

In the past year metro median net yields fell the most in Melbourne (-0.5%) and Brisbane (-0.4%), reflecting the significant gains those markets have seen in median lettable rates. Indicative of more modest growth in median lettable rates, Sydney market yields fell slightly (-0.1%) and Perth remained stable. In Q2 2022, median net yields in Sydney were 4.1%, in Brisbane they were 5.4%, in Melbourne they were 4.3% and in Perth they were 5.3%.

In the regions, yields for industrial assets continued the downward trajectory they have been on since 2019, with NSW seeing a drop of 0.7% (-1.4% over three years) and Victoria seeing a drop of 0.4% (-0.6% over three years). In Q2 2022, median net yields in regional NSW were 4.8% and in Victoria they were 5.4%.

With the yield curve starting to flatten, value growth is expected to soften, as even significant rental growth is unable to sustain values in a market of softening yields, particularly when they have been at historically low levels. Secondary grade assets are also likely to be impacted particularly those that have transacted in the previous 12-18 months.

Retail

In the retail space, there has been an increase in median lettable area rates, including particularly strong growth in suburban areas of Sydney and Brisbane.

Lettable area rates

In the retail space, there has been an increase in median lettable area rates in the eastern capital cities. Demand for well positioned suburban retail assets has been particularly strong in Sydney (+30%) and Brisbane (+19%). Lettable rates remain the highest in Sydney – more than double that in Brisbane.

Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

Sydney: $13000

In Q2 2022 | $10,000 in Q2 2021

Melbourne: $8200

In Q2 2022 | $8,100 in Q2 2021

Brisbane: $5800

In Q2 2022 | $4,900 in Q2 2021

In the non-metro and regional areas, median lettable area rates for retail assets have grown 20% in NSW and 45% in Victoria.

Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

Non-metro and regional QLD: $6700

In Q2 2022 | $2,100 in Q2 2021

Non-metro and regional NSW: $5000

In Q2 2022 | $4,200 in Q2 2021

Non-metro and regional VIC: $4600

In Q2 2022 | $3,200 in Q2 2021

Median Lettable Rates - Metro Retail Data
Median Lettable Rates - Non-Metro & Regional Retail

Yield

There has been a steady tightening of net yields in the eastern capital cities over the past three years. Retail yields in Melbourne (-0.7%) and regional Victoria (-0.8%) and Queensland (-0.9%) have firmed the most over the past year.

Note: These figures have been rounded to the nearest 100

Brisbane: 5.4%

In Q2 2022 | 5.8% in Q2 2021

Sydney: 4.4%

In Q2 2022 | 4.3% in Q2 2021

Melbourne: 3.9%

In Q2 2022 | 4.5% in Q2 2021

Retail yields have also been tightening in non-metro and regional areas over a three year period in Victoria (-1.5%), NSW (-1.4%) and Queensland (-0.8%).

Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

QLD: 6.6%

In Q2 2022 | 7.5% in Q2 2021

NSW: 5.2%

In Q2 2022 | 5.3% in Q2 2021

VIC: 4.9%

In Q2 2022 | 5.7% in Q2 2021

Office

Overall, the locational characteristics of the office property markets remained strong throughout the year. This suggests office markets have performed well post JobKeeper, which has been aided by many employers moving towards hybrid working arrangements.

However, with Sydney office yields just 0.5% higher than Commonwealth government bonds, indicates future reprising (softening) of yields and a likely softening of value levels unable to be sustained by any real net increases in effective rent.

Lettable area rates

In the office <$15m category, there has been an increase in median lettable area rates in the Sydney and Melbourne, with Melbourne assets performing the strongest with a +26% lift on last year’s numbers. There was little change in Perth over the year (-1%) and Brisbane is due to compositional change of data. Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

Sydney: $9600

In Q2 2022 | $9,500 in Q2 2021

Melbourne: $7000

In Q2 2022 | $5,600 in Q2 2021

Brisbane: $4400

In Q2 2022 | $5,100 in Q2 2021

Perth: $3,900

In Q2 2022 | $3,900 in Q2 2021

Median Lettable Rates - Metro Office Data

In NSW (+32%) and QLD (+31%) there has been a strong rise in lettable arearates for offices in non-metro and regional areas. In every quarter for three years (except Q4 2019), median lettable area rates for NSW regional office assets have been between $200 and $2,600 higher than in QLD.

Note: These figures are $/sqm of lettable area and have been rounded to the nearest 100

Non-metro and regional NSW: $5100

In Q2 2022 | $3,800 in Q2 2021

Non-metro and regional QLD: $3500

In Q2 2022 | $2,700 in Q2 2021

Median Lettable Rates - Non-Metro & Regional Office Data

Yield

There has been a steady tightening of office yields in in Sydney over last three years. Other cities have experienced more volatility, particularly during the pandemic-influenced 2020. During the past two years, yields dropped in Melbourne and rose in Perth.

Note: These figures have been rounded to the nearest 100

Brisbane: 5.9%

In Q2 2022 | 5.8% in Q2 2021

Sydney: 4.3%

In Q2 2022 | 4.4% in Q2 2021

Melbourne: 5.4%

In Q2 2022 | 5.4% in Q2 2021

Perth: 6.4%

In Q2 2022 | 6.0% in Q2 2021

Yields also continue to fall in non-metro and regional NSW and Queensland.

Note: These figures have been rounded to the nearest 100

QLD: 5.7%

In Q2 2022 | 7.4% in Q2 2021

NSW: 5.0%

In Q2 2022 | 6.1% in Q2 2021

Median Net Yields - Non-Metro & Regional Office Data

Current trends

The last 12 months have shown a positive story across metropolitan and regional markets. All markets follow a cycle and we observe that the cycle has now turned.

In terms of median lettable area rates, Sydney has again outperformed the other markets in every quarter across the asset classes. However, there has been a shift in regional performance with Queensland median lettable rates for retail assets becoming the highest in the country.

Yields have tightened the most for office assets (-1.7%) and retail assets in regional Queensland (-0.8%). The Queensland regional market is performing strongly due to the post Covid-19 migration trend as the state has opened up post lockdown.

Increased cost of funding will lead to higher return expectations for commercial property when considering the risk free returns from government bonds. Existing levels of debt held against security values of commercial property may not be sustainable and deleveraging is likely to occur. Whilst increases in effective rents have somewhat held the growth story (particularly in industrial), this trend is unlikely to continue and the next 12 months will see a softening in values in commercial markets, most likely to begin with the capital cities in the eastern states.

Ross TurnerAuthor: Ross Turner, General Manager Commercial and Agri

Ross is the General Manager for Commercial and Agri, with over 18 years’ experience in property valuation and advisory across Australia in both metropolitan and regional markets.

Ross has the benefit of having previously reviewed and provided valuation advice from a financier’s perspective in an institutional banking environment. He has considerable experience managing large valuation projects for Government and Corporates across Australia for financial reporting, strategic advisory and mortgage security purposes.

Contact Ross on 0435 039 847

We’re here to help answer any questions you might have. Contact our property specialists below.

Disclaimer

This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.

Liability limited by a scheme approved under Professional Standards

In the Spotlight: Chris Mitrothanasis

Recently appointed Senior Director – Government & Advisory, Chris Mitrothanasis currently leads Opteon’s Government services teams in NSW, QLD, NT and WA. The teams specialise in government sector-specific valuation and property advice across all asset classes for Federal, State and Local Government and their agencies.

A Fellow member of the Australian Property Institute (API) and Certified Practising Valuer with over 26 years’ experience within the property industry, Chris has worked in various leadership roles throughout his career. Today we delve into his progressive career journey.

Getting a taste of the property

Chris Mitrothanasis at Opteon's 2018 Conference

Chris Mitrothanasis at Opteon’s 2018 Conference. Photo credit: Jon W / Event Photos Australia

industry early on

Chris developed a keen interest in the property industry from a young age, having been introduced to the industry through family and friends represented in the real estate and construction industries.

During high school he worked at the local real estate agency as an office assistant. While completing his HSC, his mentor at the time suggested he undertake the Property Economics course at the University of Western Sydney. Great advice!

Growth and Leadership Accomplishments

Chris started out as a Cadet Residential Valuer in 1996 after completing his Bachelor of Commerce (Land Economics) Degree at the University of Western Sydney. Working for boutique property firms, he experienced rapid career progression over the next several years, developing technical skills and expertise in the Commercial, Residential and Government sectors.

Joining Opteon in 2013 as Director of Commercial, Chris established a Commercial/Government Department within the Sydney office. With the successful growth and expansion of the team across the Sydney metropolitan as well as regional areas, Chris was promoted to NSW State Regional Director (Commercial, Agribusiness & Government) in 2015.

Chris Mitrothanasis with Duncan Cameron

Chris Mitrothanasis with Duncan Cameron, Executive Director and Director – Specialised & Advisory. Photo credit: Jon W / Event Photos Australia.

Over the next seven years, the team continued to smash goals under his leadership, expanding rapidly and diversifying their core business offerings to cover Core Commercial, Alternate Assets/Middle Markets, Agribusiness, and Government Advisory. Chris says,

“As a leader, seeing my peers reach their goals gives me a sense of accomplishment.”

Government Expertise

Chris is well versed in the Government and Advisory sectors, managing various large-scale government and non-government projects and portfolios. He specialises in compulsory acquisitions and financial reporting valuations across Local, State, and Federal Government clientele. He has undertaken multiple complex compulsory acquisition valuations and mediations for both the resuming authorities and dispossessed owners.

Chris presenting on valuation topics

Chris presents regularly to clients and staff on valuation topics.

With strong leadership acumen and technical expertise spanning across a broad range of property sectors, he is regularly commissioned to undertake Government, Commercial, Retail and Industrial rental determinations on behalf of the API and multiple Government and Non- Government bodies.

Contributions to Industry

As an industry leader, Chris holds deep-seated passion for the Valuation and Property industry and genuinely enjoys giving back to the property community.

Chris is an API NSW State Committee member, providing critical guidance and intuitions into various issues arising or confronting the industry. He also serves the API as member of the CPD Committee, advocating for continuous professional development, event participation, and maintenance of professional standards.

Chris speaking at Opteon's Property Breakfast in 2020

Chris speaking at Opteon’s Property Breakfast in 2020

With a penchant for public speaking, Chris has hosted and presented at full house events and webinars, sharing insights and expert knowledge with peers and clients.

Motivation

Chris is involved with various graduate mentoring programs and projects, providing mentorship, and coaching to Opteon’s graduates and future leaders, helping them to achieve their qualifications and career goals.

“You never stop learning in the valuation industry. My biggest motivation at this stage of my career is to see the new generation coming through the ranks, witnessing the growth of our graduates, cadets and assistants, whilst ensuring we are expanding pathways for our teams in their career advancement.”

Recent article

Click here to read Chris’s overview of the Rise of Alternative Real Estate.  In this article, Chris examines a range of factors, including compressing yields, that are contributing to individual and private investors increasingly turning their attention to alternative real estate assets – particularly in the petroleum and childcare asset categories.

CONTACT

Chris Mitrothanasis

Chris Mitrothanasis

Senior Director – Government & Advisory (NSW QLD NT & WA)

How to get in touch

For more information about Opteon’s Government and Advisory services, click here for Government and here for Advisory.

To get a quote, contact us via the below form, or on 1800 40 50 60.


DISCLAIMER

This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.

Liability limited by a scheme approved under Professional Standards

Caravan Park

The Call of the Caravan Park

Author

Ryan Danaher, Opteon Head of Department – Alternate Investments

According to IBIS[1], the Caravan Parks, Holiday Houses and Other Accommodation sector is worth $4.5bn. It grew in market size by 13.9% in 2022 and enjoyed an annualised market size growth of 1.5% between 2017-2022.

Why has there been such strong growth?

There’s no doubt COVID-related travel and lockdown restrictions have fuelled growth in this sector. Many Australians who had accrued savings and annual leave while being cooped up throughout lockdowns and border closures have embraced holidaying options closer to home. Demand is so high that tourist bookings remain solid well beyond the typical seasons.

With a record 40,000-plus caravans, camper trailers and motorhomes bought in the Australian market in 2021[2], two preceding years of strong sales in 2019 and 2020, and an up to year-long wait for new orders, demand for tourist sites is unlikely to ease any time soon.

Another growth factor is Australia’s ageing population.

While there are many advantages of having a mixed permanent, annual and tourist site offering, there has been a rise in demand for pure lifestyle community parks. These parks are targeted at retirees who find the combination of affordable housing, great locations and instant community highly appealing. For investors, the attraction is mutual. Lifestyle community parks are typically 100% occupied with long waiting lists, which provides strong, reliable annual returns for investors.

What’s making caravan parks so attractive for investors?

Caravan parks are good income-producing assets, with many generating 50-60% profit on a going concern basis. But perhaps even more importantly for investors, they also represent an outstanding opportunity to bank land in appealing locations while receiving strong returns. Investors also see the ability to pass on rising costs to consumers.

Most large caravan parks are in premium locations, feature strong, positive cash flow and have the potential for growth and expansion. This combination makes them an attractive alternative asset class for institutional investors in particular. This is reflected in the interest and acquisitions of many of the major sector players, such as Ingenia Communities, Tasman Holiday Parks, Aspen Holiday Parks and Hampshire Property Group. They are not alone, as syndicates and private equity firms have also been helping to drive up demand and compress yields over the past 24 months.

Caravan Park

What’s next for this alternate investment asset class?

Between the consumer demand and the investor appetite – including Tasman’s reported[3] aim to double its footprint by the end of 2023 and Ingenia’s well-publicised expansion plans[4] – demand for quality caravan park assets is likely to remain high.

In the last couple of years, investors have benefited from the spread between yields and cost of debt. The only factor that might soften the market is rising interest rates, which may put pressure on some investor’s ability to acquire further holiday and lifestyle parks. But with strong private equity interest that is yet to be tested.

CONTACT

Ryan Danaher

Ryan Danaher

Head of Department – Alternate Investments

If you would like to know how Opteon can assist with Caravan Park, Holiday House and Other Accommodation sector valuations, contact us below.


DISCLAIMER

This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.

Liability limited by a scheme approved under Professional Standards

The Value of Green Data in Mortgage Valuations

For lenders and investors, there’s enormous – and often untapped – value in accurate ‘green’ property data. Green property data describes the energy efficiency and sustainability of a building – including the age, measured living area, as well as the building material used to the type of heating, cooling and appliances. Green data can be used in determining energy consumption and provides independent primary data for validation and auditability.

Since NAB issued its first green bond in 2014, demand for sustainable investments has steadily increased. The Sydney Morning Herald1 recently reported “sustainable debt issuance, which also includes green bonds and social bonds, jumped three-fold in Australia and New Zealand last year to $US44 billion”.

Companies are increasingly invested in meeting market expectations around environmental, social and governance (ESG) reporting. According to an Economist Impact report sponsored by Westpac, Financing for sustainability: Inside Asia Pacific’s rapid market growth (the Economic Impact Report),2 new [sustainable finance] products and increasing demand are helping companies and investors make the challenging transition to net zero and fulfil their ESG obligations”.

Both green bonds and ESG reporting are significant market opportunities that rely on accurate green data. However, reliable and up-to-date data is often difficult to source.

Green bonds

According to the Economic Impact Report,2 rising recognition of the urgency to mitigate climate risks and the need to meet the United Nations 2030 Sustainable Development Goals” has fuelled the rapid growth of the Asia Pacific’s sustainable market. Sustainable green bonds are attracting a premium for lenders issuing these securities.

The Climate Bonds Standard and Certification Scheme is a labelling scheme for bonds and loans. It is used by bond issuers, governments, investors and the financial markets around the world to prioritise investments that help address climate change.

The Climate Bond Initiative outlines eligibility criteria3 for green residential buildings with national and state-based requirements. These consider dwelling type, location and other relevant characteristics. State-based requirements align to the relevant building codes and may be eligible with an energy certification, such as NatHERS, Green Star, BASIX Energy 40 or Passive House certification.

The eligibility criteria is intended to evolve over time with the eligibility determined at the time a green bond is issued. As the criteria evolves, weaker proxy data is phased out as more reliable, specific and measurable data becomes available. For example, rooftop solar was eligible under a simplified proxy framework nationally (excluding WA) where financing was confirmed before 30 June 2022. The simplified proxy framework requires less data than the newer criteria, which also considers pools and gas connection.

Environmental, social and governance (ESG) reporting

In 2021, New Zealand became the first country in the world to enact climate change disclosure laws for financial firms. The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 requires approximately 200 large financial institutions to start publishing disclosures in 2023.

In Australia, where ESG reporting remains voluntary, many companies are choosing to disclose their ESG performance to meet a new range of investor, customer, employee and community expectations. For example, ANZ, NAB, CBA, Macquarie and most recently Westpac have joined the NetZero Banking Alliance.4 The Alliance members commit to transition greenhouse gas emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner. This includes addressing Scope 3 emissions,5 which can include emissions associated with residential mortgages.

Effectively managing and disclosing ESG risks has become a critical governance activity. To comply with continuous disclosure obligations and to avoid misleading and deceptive conduct, it is becoming increasingly important that corporate entities, including lenders, understand the quality of sustainability data in meeting their ESG reporting requirements. Increasing regulatory scrutiny in ‘greenwashing’, or falsely representing a company’s ESG performance, makes it critical directors are relying on accurate data.

Property Valuation

How Opteon can help tap into green asset potential

Opteon’s highly trained valuers inspect over 400,000 residential and commercial properties each year from which primary data is collected, including energy and sustainability-related data. Our independent valuations pass rigorous quality and compliance standards, leading to high quality primary data that can inform green classifications.

Opteon’s inspection data is accessible for portfolio-level analysis and can be used to identify loans that may meet residential and commercial green bonds eligibility criteria. It can also be valuable in determining emissions for ESG reporting purposes.

Using trusted green data is an important aspect of issuing green bonds. Green bonds have been attracting higher rates of returns for investors in wholesale markets, green data enables banks to identify assets in its back-book which are eligible to be securitised. Additionally, green data can be used by banks for determining Scope 3 emissions from the built environment in a bank’s portfolio, data is available historically with richer, more specific data becoming available.

CONTACTS

Scott O’Dell

General Manager – Residential



Ross Turner

General Manager – Commercial

If you would like to know how we can help you identify green loans in your portfolio and capture the value of green data, contact us below.


DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

Mortgage Report Data Reveals Flood Risks across Australia

Author

Scott O’Dell – General Manager – Residential

It’s not news that Australia has experienced many major flood events over the past two years, particularly along the east coast.

Historically, property values have proved resilient after significant flood events. For example, as reported in the AFR1: “A year after the Lismore floods in 2017, house prices rose 11.5 per cent. Similarly, after floods in the same area in 2020, median house prices surged a record high of 25 per cent from 2020 to 2021.”

Opteon data on property in high risk and medium-high flood risk areas over the past five years supports this trend. In fact, in some areas, high risk properties were worth more than lower risk ones. The value resilience of these properties has been helped by low interest rates, low turnover rates and strong median price growth that has been fueled by the rise of lifestyle factors in purchasing decisions.

However, with 100-year flooding events now occurring with frightening regularity, interest rates rising, a flattening market and housing buyback schemes being discussed for flood-prone lands, it is critical valuers closely monitor flood risks in prone local government areas (LGAs) and remaining vigilant to market sentiment and movements.

Opteon considers environmental issues, including flood risk, in all mortgage reports. We rate properties as being at a high risk of flood where one-in-20 year flood events are predicted to affect a building on the property. We assess properties as being at a medium-high risk of flood where one-in-20 year flood events are predicted to inundate the land but not affect buildings.

Flood Risk Across Australia

High risk

Over the past five years, 1% of all properties Opteon valued for a mortgage report had a high risk of flooding. These are shown by LGA in the map below, with areas with fewer than 50 high risk properties excluded. There was a notable cluster of high-risk areas in southern Queensland.

Properties with High Risk of Flooding by Local Government Area – Map
LGA Map Australia
Medium-high risk

A further 6% of all properties we valued had a medium-high risk of flooding. As shown in the map below, there was again a risk cluster in southern Queensland and risks along much of the east coast. Medium-high risk LGAs were also seen in some parts of north-northwestern Victoria and eastern South Australia.

Properties with Medium to High Risk of Flooding by LGA – Map
LGA map
Riskiest LGA’S

The following table contains the LGAs with the highest percentages of residential dwellings with high flood risk observed in the last five years by Opteon valuers. Areas with fewer than 50 properties recorded at high risk of flooding have been excluded.

Local Government Areas with Highest Flood Risk

Opteon is currently analysing how the regions with medium-high risk are performing compared to regions with lower percentage of flood risk.

Historical flood risk effect on market value

As shown in the table below, in LGAs in metropolitan NSW and QLD with high proportions of properties at high risk of flooding, property values were not significantly affected by flood risk over a five-year window. In fact, properties with a high risk of flooding were often valued more highly than properties with a lower risk. As many of these are water-front properties or located close to waterways, the appeal of the location has often outweighed the flood risk for buyers.

Impact of Flood Risk on Property Value in NSW & Queensland Cities
Low vs high flood risk

However, as we move through the next year it will be interesting to see if these trends continue, especially in some of the regions shown in our graph where multiple significant and, at times, life-threatening floods have occurred in the last two years.

We will be monitoring these regions closely and reporting on the strength of these markets over the next 6-12 months.


Scott O’Dell

General Manager – Residential

We’re here to help answer any questions you might have, contact our property specialists below.


DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

[1] https://www.afr.com/property/residential/house-prices-in-flood-hit-areas-in-for-a-long-recovery-20220706-p5azgc

Managing Credit Risk Exposures in a Residential Building Boom

Author

Scott O’Dell – General Manager – Residential

The rate of construction of new homes in Australia has increased significantly over the past two years. According to the Sydney Morning Herald 1, Housing Industry Association figures show about 105,000 residential properties were being built before the pandemic. Since then, that number has risen by roughly 80%.

The demand for new houses has been largely attributed to pandemic-associated factors, such as lockdown experiences, low interest rates, increases in savings and various stimulus packages. Unfortunately, the boom coincided with supply chain issues, high freight costs and resource shortages that have contributed to significant inflationary pressures in the construction sector.

According to the ABS Producer Price Index in March 2022, “over the past twelve months, input prices to house construction rose 15.4%, due to timber, board and joinery (+20.6%) and other metal products (+16.2%).”2

Opteon data also reflects this inflationary trend. When we looked at residential properties in greenfield/growth corridor areas surrounding capital cities over the last two years (Q1 2020 to Q1 2022) we saw an increase in construction costs across the board. As shown in the graph below, the cost of new builds increased by 24% in Sydney, 13% in Melbourne and 33-34% in Brisbane and Perth.

Construction Costs Relative to Baseline, Q1 2020
credit-risk-exposures

In the face of higher construction costs, demand is predicted to slow.3 However, lending risks are not.

Managing the risks

In the current market, it is particularly important for lenders to manage credit risk exposures with the construction of new residential properties. The biggest risk is funding a home that is not completed, as unfinished projects damage the value of the security. This can happen when builders become insolvent or due to some contractual arrangements.

When providing Construction Reports (also known as To Be Erected Reports) for loans, Opteon helps address these risks. With every report, we assess contractual issues that heighten the risk for lenders, including the inclusion of rise and fall clauses and front-end load payments. We also look for fixed price contracts that builders are unlikely to be able to honour.

To minimise exposures to insolvency risk, we provide lenders access to our regularly updated, dynamic list of builder/developer insolvencies as they take place, which is currently occurring far too often. We also provide dependable progress inspections for lenders as they release funds across the key stages of construction. This provides a high level of risk mitigation during this tumultuous time for the building industry.


Scott O’Dell

General Manager – Residential

We’re here to help answer any questions you might have, contact our property specialists below.


DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

Industrial Rental Growth Trends

Author

Ross Turner, General Manager – Commercial

Industrial assets have been the darlings of many institutional portfolios during the pandemic years, largely thanks to the corresponding e-commerce boom and appeal of onshoring. Now, thanks to rising interest rates and bond yields, industrial assets are experiencing expanding capitalisation rates.

In a typical market, a rise in capitalisation rates would put pressure on asset values. However, in the current market, high and growing industrial rentals are offsetting that value pressure and increasingly becoming the metric investors are looking for. ESR Australia CEO, Phil Pearce, was recently quoted by the AFR as saying: “We’re not buying long WALE assets, but properties where we can capture the rental growth and in some cases redevelop at the end of leases.[1]

Opteon collects rental data for all commercial valuations. Since FY19, our data on warehouse rent rates has shown a solid rise in industrial rent levels – particularly in metropolitan areas.

Metropolitan warehouse rental rates

Using a baseline of 2018-19 warehouse rates, as shown in the graph below which focuses on Brisbane, Melbourne and Perth, the trend of rising rental rates for warehouse assets in metropolitan locations is obvious.

Industrial Rent Growth Trends

However, when we examine the year-on-year changes in Brisbane, Melbourne and Perth metropolitan areas there are interesting location and annual variations, which can be seen in the following table.

The strength of growth in Perth rental rates is partly due to the increased demand of new build industrial, while rental rates are also trending higher in Brisbane overall, inconsistent transaction activity in 2020 led to the dip in our data for that year.

Regional warehouse rental rates

Changes in median industrial rent rates in NSW, Vic and WA, compared to our baseline of 2018-19, show rental rates for warehouse assets in regional areas also rose in most locations. However, the regional lift in rates typically lagged a year behind the trend seen in metropolitan areas.

Industrial rental growth trends

The year-on-year changes in regional areas, as shown in the following table, indicate regional NSW has shown more subdued growth in warehouse rentals.

Metro Area Warehouse Rent

Top performing suburbs

When we looked at our recent data based on year-on-year increases between FY21 and FY22, we identified the top 10 performing suburbs for industrial rent rates, as shown in the table below.

Warehouse Rent Rates

It is worth noting that that new/modern warehousing (particularly in regional locations) can skew growth metrics, as seen with Unanderra’s data in our table.

What’s next

This trend is expected to continue, with the AFR reporting in April 2022 that: “Prime industrial rents are expected to rise by an average of 11 per cent this year – more than double the rate of growth in 2021 – and to keep rising at double-digit rates over the next three years”.[2]


Ross Turner

General Manager – Commerical

We’re here to help answer any questions you might have, contact our property specialists below.


DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

[1] https://www.afr.com/property/commercial/rental-growth-to-compensate-for-lower-industrial-values-esr-boss-20220718-p5b2d4

[2] https://www.afr.com/property/commercial/e-commerce-boom-supercharges-warehouse-rents-20220418-p5ae5c

Rising Construction Costs put Additional Squeeze on Unit Development Feasibilities

By Julian Hawkins, Senior Valuer, Melbourne

Rising construction costs and COVID-19 caused major economic disruption through 2020 and 2021. However, the period of falling property prices was short-lived. National sales volumes rose 37.7% in the 12 months to February 2022. Transaction volumes through the month of February remained elevated at an estimated 57,427, which is 46.1% above the previous five-year February average. National clearance rates averaged 72.4% in the four weeks to February 27th, down from 78.8% in the equivalent period of 2021. Clearance rates are expected to trend lower amid softer housing value growth.

Change in sales volumes

Image Source: CoreLogic – May 2022 Monthly Housing Chart Pack 

Renewed confidence in the market through the second half of 2020 and through 2021 resulted in a surge in demand for land suitable for redevelopment for smaller unit developments (2-20 units) and larger land subdivisions. The success or otherwise of a development project is inherently volatile and a result of:

  • the price paid for the site
  • planning approval for the site
  • construction costs and timeframe for construction
  • consumer demand/price point for the units/apartments
  • off-the-plan sales/rate of sales
  • lending restrictions, regulatory restrictions and government policy
  • interest rates and other holding charges, and
  • broader changes in the economic climate and property market sentiment.

Construction cost risk

Shortages of labour and materials in the building sector continue to add pressure to development projects with the increased cost of labour and materials adding to supply chain issues and extending construction and project delivery timelines.

In a recent article in The Age, The Master Builders Association said 98% of its members are having their profits squeezed or are losing money. As the price of timber, steel, concrete and other construction materials has soared, deliveries are delayed for up to six months.[1]

Victoria’s Supply Chain Review “found that significant delays and shortages in sourcing timber were the result of unprecedented demand for construction in response to rebuilding our society post-bushfires, and the economic stimulus packages provided by governments around the world to boost post-COVID recovery. At the same time, there have been disruptions in global trade and maritime freight due to border closures and port congestion, hampering efforts to import additional building materials.”[2]

Over the past six months, Opteon has seen increases of up to 30% in contract bill prices and significant delays in the supply of materials that are impacting the timing of projects. In one case, the building contract amount increased by $220k over a five-month period for a three-unit development, with no change to the proposed product.

Similarly, timeframes quoted in building contracts are being extended even for smaller unit developments. We are typically seeing townhouse development timeframes move from 270-365 days, out to now 420-450 days.

The price of development land

The original purchase price of development land is a key factor in the feasibility of projects facing rising construction costs and lengthy delays. For example, those who purchased development land through 2020 and early into 2021, may have some buffer against rising construction costs and supply change issues. This is due to a corresponding increase in unit values through this period. However, where the land was purchased through the peak of the market in later 2021 and into 2022, the increased construction costs and material delays, added to the increased land costs, may not be off-set by a corresponding increase in the end unit value. This can result in a feasibility or project-related site assessment being negatively affected, leading to lender hesitance and the requirement for developers to inject more up-front equity.

Off-the-plan sales

Consumer appetite is product and location specific, but there still appears to be a strong demand for larger townhouses in premium locations. Other factors such as sustainability ratings can add appeal for buyers.

Demand for off-the-plan apartments appears to be easing, suggesting apartment developments are a relatively risky proposition at the moment.

As shown in the graph below, Opteon is valuing fewer ‘off-the-plan’ apartments every quarter, which indicates that purchase volumes are dropping. In the two biggest markets, New South Wales and Victoria, valuation volumes have been dropping since Q2 2019 (Apr-Jun 2019) and Q1 2021 respectively.

IMAGE SOURCE: Opteon

Interestingly, the percentage of valuations that did not support the contract purchase price has been on a downward trend in NSW since Q3 2019 and in Victoria since Q1 2021. These downward trends correlate quite closely with those in the volume of valuations.

Looking ahead

While land values remain strong, there is a possibility that rising construction costs and interest rates will create a lag effect on prices as developers become more cautious about feasibility prospects. This was anticipated by the Housing Industry Association(HIA) in 2021, which predicted Australia’s construction starts will drop to 125,030 in FY23.[3]

The alternate view is that many future-looking developers will continue to landbank, recognising the limited supply of land available for development. These developers will also be banking on: a) the likelihood of supply chain and worker demand issues resolving in the 1-2 years it takes to get a planning permit issued; and b) increased demand from foreign investors and a rise in population levels, which will lead to a boost in demand.

Author

Julian Hawkins

Senior Valuer – Residential Development

Contact Us

DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

[1] https://www.theage.com.au/national/victoria/i-ve-had-enough-why-some-want-out-of-victoria-s-building-industry-20220427-p5agn5.html

[2] https://www.vic.gov.au/supply-chain-review

[3] https://constructiondaily.news/australias-building-growth-will-hit-a-wall-by-2022-report-finds/

On the Pulse - Risk Premium Article image

Shrinking Risk Margins Challenge sub-$50m Commercial Assets

Author

Ross Turner, National Director – Commercial Agri Advisory

A risk margin is the percentage gap between property yields and bond yields. Essentially, the risk margin tracks the size of the financial benefit of a ‘growth’ investment in property compared to a ‘defensive’ or ‘risk-free’ investment in government bonds.

In the last three years, and particularly since the start of 2021, we have seen a decrease in the risk margin of sub-$50m commercial assets contract. This sends a clear signal of risk to the market.

A challenging set of market conditions

There is currently a challenging combination of market factors affecting commercial property in the sub-$50m category of assets.

Commercial property as an investment class carries additional risk to Australian government bonds, with bond returns considered a risk-free investment base due to its sovereign backing.

Commercial property prices have been rising over the last 2 years faster than net income growth, resulting in contracting property yields.  As the growth in value has not been driven by income growth, headwinds are emerging, due to rising interest rates, and trimmed mean inflation at its highest rate since 2013[1]. Added to those factors is the rising value of government bond rates, increasing the attractiveness of this investment class.

While yields on 10-year Commonwealth Government bonds fell to a 2 year low 0.60% in March 2020, they have increased since then to average 3.01% during April 2022[2] and further to a high of 3.57% on 10 May 2022, for a 3.44% 1-17 May average. [3]

These market factors have seen the risk margin between bonds and commercial property drop since 2019, particularly impacting key markets like Sydney. This is resulting in commercial property yield margins struggling to stay above the government bond rate. For example, as shown in the graph below, net yields on properties within the sub $50 million space in Sydney have been falling, which means that the risk margin is expected to drop below 1% in May. The orange dotted line is based on Opteon’s own sales data.

The contraction of the risk margins between bonds and commercial yields of sub-$50m commercial assets raises some key issues for the market:

  • Will investors shift to bonds as the general economic climate faces potential head winds?
  • Are commercial property yields going to soften to reflect an appropriate risk margin between bonds and commercial property and will values fall as a result?
  • Will increases in rents mitigate any softening in values?

Key market exposures

Leases that are structured and oriented to take advantage of rising inflation will perform more strongly at this point of the cycle. Importantly, by virtue of the low inflationary environment over the past ~9 years we have witnessed a shift away from inflation or CPI linked annual reviews toward fixed percentage reviews (say 2.5-3.5%). This may result in annual rental increases not keeping up with inflation during the remainder of these lease terms.

Rises in bond yields

Sub-$50m commercial assets are exposed to rises in government bond yields because of the growing attractiveness of bonds as an investment in comparison to commercial property. Values of commercial property may stall or drop, due to either pressures in net income decreasing (either due to flat growth or increased outgoings in gross lease scenarios), or due to softening of market yields.

Rental Growth

Whilst inflation pressures should be passed through in rental increases, not all markets are created equal, with some lease profiles subject to lease arrangements that may not accommodate immediate increases.

Gross lease structures may not allow for increases in statutory and operational outgoings expenses (leading to a net income squeeze).

Additionally, the ongoing viability of some tenants’ businesses, which may have been propped up by COVID-19 government stimulus measures is still to be proven.

Leases that are structured and oriented to take advantage of rising inflation will perform more strongly at this point of the cycle.

Net Income squeeze

In the context of rising interest rates, flattening rents and increasing outgoings, net income can be squeezed when gross lease arrangements are not being reviewed within a close enough period to accommodate adjustments for inflation of outgoings.

This is often an issue with assets with a high underlying land value. For example, securely leased, underdeveloped retail premises in urban growth areas/ development corridors where there is no ability to break or review the lease within a reasonable period of time may experience significant net income downward pressures, which could lead to a negative cash flow situation.

Outgoings

Outgoings are increasing due to rises in land tax and council rates, due to being linked to rising unimproved/ rateble property values that have risen steadily over the past couple of years. Other outgoings have also been affected by rising inflation and ongoing global supply chain issues. Where outgoings grow at a higher rate than rents in a gross lease arrangement, yields are put under further pressure. This is a common issue for commercial properties in the sub $10m category, which typically include gross lease arrangements rather than the net lease agreements that are more commonly found in corporate lease structures.

Outlook

As the market continues to evolve, holders of sub-$50m commercial assets will be watching the growth potential of their investments through this part of the cycle.

Ross Turner

National Director - Commercial Agri Advisory

Ross is the National Director for Commercial, Agri and Advisory and has over 18 years’ experience in property valuation and advisory across Australia in both metropolitan and regional markets.

Ross has the benefit of having previously reviewed and provided valuation advice from a financier’s perspective in an institutional banking environment. He has considerable experience managing large valuation projects for Government and Corporates across Australia for financial reporting, strategic advisory and mortgage security purposes.

Ross can be contacted on 0435 039 847.

DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.

Hospitality Assets Emerge from their “Worst Days”

Author

Duncan CameronDirector – Specialised & Advisory

A sector hit hard by the pandemic

In the last five years, Opteon has completed 784 hospitality valuations in the sub $50m market. This includes pubs/taverns (30%), hotels/gaming hotels (24%), restaurants (24%), and other hospitality venues (22%) such as small bars, nightclubs, licensed clubs, function centres and casinos. These have involved assets located Australia-wide, in both metropolitan and regional areas, with the highest volumes in NSW, WA, Victoria and Tasmania.

As valuation specialists in the sub $50m hospitality asset class, we saw the COVID-19 pandemic hit the sector extremely hard. The speed at which COVID-19 hit Australia and forced hospitality venue closure was unprecedented, causing significant and widespread financial hardship. During the pandemic period, hospitality venues were forced to contend with significant drops in demand. Unpredictable and wide-ranging lockdown periods, increased and varying trading restrictions and rigid operating protocols caused significant revenue and profitability decline.

The success or failure of businesses during this period was dependent on the size of their pre-pandemic financial resources and cash buffers. During the pandemic, factors such as their scale, impact on revenue, ability to access government funding support (i.e. JobKeeper) and the speed at which they could mitigate operating expenditure all played a role.

While the Omicron variant has also had a negative impact on the sector this year, there are now positive signs of recovery. Profitable trading conditions are starting to return due to high vaccination rates and relaxation of pandemic control measures. Socially, patrons are returning to hospitality venues after lengthy periods of mandatory lockdown and isolation. Most have more disposable income after two years of restricted travel and limited discretionary spending opportunities. For some hospitality businesses, the mandatory closure provided the opportunity to refurbish venues, reassess their service offering and positively restructure their operating model to deliver a more profitable financial outcome.

The impact on the hospitality sector

In a May 2020 story by Hoteliers Australia, Australian Hotels Association (AHA) National President Scott Leach said: “the industry was facing its worst days in over a century”. Leach added: “Our hoteliers and their staff are doing the right thing but they are paying a heavy price. We have to remember too, the industry is not in hibernation… Your typical country pub is losing $25-35,000 a month – again with no money coming in. There really is a limit to how much debt can accumulate before many will be forced to close their doors for good.[1]

In July 2020, an AHA opinion piece published in The West Australian stated: “For nearly every hotel, restaurant, bar, pub and tavern, the Federal Government’s JobKeeper payment scheme is the only reason they have been able to survive.[2] From a property perspective, other support measures included the National Cabinet’s Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (and subsequent state-based legislation) that was designed to provide a proportionate and measured framework for landlords and tenants to share the financial risk and cash flow impact during the COVID-19 pandemic period. Other wide-ranging relief and support measures assisted hospitality businesses to ride out the initial pandemic impact, including deferred taxation, deferred commercial and residential bank loan reviews and various state-based financial support measures.

In most capital cities, the sector was crippled by lockdowns and the impact of state and national border closures, which curtailed tourism and corporate travel and, in turn, directly impacted venue revenues. Some States and regions fared better due to an increase in intrastate tourism. However, many regional businesses were also impacted by lockdowns, state border closures, vulnerable community isolations (WA) and, in Victoria, Melbourne’s “ring of steel”.

The Australian Bureau of Statistics (ABS) reported the accommodation and food services sector EBITDA fell by $271m in FY20, or 2.7%, following a period of growth [3]. The impact was also felt acutely by hospitality staff. For example, South Australia’s three-day lockdown in November 2020 resulted in 80% of permanent employees and half of casual employees being stood down. Furthermore, between $7m and $10m worth of food and alcohol was wasted[4]

The pain continued in 2022 with isolation requirements and government capacity restrictions in venues – made to curb the spread of the Omicron variant – further restricting profits for hotels and international entry restrictions causing significant staffing issues. Across the board, the cost of doing business in the accommodation and food services sectors increased by 78% from January 2022 to April 2022 according to the ABS[5]. Businesses with between 20-199 staff were hardest hit by: a) an inability to find suitable staff; and b) supply shortages, caused by logistic disruption as COVID-19 community transmissions spread with the relaxation of containment policies.

Hospitality asset valuations

At the best of times, hospitality asset values can be particularly volatile as they are inherently linked to the trading performance and profitability of the going concern business. In turn, this financial viability is influenced by many external and internal factors, including:

  • the economy
  • consumer confidence
  • disposable income levels
  • spending patterns
  • seasonal trends
  • inflation
  • interest rates

These are combined with the skill and quality of management, trading competition and the revenue mix of the business. Fluctuations in revenue and costs can quickly expose businesses to significant trading and financial risks and asset value volatility. The pandemic period intensified trading volatility as it added a rapidly evolving and unprecedented impact on what can typically be a volatile market sector.

Property markets typically stagnate during periods of uncertainty and, consistent with this market behaviour, investors defer investment decisions until they have greater certainty and clearer market direction returns.

Unsurprisingly, hospitality assets became less attractive to business operators and investors during the pandemic period. The pandemic’s impact on the industry saw fewer transactions. Opteon’s quarterly data shows valuation volumes dropped sharply during 2020. This was due partly to the major banks’ loan review moratorium during the 2020 pandemic period, but also  to a decline in market transactional activity.

Currently, recent transactions of prime well-located hospitality venues are lower. They are either owned by:

  1. corporate and owner operators; or
  2. investors who have aggregated good quality venues over the years, and tightly hold such hospitality assets.

The general reluctance to sell profitable or securely leased assets is also impacted by the challenge of securing alternative, similar or superior yielding, replacement assets, which are typically in short supply.

Of those considering selling, many are seeking to recoup capital losses or forgone profit during the pandemic period before putting the asset on the market. Prospective vendors are typically seeking to re-establish a profitable history of trading performance to maximise the future potential realisable sale value. There’s evidence of industry-leading operators, who have successfully navigated the pandemic, making opportunistic, counter-cyclical acquisitions of underperforming businesses to expand their portfolios.

Our data indicates hospitality businesses began recovering at the end of 2020. Unfortunately, the emergence of the Delta and Omicron variants imposed further challenges and delays for the sector returning to pre-pandemic levels of trade. There are now signs of recovery and the industry is expected to rebound to pre-pandemic levels in terms of employment and maintain steady growth over the next three years. [6]

Opteon’s valuation experience indicates that revenue trends dipped in FY20, relative to previous financial years and have shown recovery in FY21 and FY22, as businesses gradually re-open to resume unconstrained trading profiles.

In focus: WA licensed premises market

In WA, the trading environment for hotels, taverns and nightclubs has been adversely affected in recent years by the Western Australian economic slowdown following the mining boom peak in 2012/13. From the moment the Western Australian Government declared a state of emergency on 15 March 2020, the WA hospitality sector was also significantly impacted by the pandemic.

Despite the pandemic challenges, well-located hotels, taverns and nightclubs (that are capably managed) are emerging from the pandemic with more positive trading indicators and recovering financial performance. In contrast, premises in poorer locations, those suffering from high localised trading competition, sub-standard management or marginal profitability, have experienced financial difficulty or failure in the challenging trading conditions.

Economic slowdown
Even before the impact of the pandemic, the Western Australian economy had been slowing for  years due to the end of the mining construction boom (2008 to 2012/13). Despite a low interest rate environment, discretionary spending by consumers also tightened, impacting the trading performance of licenced hospitality venues.

The consequential impact on the local licensed premises market is that patrons have been more discerning in their spending patterns, especially with high price consumer items, such as food and alcohol in licensed premises. Operators have needed to work harder to deliver revenue growth, so have focussed on expense mitigation to maintain prior profit levels and deliver real profit growth.

Wage costs
The market, in line with the wider economy, is expected to experience inflationary wage pressures. This is likely to impact hospitality venue operations until international and interstate migration returns to pre-pandemic levels. This adds to the current challenges of finding suitably skilled hospitality staff. Staffing shortages are widely reported, especially as businesses navigate resourcing pressures with isolation requirements for COVID-19 infections as community transmissions become more commonplace under the relaxation of containment protocols.

Increased operating expenses
Hotels, taverns and nightclubs have experienced higher than inflationary increases in many operating expenses such as utilities, rates, taxes and insurance costs. COVID-19 and current international constraints on supply chains, products and essential tradable goods are also constraining hospitality businesses during the post pandemic recovery period.

Changing community behaviours
Very public and active policing of drink driving laws, tighter general economic conditions and the convenience and accessibility of packaged liquor has resulted in increased alcohol consumption in the home (including ‘pre-loading’) compared to on-venue consumption, which has impacted revenue in licensed hospitality venues. This has been offset by people’s desire to socialise publicly post-lockdowns.

Responsible service of alcohol laws
The introduction and active policing of Responsible Service of Alcohol laws has made operating hotels, taverns and nightclubs more challenging. It has added additional training requirements, staffing and rostering logistics, compliance and potential trading impacts on venues.

Increasing competition
Reforms to the Liquor Licensing Act in late 2006 gave rise to a change in focus in liquor licensing to cater for modern consumer needs. The legislative changes introduced public interest considerations in determining the merits of new licence approvals. The reforms also saw the introduction of a small bar licence category, which has proven extremely popular.

Consequently, the growth in small bar venues has provided increasing competition to the traditional hotel and tavern licensed premises. Further, the evolution and increasing incidence of ‘big barn’ liquor outlets (i.e. Dan Murphy’s and First Choice) has provided increased packaged liquor sales competition to the detriment of some traditional drive through bottle shops and takeaway liquor outlets. More recently, the increased incidence of ‘pop-up’ bars and temporary entertainment venues has added to the competition burden for traditional hospitality venues.

Trading environment and competition

The combination of soft economic conditions pre-COVID-19, tightened discretionary spending habits and growth in small bar licenses have presented challenging trading conditions to smaller venue or marginal licensed premises operators. Anecdotal evidence indicated that such venues were feeling the financial pressure, with many marginal businesses closing or being offered for sale. Such conditions led to a natural, economic rationalisation to the benefit of larger, established, well-run sustainable businesses. Larger venues with sound clientele bases and strong market positions appeared less impacted, although they still experienced challenges in maintaining revenue, cost reduction and delivering profitability.

After the initial COVID-19 lockdown, hospitality venues generally witnessed stronger trading conditions as clientele elected to spend more heavily on discretionary food and beverage entertainment in the wake of interstate and international travel restrictions and socially constraining lockdown periods. However, volatility has been evident, and moderation of this trading performance is expected now that interstate and international border restrictions have been removed.

Property impact

During the pre-pandemic environment the constraining trading environment and softening profitability trends caused downward pressure on rental and capital values. To some degree, this pressure was offset by the softening interest rate environment and downward pressure on yields (capitalisation rates). The pandemic period government initiatives also caused deferral of rent reviews leading to a period of rental value and capital value hiatus.

As venues return to profitable trade there remains the potential for a rental value growth.  However, any potential for future uplift in capital values will be tempered by the future upward trajectory of interest rates and consequential upward pressure on property yields.

Feedback from both brokers and agents active within this sector suggests purchaser demand is currently very strong for profitable, well-performing venues given the weight of capital seeks strongly-yielding investments that deliver sustained returns. However, like most asset classes, supply of prime assets is particularly tight.

Meet our Hospitality specialists

WA


Duncan Cameron
Director – Specialised & Advisory

VIC


Ryan Danaher
Director – Specialised & Advisory

WA


Doug Shorten
Associate Director – Specialised & Advisory

QLD


Alex Dickinson
Commercial and Agribusiness

Alex Dickinson - Opteon

NSW


Ian Britton
Senior Valuer – Specialised & Advisory

WA


Ray Codalonga
Director – Specialised & Advisory

SA


Daniel Sander
Associate Director – Specialised & Advisory

TAS


William Reynolds
Director
Technical Services

DISCLAIMER

This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
Liability limited by a scheme approved under Professional Standards Legislation.