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The COVID-19 experience (and several lockdowns) has proven that many Australians can do their jobs in their pyjamas, without ever needing to set foot in the office again.
Key points:
- $425 billion of superannuation money is invested in unlisted assets like office buildings
- Office property has posted its "worst quarterly decline since 2009", figures show
- Prices are expected to keep falling with less demand for office space
It has been a huge relief for those who simply want to focus on the job, without the pressure to engage in "water cooler banter" and discuss what they did on the weekend.
But this increased flexibility has led to a sharp rise in empty office space across CBDs worldwide, which could affect their retirement savings.
"Every major superannuation fund has an element of exposure to commercial real estate," said Dwight Hillier, the managing director of valuation services at Colliers.
"Moving forward, there will be pressure on returns for those super funds".
Earlier this month, the nation's second-largest super fund, The Australian Retirement Trust (ART), wrote down the value of some of the office towers in its property portfolio by as much as 15 per cent.
The construction industry's super fund, Cbus, had a similar experience — downgrading the value of some of its commercial real estate by more than 10 per cent.
Despite that, both funds managed to deliver a solid annual return for their members (at 10 and 8.95 per cent respectively), as strong gains on the share market offset their commercial property writedowns.
'Australian market thinks it's different'
The decline in the value of office buildings owned by Australia's super funds looks very tame compared to what's happening overseas.
For instance, the world's biggest asset manager Blackstone sold its 49 per cent stake in a lower Manhattan skyscraper (One Liberty Plaza) for $US1 billion — which was a steep discount of 33 per cent (considering the building was valued at $US1.5 billion six years ago).
In addition, a study by consulting firm McKinsey estimated that the shift to work-from-home will likely wipe off $1.17 trillion from the value of office buildings in major global cities in the next seven years.
It was based on a survey of nine megacities (including Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo), showing that demand for office space would be 13 per cent lower, compared to pre-pandemic (2019) levels.
The value of commercial properties in Australia rises "very quickly during a market upswing", Mr Hillier said.
But he noted, somewhat quizzically, that Australian prices seem to fall (or get written down) "quite slowly" during a downturn, compared to other nations.
"We have seen more sentiment-based valuation and pricing happening in US and UK markets," he added.
"But for whatever reason — I think it's cultural — the Australian market thinks it's different."
"Unfortunately, in this cycle, we have a lot more global capital [in Australia], so that point of difference is probably reduced".
"The total [peak to trough] write-back across the broader office market will be between 10 and 20 per cent."
Like other super funds, Cbus and the Australian Retirement Trust are expecting the value of their office buildings to keep falling in 2023, but nowhere near that degree.
The ART's chief investment officer Ian Patrick said it greatly depends on the "quality" of the office asset.
"A [high-quality] building that is leased to a government tenant with 10 years left to run on the lease is very different to a building that's rented to a whole bunch of small companies where the outstanding lease term is very short," Mr Patrick said.
'Overshooting' on the upside and downside
The superannuation industry has been criticised for lacking transparency in the way it determines the value of unlisted assets like privately owned buildings, infrastructure and stakes in companies that are not listed on the share market.
In the nine months to September, the value of unlisted property funds surged by almost 19 per cent, according to figures from the Property Council of Australia.
But those same figures also showed a nearly 20 per cent plunge in the value of property funds listed on the stock exchange.
"Listed markets obviously trade daily, so they're more exposed to momentum and sentiment in the market," said Brett Chatfield, the chief investment officer of Cbus.
"Whereas unlisted valuations are typically on a quarterly cycle, so you can see some short-term deviations."
Mr Chatfield also pointed out that listed markets often "overshoot on the upside" when markets are doing well — and they "overshoot on the downside" when markets are faring poorly.
His counterpart at the ART, Ian Patrick, also defended the valuation practices of super funds, which update their unlisted asset valuations every three months.
"I think 'big super' is doing a very solid job on the frequency of revaluation and transparency of the process," Mr Patrick said.
"Bear in mind, most buildings have longer-term leases, so something more frequently than quarterly doesn't really exhibit much change in terms of transparency.
"We also rely on external, professional valuers and rotate them on a regular basis every three years."
'Worst decline' since the GFC
Some of Australia's largest superannuation firms have invested as much as 12 per cent of their members' funds into commercial properties, which have seen their value fall sharply in the past year.
Vacancy rates at Sydney and Melbourne CBD offices jumped to 12-month highs in the June quarter (at 14.4 and 16.2 per cent, respectively), the latest research from property firm Jones Lang Lasalle has revealed.
The rise in vacancies has contributed to a significant fall in Australia's commercial property values.
"After months of speculation about when the market will see significant falls in value for the office sector, they have finally arrived," according to a report written by Benjamin Martin-Henry, MSCI's head of real assets research in the Pacific.
"The one-month capital growth for June alone came in at -5.2 per cent, which drove the worst 12-month total return since early 2010."
He also said it was the "worst quarterly decline since 2009", at the depths of the global financial crisis.
The MSCI report also noted that "office funds recorded an annual total return of -4.4 per cent" (due to a 7.9 per cent drop in the value of office properties and a rental income return of 3.7 per cent).
'Delayed and deprioritised' regulator
In recent months, the Australian Prudential Regulation Authority (APRA) has warned that super funds need to improve their valuation processes over concerns their assets may be over-inflated.
However, APRA itself has come under fire for not doing enough to scrutinise how industry funds value their unlisted assets — like office buildings, shopping centres, toll roads and investments in startups which are not listed on the share market.
By the end of 2022, around $425 billion (18.5 per cent) worth of superannuation money was invested in unlisted assets.
A review by the Financial Regulator Assessment Authority (FRAA), commissioned by the federal government, found that APRA's lack of sufficient oversight could result in super fund members losing money due to "unfairly reduced" or "inflated" balances.
It noted there was also a perception that APRA's focus on the issue had been "delayed and deprioritised".
The FRAA spoke with "external stakeholders" who were concerned that APRA had only started writing to super funds about their inflated valuations of tech startup Canva, in particular — as a response to ongoing media coverage of the issue, rather than the regulator's "proactive identification".
"The valuation of unlisted assets is important due to the potential consequences on members’ fund balances," the FRAA said in its report, released earlier this month.
"If members decide to switch asset allocations or withdraw funds, and assets have not been appropriately valued, the amount withdrawn may not reflect the asset’s true value.
"Remaining fund members may then be left with an unfairly reduced or inflated balance, and new members may overpay as they enter the fund."
Sellers' strike
Director of research at Rainmaker Information Alex Dunnin says it's hard for superannuation funds to value unlisted assets (and office buildings especially) because there's currently a "sellers' strike".
"There's so much nervousness. We're not sure about interest rates or inflation have stabilised yet," Mr Dunnin said.
"Valuers tend to estimate what a property is worth based on what other similar properties are selling for.
"But one of the problems we're seeing is that there just aren't many commercial properties being sold and bought, so we're not really sure what they're actually worth.
"It's like trying to judge what all the properties on my street are worth when only one house, was sold a year ago."
Last month, one of Australia's biggest owners of office towers, Dexus, downgraded the value of its diversified portfolio by $1 billion.
In addition, Dexus was one of the rare landlords that decided to sell one of its 26-storey office towers in the Sydney CBD for a significant loss.
It sold the 44 Market Street building for $393.1 million to a Hong Kong private equity firm (a 17.2 per cent discount to its book value).
In contrast, other owners have been marketing their office buildings intensively — but withdrawing them from sale because they failed to attract a decent price from potential buyers.
REST Super, for example, tried to sell its Melbourne Docklands office building (717 Bourke Street) for around $490 million. But it withdrew the sale late last year because the best offer it received was much lower than that.
Reassuringly, Mr Dunnin believes superannuation returns will be solid in the near future.
"We should remember that office property is only half of the property investment market.
"The industrial sector — factories and warehouses — is booming, and delivering returns that are two to three times higher than what office properties are delivering right now.
"And we need those warehouses to deliver all those online goods that we're buying and selling.
"So investing in property is still a good thing to do."
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