Companies are moving to smaller premises or handing back entire floors of office space to their landlords to allow for more flexible working. But others are using flexible working as a cover for cost-cutting.
The long-term structural shift in demand for office space is being compounded by the slowing economy. While employment isn’t falling, companies are positioning for the possibility the fight against inflation will tip us into a recession.
And should Australia suffer a sharp downturn, companies will be selling less and potentially shedding staff.
A third factor hitting office property is that it has become a less attractive investment option as interest rates have risen. The average yield for prime offices in the Sydney CBD for the past six years mostly sat between 4.5 and 5 per cent. These were attractive numbers in an era of ultra-low interest rates, but they are now marginally better than the yield on Australian government bonds.
These factors are leading to a drop in office property values. Property companies and superannuation funds are facing 10 to 15 per cent write-downs on the value of their office assets.
In June, ASX-listed Dexus, one of the country’s largest office tower owners, wiped A$1 billion from the value of its diversified portfolio.
Other investors are rushing to get out of the sector, but this isn’t always possible.
Developer and fund manager Charter Hall has limited investor redemptions from its A$2.5b unlisted office fund to 25 per cent of their investments. The company says it’s unable to sell buildings at fair prices to realise cash, but expects to do so at the end of the year. It’s far from certain, however, that office property values will have improved by then.
Vacancy rates in Sydney and Melbourne CBD office towers are running at around 15 per cent. Landlords might struggle to find new tenants anytime soon, with a lot of corporates reluctant to sign on to long-term leases while the economic outlook is so uncertain.
As the economy gets through the worst of the downturn, quality CBD properties are likely to continue to attract tenants, because people generally want to work in the city, at least when they’re not working at home. These are usually prime office buildings, with features such as a concierge service and what the property sector likes to call “end-of-trip facilities”, but which the rest of us call showers and towels.
Those offices on the edges of the CBDs or further away will have trouble finding tenants, particularly if they are in dowdy old buildings.
Many of these properties could end up being converted into apartments or hotels, but that’s expensive and some way down the track. In the meantime, office property will remain under pressure.
Greenwashing
The Australian Securities and Investments Commission has launched its second major greenwashing case against Vanguard, the world’s second-largest investment company.
It accuses Vanguard of misleading investors about the sustainability of its A$1b-plus ethical bond product and alleges Vanguard did not screen certain investments held by the bond fund against promised ESG criteria.
Vanguard’s “ethical” fund was exposed to the Abu Dhabi Crude Oil Pipeline; Chevron Phillips Chemical Co; Colonial Pipeline Co (which pipes oil products); Chilean oil explorer and producer Empresa Nacional del Petroleo SA; and a gas-fired electricity generator, John Sevier Combined Cycle Generation.
There is a huge appetite among both retail and institutional investors in Australia for green investments. But if investors can’t be confident in a fund’s green credentials, they will quickly find another.
So far, funds which have been pinged for greenwashing have been hit with fines in the tens of thousands of dollars. But the damage from ensuing negative publicity they receive will prove to be even costlier.
