Each of the three quarterly market updates in 2021 have seen radically different lockdown scenarios, travel restrictions and CBD occupancy levels in Australia’s Central Business Districts (CBDs).

In March 2021, there was optimism coming off the back of office occupancy trending upwards and a return to our new anticipated ‘normal’. In June 2021, the country’s south-eastern state capitals (and multiple regions) were back in lockdown, with escalating cases pointing to a Christmas at home for most of Australia. Finally, at the conclusion of the September 2021 quarter, there were again green shoots with most states clearly identifying the path forward for life to return to ‘normal’.

Irrespective of the promising outlook, office occupancy in Australia’s CBD’s currently remains low, as illustrated below.¹

On a global scale, a number of developed countries are further into their recovery, providing lessons to owners, occupiers and managers in Australia. The experience in London and New York shows higher vaccination rates are linked to higher office occupancy rates, which should also be positive for the CBD retail sector in Australian capital cities.

Analysis by Savills shows “…increased vaccination leads to increased mobility, investment and declining commercial vacancies”. Leasing activity in Manhattan “…increased by 48.6% over the 12 months to June 2021, with relocations and new leases making up 74.6% of activity and renewals and expansions accounting for 25.4%.”²

AMP Capital takes a similar view, expecting vacancy rates to drop sharply over the next two years and asserting that office occupancy rates historically bounce back faster than expected after downturns³.

Despite the changing office landscape, we continue to see the physical office as a hub for collaboration, mentorship and the fostering of company culture. According to the latest ABS payroll jobs index, overall demand has also increased as white collar industries (traditional office occupiers) have grown headcount by 17% since the start of the pandemic.⁴

We still see the office sector therefore as delivering superior risk-adjusted returns relative to the current popular industrial sector where the online retail / e-commerce focus has resulted in substantial price escalation and a subsequent narrower risk premium.

Australian unlisted property was ranked the best performing asset class for annualised returns over five years, according to the latest Fact Sheet from MSCI, Zenith, PFA and PCA, delivering a 17.8% annualised return. This outperformed Australian listed property (2.4% annualised return), Australian equities (11.1%), global equities (15.3%), and fixed income (3.6%) over this same period.⁵

How did Cromwell Funds Management fare this quarter?

Recent Cromwell Funds Management transactions demonstrated the continued appetite for direct commercial property with the settlement of the Cromwell Ipswich City Heart Trust’s Icon Building in Ipswich, Queensland selling at a 13% premium to book value and the Cromwell Direct Property Fund’s (DPF) Bunnings asset at Munno Para, South Australia selling at a 33.7% premium to book value.

The proceeds of these two sales have been redeployed into 100 Creek Street, Brisbane. The 24-storey office tower is the second asset to be purchased by DPF this year following the acquisition of 545 Queen Street, Brisbane in May 2021.

^{[1] Property Council of Australia, CBD Occupancy Update, 31 October 2021, CBD Occupancy Update (propertycouncil.com.au)}

^{[2] Property Funds Association, Key reasons why unlisted property funds are attracting investor, 21 September 2021, Key reasons why unlisted property funds are attracting investors - Property Funds Association}

^{[3] AMP Capital, Don’t write off the Office, 1 September 2021, Don’t write off the Office | AMP Capital}

^{[4] Australian Bureau of Statistics, Weekly Payroll Jobs and Wages in Australia, 7 October 2021, Weekly Payroll Jobs and Wages in Australia, Week ending 11 September 2021 | Australian Bureau of Statistics (abs.gov.au)}

^{[5] PFA, PCA, MSCI, Zenith Investment Partners, 2021, Property Investment Factsheet – June 2021, FINALPCA+PFA+Factsheet+deliverable+2Q21 - New logo - Zenith.xlsx (propertyfunds.org.au)}