We have received many requests to explain the major losses being announced by Lend Lease, Stockland, FKP and others. The simplistic explanation is as follows. The world financial crisis has generated two drivers affecting commercial property investments. The first is that banks won't lend to property trusts and private buyers because they (the banks) are not confident of the property valuations in the worlds uncertain markets. If there are fewer buyers, because banks aren't lending money, prices are dropping to meet the market. The second major cause is the economic slowdown which is causing office towers to empty and shop cash registers to stop ringing. This affects both the income/yield and once again, confidence.
The S&P ASX 200 property index closed out the 2008 year down by 50% in value -- meaning over 12 months the investment in commercial property lost half its value. A Grade office towers dropped an average of 25% to their 2007 valuations. The value of major transactions in Sydney fell by 70% in 2008, according to CB Richard Ellis, the lowest since 1994. Just nine sales worth $100 million occurred in 2008 versus 29 and 2007. Dugald Higgins of Property Investment Research says a recovery in 2009 his slim to nonexistent.
Against this background the major property developers are required to revalue their properties, in most cases half yearly, and in most cases downwards, reporting a paper loss. But it should be remembered that solid businesses like retirement villages, with full occupancy and the proven DMF model provide secure net profits; it is basically the only sector in property to do so. (The new home buyer market however is picking up steam but the developers need to have the stock available).
