FAST PODCAST: How retail and office property will recover as post-Delta party season begins

Re-opening 2.0 is perfectly timed for retail property, but the office market is also surprisingly robust, says Pendal’s Julia Forrest in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: We’re talking about property and particularly retail and office real estate. New South Wales and the ACT are emerging from lockdowns. Victoria is about to. From an investor’s point of view, what does it mean for retail property?

Pendal Portfolio Manager Julia Forrest: Well, it’s exciting times and what a time to open – leading into summer and Christmas. They couldn’t have got their timing better. We have been in lockdown here in Sydney for 102 days. So we’re re-emerging.

The first point of call will probably be services. We’ll see all of the services at all of the shopping centres fully occupied, probably from 8am in the morning to 8pm at night. Everybody’s raring to get out and get their hair done, maybe update their clothes and their jewelry because of course we are leading into party season.

So I am expecting a very buoyant time in terms of retail and shopping centres. Partly it’s timing, partly it’s that we’ve been locked down over two lots of school holidays.

People have money to spend. I don’t know about you, but I didn’t have a lot of confidence booking holidays for December. I have two teenage daughters and looking forward to spending some money on them.

So in terms of timing, it couldn’t have been better for shopping centres to be opening.

I think what will differentiate this reopening versus the previous reopening last year is that we’re coming out into a period of surging asset prices.

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So when we emerged last year in May-June, people were still uncertain. We have seen house prices up 20% to 25% since then, and also stock prices up a long way.

People have cash in their banks and they’re feeling wealthy. So I’m expecting a pretty buoyant time for retail.

Interviewer: If you go to some of those shopping centres today — and particularly the ones in Sydney – there are still some boarded-up shops. Do you think many retailers won’t come back?

Julia Forrest: Unfortunately, that is a likelihood. We’re probably opening up into a period of less supply, whether it’s cafes or apparel. Retailers have used this time to close their bottom 5% to 10% of stores – particularly if they are in hold-over (ie there wasn’t an active lease on the premises).

So we probably are opening up into a period where they will be less supply. One of the issues for retailers is whether they actually have had the confidence to order enough inventory ahead of reopening.

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So that will be an issue, as well as whether they have sufficient staff. So that complicates things a little as well.

Interviewer: Let’s move on to office. People presumably will return to work in coming months. Though perhaps not at the same levels as they have been pre-pandemic. What do you think about the outlook for the office market?

Julia Forrest: I’m actually sitting in the office at the moment. There are very few people here, but I suspect that most people will be back in December for Christmas parties and lunches.

Because everybody has been locked down for a long time and they’re probably missing their colleagues.

So I guess the big returning time, in earnest, will probably be sometime in January where you’ll see this continuity of people back in the office.

But I think the cycle of “work-from-home” is quite well established. I suspect we’re only going to see people in the office probably three days a week from here on, which will obviously impact demand for office property. Probably more in the reconfiguration of space.

I think that employers really need to get people back in the office to work together, to collaborate. But I think they probably need to “earn the commute”, to quote Lend-Lease. They need to make the office vibrant and compelling for people to really want to come back into the office.

Interviewer: So for investors, the big question is: what’s the medium and long-term outlook for retail and office?

Julia Forrest: For retail, we have seen a number of transactions announced in the last two weeks. We do expect a couple more, which really put a floor under prices.

Prices have been marked down in the last year and a half. They’re probably off somewhere between 7% and 20%, depending on the quality and the dominance of the centre.

I think we’re book values are now we’re seeing quite a lot of support. So for retail things will improve from here. You have seen rents marked down and I think they’re probably more at sustainable levels now.

The surprising thing has really been office.

The demand for office assets has been robust. Book values have held and that’s despite what we can see is probably going to be slower demand, but also continued supply.

The reason why supply is continuing, is that office values have held their values.

It makes sense for developers to continue developing, because they can continue selling assets at book value, even though the underlying demand may not be there.

So we’re pretty optimistic on retail, in terms of net operating income and in terms of values.

The office book values are holding, but we can see rents continuing to be under pressure for the next two-to-three years.