Current and Future Implications for Commercial Property Managers

COMMERCIAL PROPERTY MANAGEMENT
TOPIC – 1:
Current and Future Implications for Commercial Property Managers
AN OUTLOOK
Australian commercial property sector is growing strong as the economy of the country is stable
and policies of the government are people-oriented. This study has its focus on the commercial
property sector’s financial as well as developmental structure, from the perspective of the
Commercial Property Managers (CPM). 2005 to 2010 has been a trying period for this sector due
to the effects of the Global Financial Crisis (GFC). The Australian construction industry can be
divided into four sectors – Material Providers; Property Developers; Construction Companies;
and Real Estate Investment Trusts (REITs), assert Barnes & Doidge, (2010). The after-effects of
GFC were minimal for the material providers and the construction companies, but more severe
for the property developers and REITs. According to Dr Shane Oliver1 with whom I had
discussions on this topic, a big factor that provided a stabilization platform to the material
providers and the construction companies was the economic stimulus package provided by the
Australian government to them in the aftermath of GFC, say Emerald Gems (ed), (2015).
Whereas the decreases in the value of the assets, especially the commercial properties, was
responsible for reduced profitability of the property developers and REITs during and after the
GFC is the view of Mr. John Hill2 (his Business Card is appended in Appendix-1), who was
interviewed on the subject by me and who became the spokesperson for other CPMs on the basis
of his experience. But these sectors were quick in their recoveries from the global and domestic
adverse conditions and were able to return to a more sound financial condition by the end of
2010 when the effects of GFC were diffused. Since then, the investors, in synchronized
functioning with the Construction Company Managers and other construction professionals have
been able to devise robust and successful financial as well as development strategies to
1 Head of Investment Strategy and Economics and Chief Economist at AMP Capital
2 A practicing Real Estate Manager who specialises in Commercial Properties

encourage a prudent financial management which helped in weathering any future financial
crises, as per Christensen & Duncan, (2004).
INTRODUCTION
The reason behind GFC, which is considered to be the worst global financial crisis after the
Great Depression, was the environment of low interest rates. Using this as the lever, large
number of loans were distributed to US homebuyers and this set-off a housing boom which
eventually went bust as soon as the interest rates went high resulting in supply glitch, says
Parker, (2012). The crisis became global because the financial institutions faced losses and these
losses were magnified because of gearing. This forced the investment banks and hedge funds to
liquidate their fund positions for meeting redemptions. This was the time when across the world,
banks were sourcing more money which was being collected from global money markets. These
large amounts of funds were obtained from the expensive bank deposits which were held against
the bricks and mortar properties, asserts Marsden, (2011).
Key Points
In the opinion of Dr. Oliver and Mr. Hill, the following are the key lessons which were learned
from the Global Financial Crisis (GFC) –
 High returns evidently come with higher risk (See Figure-2 in Appendix-1).
 Markets get pushed to extreme valuation as each boom-bust cycle behaves differently.
 It is necessary to be cautious of hard-to-understand financial products.
 Excessive gearing or wrong gearing must be avoided.
 Due diligence of monetary and fiscal policy must be done.
Dr. Oliver thinks that GFC highlighted to the investors how important it is to diversify their asset
allocation. Mr. Hill opined that a boom is a cyclic phenomenon and it is inevitable to happen in
future too but it will be different from this GFC.
WILL IT HAPPEN AGAIN?
This question came up in every talk with Dr. Oliver and Mr. Hill and both were of the opinion
that in the post-GFC world financial environment, broad-based bubbles on the scale of the US
housing/credit boom have been non-existent so far. My assessment is also that just because the
global debt is rising to new high does not show signs of another global crisis. Most of the debt
growth, after the GFC, in developed countries is the result of growing public debt, as stated by

Spoehr (ed), (2009). Comparatively, the debt interest burden of these nations are low when taken
in relation to the low interest rates of the pre-GFC period. Although, all over the world,
economists are showing the concern that after the pull-back post-GFC, this is growing rather
steeply in relation to global GDP (See Figure-3 in Appendix-1).
Falling Sydney & Melbourne Property Prices: Key Points
During my interaction with different CPMs in the region, I could summarize some of the key
points worth considering in this context as –
 Property prices may have shown more downside in Sydney and Melbourne, but a crash is
unlikely as there is absence of high mortgage rates and high supply due recent high
construction activity.
 Other cities are performing better.
DISCUSSION
Many practicing CPMs in the region were of the view that Australian property prices fell by
0.2% in March and this was the fifth monthly fall in continuation and this has resulted in a fall in
annual growth by 0.8% from 11.4% shown in May last year. Most of this downfall is being
attributed to Sydney and less to Melbourne (See Figure-4 in Appendix-1), assert Wells (ed),
(2013). This can be a concern because property price downturns have been usually effected by a
significant interest rate increase and this is not evident from the table below which summarises
JP Morgan’s price targets for four big banks as compared to current prices of today(See also
Figure-5 in Appendix-1).
The property cycle and the economy
In Mr. Hill’s opinion and this was reciprocated by many other CPMs practicing in the region,
there can be a further fall of about 5% in the prices of commercial real estate in Melbourne and
Sydney in the coming two years period. His assumption is based on the financial institutions’
tightening in lending on the basis of increase in the borrowers’ income levels, explain Marshall

Williams & Morgan (ed), (2015). However, as economy level currently stands, a drag in
construction activities is likely to be at the minimal because building approvals being obtained
by the industry do not point towards a slowdown in new construction plans (See Figure-6 in
Appendix-1). Dr. Oliver is also of the view and he was supported by many other CPMs of the
region, that negative wealth effects will not affect the consumers and in the absence of property
prices crashing down, the impact on banks’ lending will be manageable, as detailed by Setten,
(2009).
Implications for investors
In the light of the above discussions, I suggest the following implications for investors –
 Firstly, the long term commercial property adjustments for costs have had returns similar
to the Australian shares (See Figure-7 in Appendix-1). The lower volatility and lower
liquidity has made commercial properties a good portfolio inclusions. Hence, I am of the
opinion that commercial properties have an important place in any investors’ portfolio.
 Secondly, as per Mr. Hill, commercial properties still remain a cautious investment
destination for new investors. This is because it remains expensive and offers low income
(rental) yields when compared to the other growth assets. Hence, Mr. Hill thinks a
commercial property investor has to depend more on the assets capital growth (See
Figure-8 in Appendix-1).
 Thirdly, as opined by Dr. Oliver, these comments are in context to overall position of
commercial real estate in Australia and it cannot be generalized for specific regions.
Notable is the fact that many other cities and regions are becoming far more attractive
destinations compared to Sydney and Melbourne (See Figure-9 in Appendix-1).
In this context, a very important development that came to my notice was the interest shown by
foreign investors and developers in creating opportunities in Australia through certified CPMs.
The Roxy Group, a hospitality sector major from USA has taken up a major development project
in Sydney for a big luxury hotel to be located in Parramatta. A location and site map of the
project is shown in Figures-10 and 11 of Appendix-1.
DATA AND METHODOLOGY