24 February 2020

Is Canberra's property undervalued? Some powerful investors think so

| David Tuckwell
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Canberra property may be undervalued despite excellent security and yields. Photo: File.

When corporate landlords dream at night, they dream of buildings like Garema Court.

Fronting Garema Place, the landmark block in the city at the end of the tram line, its location is ideal. Its tenants, mostly Commonwealth departments, are also the low-risk type that landlords like.

Yet when Garema Court was sold in January it fetched just $71.5 million – below the $75 million some sources tipped it to go for.

The price came as a surprise as Garema Court had everything going for it. It was a quality property. It had a high-profile seller in Dexus, Australia’s most powerful office landlord. It was fully occupied and had a long track record as an A grade investment property.

Despite the lower than expected sale price, it still sold on a 6.5 per cent yield, ASX disclosure documents show – far higher than comparable office buildings in Sydney and Melbourne sell for.

Canberra office yields compared to other major cities

Yields for Canberra office buildings outstrip those another cities. Source: Colliers International.

It’s instances like this that are causing powerful international investors to take notice of Canberra.

According to Michael Montelibano, a director at property broker Colliers International, some of the biggest Asian companies have bought up Canberra property in recent years.

“Canberra is a great place to invest. It has a lot of attraction for investors because you get a higher return on a really secure credit as a Commonwealth tenant is AAA rated. Rental growth in Canberra is also very strong thanks to the solid local economy,” Mr Montelibano said.

“We think there will be a narrowing of pricing between Canberra and Sydney and Melbourne.”

Buyers include Seoul-based Mirae Asset, Korea’s largest investment bank, and NTT Urban Development, a subsidiary of Japan’s fifth largest company.

But some experts caution that Canberra is not a straightforward bargain story. They claim Canberra properties offer higher reward because they come with higher risk. One common worry is whether Canberra’s high population growth, which is heavily influenced by local universities, can match the increasing stock thrown up by property developers.

Chris Antos, an agent at commercial property agency Laing+Simmons, says population growth and oversupply are the top concerns for investors. But commercial property has not suffered the same oversupply fears as residential apartments.

“In absolute terms, our population is not growing as much as the major cities. The returns are better in Canberra but there is slightly higher risk about filling these properties. There’s that perception in the market,” Mr Antos said.

“Commercial property is getting more interest than residential given the number of apartments getting built. A lot of investors think that there are too many of these complexes getting built too quickly.”

Landlords can help themselves, however, by dangling carrots for prospective tenants including property upgrades and, in some cases, cheaper rents.

But perhaps the biggest risk for Canberra property is interest rates. Central banks around the world have drastically lowered interest rates in the past ten years.

When interest rates fall, property investors tend to get richer as debt gets cheaper and rental yields become more valuable.

Yet many are now worried that the worm is turning and that interest rates in 2020 will flatline or rise.

While this would affect property values everywhere, investors would be differently affected, Mr Montelibano said.

“All properties will be affected by interest rate changes … but the effects will be felt differently depending on the investment strategy,” he said.

“There are core investors that like to take the [interest rate sensitive] yield. There are value-add investors that refurbish and sell the property. It depends on your investment strategy. In Canberra, we’ve seen both.”

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Commercial property owners will have annual percentage rent rises included in the leasing agreement to mitigate future interest rate rises. Small investors can share in the benefits of commercial property through ASX shares and ETFs.

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