With their long leases to national tenants and exposure to rising domestic travel, service stations are expected to outperform all other asset classes during the pandemic and in the subsequent recovery phase, according to a survey carried out by national valuation firm m3property.

Service station values are forecast to hold steady with yields tightening, a relatively better performance than other forms of commercial property.

Medical-use properties, industrial assets, self-storage facilities and residential subdivisions will also come through the crisis with their values relatively intact. But asset classes battling high vacancy rates like hotels and malls could experience valuation falls of up to 25 per cent and will take the longest to recover, the survey of 43 of the firm’s top valuers found.

“While prime, well-located assets are likely to perform better across the sectors, secondary assets and assets subject to high vacancy, short weighted average lease expiry, poor location or requiring significant capital expenditure will experience a greater decrease in value with investors taking a conservative approach to risk,” said m3property national research director Jennifer Williams.

Among the worst asset classes hit will be secondary hotels – properties outside of the major urban centres or regional tourism hubs – with expectations that values could fall by between 10 and 25 per cent and a recovery could to take up to 18 months.

The outlook is better for hotels in prime CBD and regional locations, according to the m3property survey, despite very low capital city occupancy rates and more than 13,000 rooms under construction.

James Ruben, NSW director at m3property, said the hotel sector was “quite stratified and segmented” with the larger hotel players having access to the capital resources to get through the pandemic and come out stronger on the other side.

“Naturally the whole market is going to offer discounts to get people in to their properties. The better products will fill up more quicker and will be better placed to compete for market share in the recovery,” he said.

For retail property, m3property valuers said neighbourhood centres, which are usually anchored by a major supermarket, would be less impacted than the larger regional and sub-regional malls, which have a higher proportion of discretionary retailers.

This divergence has already been highlighted in the poor performance of major mall funds like those managed by AMP Capital and the recent 11 per cent devaluation of the Vicinity Centres portfolio.

On a brighter note, service stations, which usually include a convenience retail outlet, were the only asset class out of 12 that valuers thought would see yields tighten.

“With the re-commencement of intrastate travel and borders starting to re-open petrol stations are well placed to benefit from increased domestic travel while international borders remain closed,” said m3property.

Prime industrial properties are expected to experience minimal change in values or yields but the value of secondary industrial assets are expected to fall as occupiers gravitate to bigger and more modern logistics facilities.

“There is no doubt that the relatively stable prime industrial sector has been an investment market favourite recently, but the recovery period for secondary assets is not so good with an expectation it may take up to two years in some locations due to the reassessment of risk by many owners and investors,” said m3 property national director of industrial, Daniel McGrath.

In the office sector, m3property valuers anticipated that prime office assets with strong income security were likely to maintain their values while secondary values were expected to decrease moderately.

Office buildings with poor tenant profiles, including those with a higher proportion of SMEs, and those in secondary locations were likely to experience larger declines in value, warned NSW managing director Andrew Duguid.

“Short-term, Brisbane and Melbourne yields could soften by slightly more than other markets with prime assets in Melbourne currently reflecting a 10 to 20 basis point softening in value,’’ Mr Duguid said.

Extracted in full from: https://www.afr.com/property/commercial/service-stations-best-assets-in-a-pandemic-valuers-20200728-p55g4z