At the start of the Covid pandemic and throughout 2020, demand for longer Weighted Average Lease Expiry (WALE) assets leased to strong covenants shifted dramatically, and shorter WALE assets higher up the risk curve were less in favour.
According to James Girvan, Director, Capital Transactions at Savills Australia, uncertainty around market rents, leasing assumptions and availability and cost of debt financing was a challenge for pricing in risk.
However, in 2021, there has been a resurgence of purchasers seeking returns on those assets requiring a ‘hands on’ approach, particularly, in the core plus or value add nature.
“This is due to stronger competition for longer WALE assets heating up, and more positive sentiment around the pricing of assumptions, including alternate ways of debt financing for the style of assets higher .
Since the start of the Covid 19 Pandemic, demand for A and B Grade office assets with a shorter Weighted Average Lease Expire (WALE) has increased. Real Capital Analytics (RCA) reflect sale volumes for sub-4 year WALE in Sydney and Melbourne are up approximately $1.5b from Q3 2020 to Q3 2021.
Whilst yields on entry pricing for shorter WALE assets have remained a constant throughout the pandemic, Mr Girvan believes expectations on exit pricing in the medium term have adjusted, which has now pushed the demand back in favour of those core plus style of assets.
Mr Girvan said in Sydney and Melbourne in particular, strong demand for assets located in the fringe and metro markets have been in favour due to the relative value in rental when compared to their respective CBDs.
“We’ve seen assets trade in 2021 at 241 O’Riordan St to Savills Investment Management and RMIT to Futuro Capital, both with a sub-4 year WALE, but are transactions reflecting strong conviction on leasing headwinds in the next short to medium term”.
Mr Girvan concluded that demand for core plus style of asset is set to continue throughout 2021, albeit with a sense of cautious optimism.