The Victorian commercial property market is experiencing a shift, with many development sites and CBD office buildings hitting the market at discounted or distressed prices. This trend reflects broader economic and policy pressures, forcing some landlords and vendors to sell assets under less-than-ideal circumstances. While this presents challenges for property owners, it also creates opportunities for strategic investors prepared to pursue the complexities of distressed acquisitions.
We have seen evidence of larger funds and Real Estate Investment Trusts (REITS) seeking to exit, with discounted valuations particularly evident in the office sector ranging from $15 million – $100 million.
Several factors are driving the rise in distressed property sales, namely changes in Victoria’s land tax have dramatically increased holding costs, particularly for underutilised or vacant sites. Office buildings with significant short-term capital expenditure requirements or heavy incentives needed to attract new tenants are also struggling.
This combined with higher interest rates and tightening financial conditions, has property owners and major fund operators finding it challenging to maintain profitability, especially for assets requiring substantial development due to cost of construction or change in tenancy behaviours.
Plus, the market in recent years also plays a role, with shifts in tenant demands and broader market uncertainty impacting rental yields. For some, selling at a discount has become the most viable option to relieve financial pressures or to meet bank obligations. We are now advising our larger family office groups and High-Net-Worth clients (HNW’s) to take a position if the opportunity presents with a view to hold for the medium term.
For our HNW’s, this environment opens avenues to acquire assets at heavily discounted prices. However, realising the potential of these properties often requires a considered, long-term approach. Professional portfolio management can provide the support needed in helping investors assess the viability of a distressed asset and ensure it aligns with their long-term objectives.
A cost-benefit analysis is essential to understanding a property’s true potential. This involves evaluating upfront acquisition costs, development requirements, and projected returns. For properties requiring significant work, such as tenant fit-outs, expert guidance can make a huge difference in transforming the asset into a high-performing investment. Additionally, the property should offer multiple exit opportunities to maximise flexibility and value.
Recently, we met with a family group who was offered a distressed commercial property offered at $40 million – half its original sale price at $80m. This property’s rental yield was between 6% – 6.5% and at the $40 million purchase price.
While the discount was appealing, we emphasised the importance of assessing whether significant renovations, structural updates, or even compliance adjustments were necessary. Equally important was carefully evaluating the opportunity to ensure it aligned with the client’s broader financial goals and their ability to fund the property over the next 3-4 years, and the implications of the lower yield
Strategically integrating a distressed asset into an existing portfolio can deliver strong returns when executed effectively. This includes future-proofing property investments to withstand market fluctuations.
Distressed property sales in Victoria signal a period of transition in the market. While challenges persist for many vendors, this moment represents a unique opportunity for astute investors to acquire assets at a fraction of their long-term value.
By partnering with experienced professionals who understand the intricacies of distressed sales, buyers can secure favourable outcomes, stabilise their investments, and look to secure future potential. Whether you’re looking to expand your property portfolio or make your first commercial acquisition, now is the time to explore what these properties have to offer.
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