Investors have enjoyed good returns for the last three years. Share markets around the world are now close to record highs. There are uncertainties in the global picture including geopolitical conflict and the Trump chaos factor.

In Australia inflation has rebounded and interest rates have begun to follow higher. Investors often see that as a negative, though the values of scarce assets such as property and shares in high quality companies actually tend to rise with inflation.

A search for investment sectors that are undervalued reveals unlisted commercial property as one. These are physical buildings not traded on a share market. Property funds and companies that are traded on the share market are at high prices and have provided strong returns in recent years.

However most unlisted, direct properties have lost value. They have never fully recovered from the Covid induced slump. Back then most staff were going to be working from home permanently so office buildings would be empty. And everyone was going to shop online eliminating the need for shopping centres.

These properties are valued by professional valuers looking back at past sales. Volumes sold have been below long-term averages. Few owners want to sell when prices are weak. Some sales have been under financial stress, depressing prices.

Valuers have also been pressured by regulators ASIC and APRA to ensure they have firm evidence for the valuations they determine, causing them to take a cautious view.

There now seem to be prospects for this to turn around. Property funds management company Cromwell says tenant demand for office space is growing and now exceeds pre-Covid levels in CBD markets. As a result, rents are now increasing faster than inflation.

Construction is very expensive meaning few new projects are starting. Retail space is also seeing a shortage of new construction. Supply of both will lag demand for some time, keeping rents up. Occupancy in industrial properties such as warehouses and factories is high, so their rents are rising.

Office buildings are being refurbished with extra facilities to appeal to workers and entice them back to the office. Shopping centres are as busy as ever.

Cromwell conclude by saying that the commercial property market continues to stabilise with improving sentiment evident in both the sales numbers and leasing fundamentals. 

Managed funds that own a range of direct commercial properties look appealing. They are best for investors with a long-term view as they can sometimes have limited liquidity if many investors want to withdraw at the same time.