Bricks and slaughter as CBDs turn to ghost towns

Billions of dollars are up in smoke in the office heartlands of Australia's biggest cities after workers fled to escape the spread of the deadly COVID-19 virus, leaving investors wondering if the sector can ever regain its reputation as a defensive yield play.

At the start of the year, office property looked like a great place to invest. Top office real estate investment trusts (REITs) enjoyed strong demand for prime office space, higher income and a robust pace of capital growth.

Millions of square metres of prime office space attracted near-record high rents as vacancies hovered near record lows in Sydney and Melbourne.

Dexus, GPT and Charter Hall were just some in a sector where deals had just topped a record $22 billion, as offshore buyers drove mega-deals in Melbourne and Sydney. Perth and Brisbane were rebounding from a long downturn.

But when workers were forced home at the end of February as the pandemic hit like a wrecking ball, the market reaction was both swift and savage. REIT market capitalisations were cut in half as investors panicked about the end of the glory days of the central business district.

The ASX A-REIT index dropped 49 per cent from its peak on February 20 to the trough on March 23. It has managed to claw back about half of that drop in the weeks since.

The index includes both retail and office property and the office REITs are struggling to recoup their losses as they battle the perception that office life has changed for good. Abacus Property Group and GPT Group are up about 30 per cent off the March low, lagging the overall advance for the sector,

Yields still attractive

Office REIT believers point to yields. Despite this year's battering, expected yields from leading REITs range from 5 per cent to 8.5 per cent, which compares very favourably to the 10-year government bond yield at 0.87 per cent and the Reserve Bank of Australia cash rate of just 0.25 per cent.