Talk of opportunistic investment in commercial property markets has picked up as the previously strong office sector starts to sour.

The unexpected slowdown from Covid-19 came towards the end of a frothy market—with cap rates and yields at record lows, offshore interest in Australian commercial property had begun to wane pre-Covid.

The market shift has created deal flow in areas that weren’t anticipated, according to Jameson Capital director Nick Browne, who says that he’s seen a significant increase in interest from offshore investors.

Browne recently launched a special situations fund targeting assets impacted by Covid-19. The fund is targeting 20 per cent IRR.

“The level of demand has really surprised us, from the 200-plus investors we’ve approached there is a consensus that assets in Australia are overpriced on a relative basis to the rest of Asia,” Browne said.

“Our shared view is that unemployment will exceed 10 per cent, mortgage delinquencies will increase, investment in rental apartments will stall and there will be a decline in demand for fringe office space.

Browne said that as risk premiums skyrocket, the cost of accessing capital may become harder for some—triggering a wave of distressed assets.

“Our view is that the market is going to get materially worse in the next three to nine months and we’ve had a huge amount of interest in this fund from offshore investors that share this view.”

Jameson’s special situations fund has a hard cap of $100 million, which Browne expects to close at the end of September.

Related: Lower Valuations a Challenge for Developers

Sentiment falls to record lows

The number of developers set to kick off new commercial projects in the next 18 months has fallen to new lows, according to NAB’s quarterly commercial sentiment survey.

The result suggests that the property industry is not expecting markets to improve any time soon.

“The disruption caused by the pandemic has not only had an immediate impact on the building construction industry, but will continue to impact over the next few years,” NAB chief economist Alan Oster said.

“The hit to confidence was also severe, with the 2-year measure [falling] to -29—its first ever negative read.”

Slower leasing volumes and tenant renewals, along with firms’ ability to continue operating and pay rent has negatively affected sentiment in retail and office markets.

A surfeit of supply has hit all commercial property sectors, save for industrial, with office vacancy hitting a 2-year high of 8.5 per cent in the second quarter.

The number of tenants putting office leasing requirements on hold sits at around 32 per cent, with all CBD office markets recording negative net absorption over the second quarter.

“New research also shows Covid-19 had a big impact on rent collections across all retail property formats,” Oster said.

“Bulky goods retail and large format have held up best with 30 per cent and 21 per cent of experts reporting no change in collections.

“At the other extreme, rent collections were [between] 30 per cent to 50 per cent lower from strip retailers.”

Industrial property remains largely well-insulated, with vacancy falling to 5.8 per cent.

Of the 370 property professionals surveyed by NAB only 2 per cent said that conditions will return to pre-Covid-19 patterns.