Commercial property investment yields have firmed across the board: Savills/Deakin University research

Commercial property investment yields have firmed across the board: Savills/Deakin University research
Commercial property investment yields have firmed across the board: Savills/Deakin University research

Sydney offers the most attractive office investment yields at 5.62 percent among international gateway cities even as the world sees a fall in yields, says new research from Savills and Deakin University.

The World Office Yield Spectrum, which compares 54 cities across Asia, Europe, the United States and Australia, confirms that office property is the asset class of choice as investors scour global cities for the most attractive yields in the most secure markets.

Apart from Sydney, LA West and San Francisco are the only other gateway cities offering yields above 4.5 per cent. 

The report found yields had firmed by an average 32 basis points across the 11 gateway cities since December 2014 with both Munich and Tokyo’s yield falling 55 basis points, Hong Kong 40 basis points and Sydney a whopping 100 basis points. Singapore, at 4 per cent, saw yields soften 15 basis points in response to slower economic conditions.

Of the 54 cities, London’s West End, at 2.82 per cent, was the only other city to record a sub 3 per cent yield with Hong Kong, while Ho Chi Minh City (9.36 per cent) and Hanoi (9.00 per cent) offered the highest yield, however those yields reflected a perception of greater investment risk.

Report editor, Savills’ national head of Research in Australia, Tony Crabb, said 10-year bond yields had fallen by an average of 50 basis points around the world in the past six months, averaging around 1 per cent with negative rates in Japan and Germany.

“Property yields have continued to firm but bond yields are falling faster and, in that context, investors are viewing risk premiums of between 2 and 3 per cent in most office investment markets as fair value,’’ Crabb said.

The uncertain economic environment in most markets globally means office risk premiums would offer better value and hence drive greater demand and even firmer office yields, he added.

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 Commercial property investment yields have firmed across the board: Savills/Deakin University research

“Much of what happens in 2017 and beyond will depend on the course the US Federal Reserve takes with regards to interest rates. Chairman Yellen has made it perfectly clear that movements will be ‘data dependent’, so we wait.”

“The movements in US interest rates will determine how currencies behave, how trade flows and how capital moves around the world,’’ Crabb said.

He said the outlook for office yields was likely to be one of further compression, particularly in gateway cities like Sydney where strengthening fundamentals were beginning to drive rental growth.

“Firming yields in many instances could be viewed as counter-intuitive as soft leasing markets have resulted in very high incentives and correspondingly low net rents, and so any growth in net effective rents, and thus returns, is certainly going to drive even greater demand for office property and ultimately firmer yields,” he said.

In Australia, large capital from overseas had encouraged many investors to dispose of property, rebalance portfolios and change their exposure which had led to a record 12 months turnover of nearly $33.4 billion in commercial property sales, said Crabb.

However, market fundamentals show the two-tone nature of the Australian economy with some indicators deteriorating in Perth and Brisbane, in contrast to improvements in Melbourne and Sydney. 

“Commercial property investment yields have firmed across the board but we still do not believe it has fully run its course. In some markets, fundamentals are improving rapidly and that improvement will lead to further tightening in yields as investment capital starts to price in expectations of future NOI growth. This part of the yield cycle is just beginning.’’

 

Tags: 
Office Market Commercial Investment

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