Australian investment property: a look back and a look to the future
GUEST OBSERVER
Last year saw another year of strong performance in property investment markets across Australia, with Savills recording approximately $27 billion worth of commercial property transactions in the 12 months to December 2016.
Although this is down on the previous year ($33.74 billion), it’s much the same as the five year average ($25.6 billion). The reason behind the numbers is the lack of portfolios and a diminishing supply of prime properties continuing to weigh on investment volumes.
When comparing global yields in the World Office Yield Spectrum, of the gateway cities, Sydney led the pack offering by far the most attractive yields at 5.37 percent, with LA West and San Francisco the only others offering above 4.50 percent.
A look at regional performances
Australian interest rates fell to historic lows due to the slowdown in resource demand from China, a reversal of commodity prices and the end of the mining investment boom (coupled with the GFC). A subsequent pickup in occupier and investment demand in Melbourne and Sydney followed whilst there was a substantial reversal in fortunes in Brisbane and Perth.
Whilst Brisbane has stabilised, Perth continues to be challenged (more office supply is in the pipeline), Melbourne is meeting both occupier and investment demand with a supply response whilst Sydney remains challenged on the supply front. An added difficulty in both Melbourne and Sydney is the continual withdrawal of office space and development sites (both in CBD and non-CBD office markets) for conversion to residential or compulsory acquisition for public works.
A look at the future
Commercial property investment yields continued to firm across the board (by an average 20 basis points) – a theme we have been seeing for several years now. Whilst the “bond yield” story has run its course, in some markets, fundamentals are improving rapidly. We believe this improvement will lead to further tightening in yields as investment capital starts to price in expectations of future NOI growth.
Generally, office markets look set for another year of strong investment driven by office property’s most preferred investment status, along with economic and political factors which are pushing investors towards the safety of bricks and mortar.
With some level of economic and political uncertainty remaining in most markets, it is fair to say that office risk premiums will continue to offer very good value and hence drive demand and, in some instances, even firmer office investment yields.
Much of what happens in 2017 and beyond will depend on the course the US Federal Reserve takes with regards to interest rates and the new President’s policy settings. Those factors, along with Brexit negotiations and elections in key European countries, will largely determine how currencies behave, how trade flows and how capital moves around the world.
Tony Crabb is Savills Australia’s national head of research and can be contacted here.