Hotels outperform all other commercial sectors: IPD

Hotels have delivered the greatest total return (rental income and capital growth) of all commercial assets, according to third-quarter Commercial Property Index results released by the Property Council of Australia and real estate information group IPD.

Over the last 12 months the hotel sector has delivered total returns of 17%, significantly higher than those generated for office, retail and industrial assets, which all returned about 10%.

Hotels delivered both the best income growth at 8.9% and top capital growth at 7.5%.

The next best income generating assets were industrial assets (8.6%), while the next best capital growth assets retail assets (3.1%).

The retail property sector was the only commercial asset class where total returns declined over the quarter, falling from 10.7% to 10.4%.

Industrial assets returns increased from 9.4% to 10% while office asset returns were unchanged at 10.2%

Overall, the commercial property index showed a total return of 10.5% for the year ending September 2011 made up of a positive 7.5% income return and positive 2.9% capital growth.

This result represents a slightly lower total return in comparison to the previous quarter of 10.6%. The result is still slightly above the long-run average return of 10.1%.

Anthony De Francesco, managing director of IPD in Australia and New Zealand, says the third-quarter results suggest that the commercial property investment cycle has stabilised. 

“The moderation in returns is underpinned by a softening economy and unfavourable capital market conditions. We expect the property market to continue to soften over the next few quarters below the long-run average return,” he says. 

“IPD expects cap rates to remain relatively steady over the short-term given the softness of space markets and increased uncertainty in global capital markets. The persistence of the Euro crisis is likely to keep capital markets on edge and cause ongoing volatility. This will adversely impact investment performance for commercial property and competing asset classes.”