THE pressures of rising inflation, interest rates and fears of a global recession weighed on investor confidence, with commercial real estate transactions falling further in the Q3 2022 and industrial property yields expanding for the first time in four years, according to MSCI Real Assets. MSCI’S latest Australia Capital Trends report reveals the volume of sales fell 24% from a year earlier to $16.6 billion. This followed a year-on-year decline of 19% in the second quarter. Head of Pacific real assets research Benjamin Martin-Henry said the market has entered a period of change. “Last year was a record year for Australia, so deal activity comparisons may feel a little harsh, but with the economic outlook and investor confidence slipping, it’s clear than investment momentum has paused. Yet, looking at more long-term trends, commercial real estate is still trading above averages,” he noted.
Once the darling of commercial property, the industrial market posted the sharpest year-on-year decline among the core property sectors. Although this was largely due to the large portfolio deals which took the sector to record levels of activity in 2021, which have been largely absent in 2022. For the first nine months of this year, there were only nine deals, compared to 27 for the same period last year. Martin-Henry said the more pessimistic outlook for e-commerce spending and the impact on future occupier demand have weighed on investors. Economists are predicting consumer spending will slow after the Reserve Bank of Australia yesterday raised interest rates for the seventh consecutive time, by 0.25% to 2.85%.
ABS data for September reveals retail sales growth has slowed in worrying signs for retailers, who are hoping for a bumper Christmas trading period. ANZ Bank senior economist Adelaide Timbrell said quarterly volumes data is due on Friday, and she expects retail volumes growth of 0.4% q/q. “This would represent the slowest growth since COVID but still solid for household spending given the shift from retail to services,” she added. Total ANZ – observed spending growth in the first 25 days of October 2022 shows slowing momentum compared to the same time of year in 2019. As a result, yields for industrial real estate in Sydney have recorded expansion — albeit marginal — for the first time in four years, according to MSCI.
On the other hand, despite continued debate about the future of the office and the ‘new-normal’ flexible workplace, investment in offices was relatively strong. Deals fell by just 10% in third quarter compared to a year ago and were flat for the first nine months of the year. Although yields expanded, albeit marginally. In the Sydney market, yields moved out for the first time since early 2020. In one of the most significant cross-border and office transactions of third quarter, Singapore’s GIC agreed to acquire 50% of 555 Collins Street in Melbourne in a forward sale for $750 million. Hong Kong-headquartered Baring PE Asia also acquired the Hilton hotel in Sydney for $530 million. Cross-border investors spent $4.5 billion on Australian commercial property in Q3, on par with the same period last year. Conversely, domestic investors deployed 30% less capital than in Q3 2021.
Meanwhile retail investment volumes fell 41% in Q3, and for the first three quarters of the year were down 18%. The picture for yields was mixed. Yields for city centre, large format, and big box retail assets compressed; but at a slower pace than the prior quarter. Yields expanded for subregional, neighbourhood and regional shopping centres. The CBD retail sector, at least in Melbourne, will face a major test, as the owners of St. Collins Lane in Melbourne have put the CBD centre on the market. JP Morgan Asset Management acquired St Collins Lane late in 2016 for $247 million from LaSalle Asset Management, who had spent $30 million overhauling what previously the dated Australia On Collins mall, looking to add a high-end retail hub in the heart of the city following the opening of the Myer Emporium and debut of Swedish fast fashion giant H&M. In a reflection of the asset’s struggles and the harsh retail conditions of the COVID era, it reportedly sold the asset to joint venture partners Vantage Property and Credit Suisse Management for about $125 million in 2020.
Although deals have fallen, Australia remains on the radar for offshore investors as evidenced by the announcements made by build-to-rent developer Greystar, and Singapore’s sovereign wealth fund GIC to expand their portfolios down under. MSCI global head of real assets research David Green-Morgan said Australia is very much in the sights of global investors. “US and Singaporean investors have led the way in 2022 and there’s been continued interest from elsewhere. Despite overall volumes dropping in recent quarters, Australia remains one of the most liquid and transparent markets in the region.” Green-Morgan concluded.