Welcome to this week’s Property News.
As we edge nearer to the end of the financial year our RESourceData stats are suggesting that we will surpass $14bn of real estate transactions in the 2nd Quarter. This level of activity will surpass the previous record of $13.9bn set in the 3rd Quarter of 2019. These stats cover just Office, Retail, Industrial and Development deals over $5m. Industrial assets comprise over $6.3bn of sales so far this quarter and include the significant deals completed this quarter by Blackstone to ESR and PGIM/Manulife. The heat in the Industrial property market has seen the weighted average cap rate sharpen by 60bps over the past 12 moths to 4.5%.
Our chart below shows the Yield spread between Weighted average cap rates for each Property Sector and the 10 year Australian Bond rate. If you assume that 10 year Australian Government bonds represent a risk free rate, and traditionally, prime real estate tends to trade between 2% and 4% above the 10 year rate, then what we see is that throughout 2019 and 2020, most sectors of real estate in Australia were trading above the normal margin. That is to say, that the market felt the risks in real estate were slightly higher than normal. In 2019, this was predominantly due to the thought that interest rates would begin to increase, where as in 2020 the risks turned to the impacts from COVID.
As is indicated in the graph, the Industrial sector has dropped dramatically in Q2. Part of this is explained by lower 10 year bond rates in Q2 (down 20Bps from Q1), however a 110Bps drop in the WACR is the key factor, thanks mostly to the Blackstone portfolio sales. Whilst the indicator for Industrial is now within the normal range for prime real estate, my view is that it is mis-representing the risk in the market. Low interest rates have helped to pull the economy into strong positive growth territory, leading to shortages in labour and materials, both of which will lead to higher inflation, which increase the risk of interest rate rises. The relief valve against this may be the re-opening of international borders, however this is still 18 months away at least.
I spoke with one large listed REIT this week who have deep investments into the Industrial sector. Their view is that their portfolio is well positioned for increases in inflation due to a mix of shorter term lease renewals (enabling rents to to be rest) and or long term tenants with rental increases tied to CPI, both of which are key to growing rental income, when interest rates increase and if cap rates soften.
I feel that the Office and Retail sectors are fairly priced at present.
If you have any news, information or research reports you’d like us to share with the market, please feel free to send me an email at info@propertymarkets.news.
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