1st Quarter Transactions Surge Ahead

According to RESourceData, real estate transactions in key commercial markets in the first Quarter have grown +38% on the prior corresponding period to $9.7bn.

Whilst recorded sales across Office, Retail, Industrial and Development sectors (above $5m) dropped from just under $13bn last quarter, sales were much higher than a typical 1st Quarter. The resurgence in COVID in late December and the economic reverberations from the outbreak of war in the Ukraine have not dampened enthusiasm for Australian real estate.

Highlights

  • The Office market produced a surprising upturn in sales in the 1st Quarter compared a very subdued 1st Quarter in 2021, up 233% to $4.1bn, but still short of the $4.5bn recorded in 2019.
  • The Retail sector has also seen investors take advantage of a “counter cyclical” market with $1.6bn of sales in the 1st quarter, up 102% on the 1st Quarter of 2021 and well ahead of the pcp 2019 at $632m.
  • The Industrial market has seen the largest decline in transactions, down -63% on 2021 to $923m, but still high in comparison to pre-pandemic levels.
  • The Development market has increased activity by 22% on the same period last year to $3.0bn.

The chart below shows the performance of each major sector of the Australian real estate market for each quarter over the past 5 years.

Chart 1

Click below to expand each Sector to see the key data and our summary for Q1.

The Office market produced a surprising upturn in sales in the 1st Quarter compared a very subdued 1st Quarter in 2021, up 61% to $1.98bn, but still well below the pcp of 2019 at $4.4bn.

The key transactions in Q1 included Dexus’ invested of $1.0bn in to the Atlassian building in Sydney (fund through), the acquisition by Allianze Real Estate of Darling Quarter for $630m, the acquisition by Lendlease and Marquette of 12 Creek Street Brisbane for $391m, and the acquisition by Link REIT of 567 Collins Street and 126 Philip St for a combined $588m.

CBD markets accounted for 85% of transactions in the quarter as investor return to Core assets for recovery with the average reported yield much lower at 4.4%.

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Retail sector has also seen a investors take advantage of a soft market with $1.7bn of sales in the 1st quarter, up 102% on the 1st Quarter of 2021 and well ahead of the pcp 2019 at $652m.

The largest Retail Centre sale in the quarter was acquisition of Casuarina Square by Sentinel at $420m and the acquisition of West End by Centuria for $202m. Average reported yields for the sector were 5.2%.

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Industrial market has seen the largest decline in transactions, down -63% on 2021 to $923m, but still high in comparison to pre-pandemic levels.

A lack of quality stock and far fewer large scale portfolio deals is the key factor affecting the sector this quarter.

AirTrunks deal in Huntingwood at $110m was the largest in the sector during the quarter.

Yields have continued to remain the sharpest across the sectors at an average of 4.5%

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Development market has increased activity by 22% on the same period last year to $3.0bn. The majority of development transactions are for large scale industrial precincts or house and land subdivisions in outer suburban areas.

The largest sale we recorded was by the Bingara Developments paying $207m for a large site in Wilton, NSW.

Premium Subscribers can access and manipulate the charts at RESourcedata.

Yields

Reported yields continue to sharpen across most sectors, driven by the weight of capital and limited supply of good investment opportunities.

The Chart 2 below shows the weighted average yields for each sector each from 2015 to 2021.

The reduction in interest rates and the risk free rate (ie 10 Yr Bonds) has been the catalyst for sharper cap rates, however concerns are rising that this trend will begin to push back up as global inflationary concerns are forcing Federal Banks to lift interest rates.

Chart 2
Chart 3

The Chart 3 (above to right) shows the gap between the reported yields and the 10 year Bond Rate. Prime real estate investments typically sit at between 200Bps and 400Bps above the 10 year bond rate.

The recent surge in demand throughout 2021 has pushed the Yield Spread back into the long term range (having been trading above this for some time).

Australian 10 Year Bond Rates reached a low in October 2020 and have been trending upwards since. This has had the affect of pushing the Yield Spread to the lower end of the average trading band, suggesting (to me at least) that real estate pricing (ie cap rates) are likely to come under pressure if bond yields continue to push higher.

Trading activity over the next 6 – 12 months will be interesting to see whether investors switch out of real estate and into other asset classed which offer better risk adjusted returns, or whether the economic prospects for Australia will continue to fuel demand for real estate.

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