The COVID19 pandemic has decimated real estate markets with activity falling -55% in the 2nd Quarter compared to the same period last year.
Data collected by RESourceData reveals that transactions of office, retail, industrial and development sites for the 3-month period ending in June, reached $5.4bn, down from $12bn in Q2, 2019.
Office transactions, which usually comprise almost 50% of all transactions fell -73% in volume to just $2.0bn and reduced to comprise just 37% of all transactions in the quarter.
Two key transactions in the quarter dominated the Office sector. The acquisition in early April by Dexus & GIC of 50% of Rialto Towers at 525 Collins Street for $644m (5% cap rate) was a big bet on the Melbourne office market. Just two months later, Dexus became a seller of 45 Clarence Street sold for $530m (4.8% cap rate) with Zone Q Investments entering the market.
Despite the lower number of transactions, the weighted average cap rate across the Office sector tightened by 16Bps from 5.25% to 5.09%.
The industrial markets have been the flavour of the quarter with transactions actually up 43% on last year, (which was starved of stock). Industrial transactions typically comprise 12% of the market data, but increased to represent 28% of the market in the 1nd Quarter. The weighted average cap rate tightened by 54bps from 5.64% in 2019 to 5.1%. The Charter Hall / Allianz acquisition of the Aldi portfolio dominated the market with a $648m acquisition completed on a cap rate of 4.65%. Also recorded in the quarter was a land transfer of a large paper mill in Marrickville acquired by Nippon Paper which formed part of a larger business play.
Retail transactions were high in number but low in volume with -42% less value changing hands in Q2, representing 13% of the market. Cap Rates for retail assets softened by 30bps from 6.0% in 2019 to 6.32%. The acquisition by YFG Shopping Centres of the remaining Nuveen interest in Mt Ommaney Centre for $285m was the largest transaction in the period. Excluding that transaction, the average deal size of the balance was $16.6m, reflecting the higher demand for non discretionary retail assets.
Development transactions also felt the drop in interest with 43% less volume changing hands in Q2. Several groups continued to invest in large residential projects and industrial developments with $1.1bn in transactions recorded by ReSourceData.
The Yield Spread to 10-year bonds continues to be well above the long-term average of 200 – 400bps, reflecting the higher than usual risks associated with tenant demand. With an average yield of 5.4% in the office sector and a 10 year bond rate of 1.0%, the current spread is circa 420bps, above the long term average.
The risks around tenant demand are yet to be fully understood as the economic conditions in Australia are being well supported by Government stimulus packages. There is sufficient evidence to suggest that office space requirements will shrink and the retail vacancies will rise, causing rents to fall and incentives to increase. Rental growth assumptions are already being adjusted downwards in valuations however cap rate appear to be holding or firming as alternative stable investment options are hard to find.
RESourceData has collected a comprehensive database on over 3,000 real estate transactions since 2015 across all retail, office, industrial and development sectors in Australia, providing invaluable data mining capabilities to clients.