Weekly Update 7/2/20227 February 2022
Welcome to this weeks Property News.
The property industry returned to work this week in full force with several major announcements hitting the headlines. Allianz’s acquisition of 50% of Darling Quarter for a 4% yield demonstrates once again the depth of capital that exists for quality assets, whilst Sentinel’s acquisition of Casuarina Square in Darwin indicates support exists for even more challenging assets in secondary markets – at the right price.
Whilst their are only a few viable M&A targets in the public market, we expect activity will continue this year. This week, Charter Hall’s launched their bid for Irongate with a 21% offer premium to the previous closing price and the support from Tony Pitt’s 360 Capital (who hold a 19% stake and a previous bid). As we have seen with Australian Unity, M&As offers of this magnitude do not always guarantee success and very much depends on the make up of the unit holder register.
This week we also had the latest Retail Sales data, Lending Indicators and Dwelling Approvals which all point to heightened activity, however supply chain constraints and low unemployment are pushing up prices. The recent increase in inflation to 3.5%pa signals a potential shift which requires monitoring. The RBA has now indicated that a move on interest rates in 2022 is now likely although banks are already in the process of tightening lending restrictions to reduce demand and pressure in the housing market.
Against the weight of capital and the prospects of higher inflation and interest rates, we continue to favour investment or development property underpinned by long term secure tenants who rely on non discretionary consumer expenditure. These include neighbourhood convenience retail, medical & health facilities, education and child care services, fuel & automotive services. The risks to construction cost price increases and timing are heightened and necessitate appropriate controls and contingencies to mitigate against higher costs and extended delivery time frames.
For commercial inventors, the cost of debt is therefore likely to rise across the 5 year horizon, impacting potential returns. For moderately geared property, rental growth is likely to cover the increase cost of debt particularly in the industrial sector which has had very little growth over the last 10 years. Leasing spreads in the Retail and Office markets are however unlikely to show much (if any) positive growth, however higher incentives will seek to cushion this impact.
From an investment point of view, the ability to capture increased income that comes with economic growth and inflation or the reversionary value that is associated with these are important. Assets with access to market rents in 4-5 years time are likely to be more valuable than those with much longer term leases.
As you would expect, we are still cautious on CBD office, hotels, regional and major / regional shopping centres but expect there will continue to be opportunistic buying that can deliver good yields.
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