This article is from the Australian Property Journal archive
THE retail property sector has ground to a halt in the midst of the US banking crisis and the discrepancy between the bid and offer spread for shopping centres, with the number of transactions having plunged over the past year, while capitalisation rates have jumped by more than 200 basis points.
The latest numbers from The Data App shows deals have fallen by 41.2% annually in the three months to April, and while there was improvement in the volume and value of transactions this reflected some large assets changing hands, such as Craigieburn Central, which IP Generation snapped up alongside a parcel of land for $300 million from Lendlease and its Australian Prime Property Fund Retail, following its $180 million purchase of a half-stake in Western Australia’s Rockingham Centre.
The Craigieburn Central sale furthered APPF’s selldown of assets beyond $1 billion as it looks to satisfy unitholder redemptions. In March it launched a sales campaign Far North Queensland’s only regional shopping centre, Cairns Central, and could realise about $500 million from the sale – but finding a buyer at the right price could prove difficult.
“(As a result of) The unfolding of the US banking crisis in March, with the collapse of the Silicon Valley Bank and Credit Suisse, as well as an apparent discrepancy between the bid and offer spread for shopping centre, the number of transactions has come to a virtual standstill,” said Rob Ellis, director of The Data App.
Prices per sqm are down 16.4% to $4,101 per sqm.
Trend cap rates have surged by 218 basis points, from 5.12% to 7.3%, although Ellis said recent readings should be treated with some caution, given the dearth of transactions.
“Furthermore, the bulk of the increase in cap rates has been associated with bigger, sub-regional and larger assets. This remains the case. Cap rates for smaller, everyday needs types of shopping centres remain low by historical standards.”
“Notwithstanding the fallout surrounding the American banking system, where disaster myopia will, no doubt, take hold again, the upwards trek should go some way to stimulate transaction activity. Moreover, the implied shopping centre risk premium, which has been below its long-run average since the beginning of 2022, is now pointing to offering positive value.”
The implied risk premium has lifted 114 basis points from 5.02% to 6.16% over 12 months.
“So, while cap rates have reverted closer to fair value, this has primarily been for larger retail assets. Therefore, it would seem if valuations are to return to their long-term trend across the various retail asset types there is still potential for cap rates to rise for everyday needs-type assets,” Ellis said.
Last week MSCI head of Pacific real assets research, Benjamin Martin-Henry said price discovery has become more and more challenging for both buyers and sellers, which resulting in restraint in the market.
“While its common to see transaction volumes drop during periods of rising interest rates, the slow activity introduces other uncertainties. With fewer deals the process of price discovery becomes challenging for both buyers and sellers, which can cause more restraint in markets,” said Martin-Henry, who was presenting at the Property Funds Association of Australia’s 2023 Conference in Canberra last week.
Industrial, retail and office sectors all showed declining sales activity in the quarter.
“Current challenges facing the market are common, in contrast with what we saw in the early days of the pandemic. Markets take time to adjust to rising rates, and may be looking for a clear direction,” Martin-Henry said.
“The unknowns around credit markets and economic fundamentals may be causing investors to become more subdued. But there has also been a recent context of roller coaster fluctuations since COVID, which we have seen with record highs last year and a slowdown this year.”
Australian asset owners have looked on as values overseas have come off heavily in the COVID fallout of higher vacancies, lower occupancy, and higher incentives. The trend is expected to land down under.
Listed office asset values have held up so far in Australia, but are likely to fall in the coming 12 months because of weaker market fundamentals and the increasing cost of debt, Moody’s Investors Service has said.
Barrenjoey analysts have warned office tower prices could come off by 15% to 20%. Colliers is expecting capital values to drop by an average of 10% from peak-to-trough, before the market recovers in 2024, a much less turbulent trajectory than the GFC which saw some assets suffer 25% in devaluations.
Dexus, which is also shopping round 44 Market Street, has said transaction markets are “likely to remain soft” over the next six months.
Occupants in the 26-level 44 Market Street include the Australian Bureau of Statistics. The tower is 85.4% full and the WALE is also low, at 2.7 years, while it returns net passing income of $24.3 million.
The market is also eagerly awaiting the result of Blackstone’s offering of the JPMorgan tower at 85 Castlereagh Street, which had a June book value of $835 million, and Mirvac’s prospective sale of 60 Margaret Street.
