This article is from the Australian Property Journal archive
AFTER more than half a decade of repricing and challenging fundamentals, the retail property sector is looking compelling on a relative value basis with yield expansion milder than other core commercial property markets, whilst offices are expected to recover in the medium-term.
At the same time, a recovery in office markets may be on the medium-term horizon, according to major tower owner Dexus, as new supply dries up and empty space across the country is gradually absorbed.
Dexus offered some reasons for investors to be more optimistic in its latest quarterly Australian Real Asset Review.
“Notwithstanding the challenge of high vacancy rates in the short term, the seeds of a medium-term recovery in office markets are being sown as new supply dries up,” said Peter Studley, Dexus head of research.
“Office development commencements are forecast to fall 31% over the next three years, helping markets to rebalance.
“Increasing construction costs and rising interest rates have put pressure on feasibilities, limiting project commencements.”
Since Q4 of 2019, the amount of stock forecast for Sydney CBD in 2027 has declined by around 200,000 sqm due to previously planned projects being postponed. In Melbourne, planned buildings such as the 44,000 sqm 383 LaTrobe Street have been shelved, and now expected to be developed into apartments.
It comes as a recent survey of businesses found 91% of CEOs are backing hybrid working, a decision which is expected to impact office market valuations and lead to further repricing of assets, which are already trading at a discount to book value.
“The pathway to recovery for office markets over the next three to five years will be driven by demand benefiting from employment growth, falling supply levels and a tightening of vacancy rates,” Studley said.
June quarter data from JLL showed total vacancy rates lifted in the Sydney (by 1.2% to 15.6%) and Melbourne (by 3.4% to 19.6%) CBDs, with a fall in Brisbane (to 10.3%). Perth inched upward.
Dexus is expecting rents to increase in the Brisbane and Perth CBDs over the next 12 months, and hold steady in the Sydney CBD, North Sydney, Parramatta, and the Melbourne CBD.
Office market normalising, retail sector at an inflexion point
An increase in office transactions was a feature in an otherwise slow real estate transaction market. Office transactions comprised 36% of total transactions in the June quarter, up from 22% in the prior year.
“While prices are down on a year-on-year basis, recent sales indicate that market values are approaching a level where the market can function more normally,” Studley said.
The recent sales materialised the fall in values across the office sector as it continues to wrestle with working from home and tough economic conditions. Among the sales was Dexus’ divestment of 130 George Street in Parramatta, at 63% below peak value.
Dexus expects yields to increase across all markets in the next year.
Studley said the retail sector is looking compelling on a relative value basis. Yield expansion has been milder than the other main real estate sectors and total returns for retail funds in FY24 of 0.7% per annum exceeded the “All funds” index of –3.4% per annum.
“The retail sector appears to have reached a significant inflexion point after a challenging period over the past five years,” Studley said.
He said shopping centre fundamentals are generally positive. Vacancies across shopping centre types have held relatively steady despite the weak sales environment, occupancy costs are lower than prior to the pandemic, and there is a lack of new shopping centre supply.
“It appears investors are waking up to the positive story. Over the past year, the discount to net asset value for listed retail REITs in Australia has narrowed from 13% to 3%, indicating greater confidence in the future stability of these asset values over office and diversified AREITs.”
There are signs of opportunistic investors making the play for retail assets, as evidenced by the recent transactions including Nick DiMauro, of the DiMauro family, acquiring Hobart’s Channel Court from Challenger Group for $82.5 million; whilst earlier this month Realside Property paid $107 million for Maddington Central in Perth to Vicinity Centres; and Chris Lock’s IP Generation’s acquirising Stockland Glendale for $315 million – in the largest retail transaction of the year , and Scentre buying out Dexus’ stake in Westfield Tea Tree Plaza.
IP Generation’s other recent purchases including spending $300 million on Craigieburn Central, VIC and $180 million for a 50% interest in Rockingham Centre, WA.
In April Centuria Capital bought the Halls Head Central sub-regional centre from ISPT for $70 million, which was 40% below replacement cost. Charter Hall acquired Eastgate Bondi Junction in February for nearly $127 million. ISPT also sold the Brisbane home of fast fashion giants H&M and Uniqlo for $145 million.
Rent growth, while slowing, is continuing in the industrial real estate sector, which has seen rents surge by 30% to 50% amid the e-commerce boom of the last few years.
Studley said warehouse demand is moderating due to a subdued level of retail sales.
West Melbourne and south-east Melbourne recorded 10.1% and 8.8% net face growth respectively in the June quarter. Sydney markets were more subdued, with rents in the outer west rising by 0.7% in the quarter and 6.8% in the year.
