This article is from the Australian Property Journal archive
AUSTRALIAN retail property delivered the highest returns in the 12 months to September, while office sector returns continued to be weighed down by high vacancies and the growing gap between prime and secondary assets.
New Property Funds Association, Property Council of Australia, Zenith Investment Partners and MSCI showed that REITs’ unlisted property funds continue to materially underperform Australian equities, REITs and direct property in the September quarter.
Over the past year, unlisted property returns returned -14.9%, compared with direct property at -3%, and REITs which delivered 44.7% returns. Australian equities returns 21.8%.
“Despite greater market confidence around the potential timing of interest rate cuts and more transaction activity, there remains a wide gap between buyer and seller expectations, albeit that this is beginning to tighten,” the report said.
There was no early Christmas present from the Reserve Bank this week, with interest rates remaining on hold for a ninth consecutive board meeting, but a change in tone in its post-meeting statement reignited hopes for a rate cut early in the new year.
On a three-year annualised basis, unlisted property returns are just sitting in negative territory, while Australian equities and unlisted property are both at around 10%.
By sector, Australian retail property delivered the highest 12-month returns with 2.4%, up 0.5% year-on-year (yoy) while industrial property delivered just 0.7% and office fell to -8.6%.
“While industrial assets continue to benefit from low vacancy rates and strong demand, significant cap rate expansion in the sector over the last 12 months meant total returns were only marginally positive,” it said.
“Market fundamentals in the office sector remain challenging and there is a material performance dispersion between prime and secondary assets.”
“Green shoots are emerging” for direct property investment returns, it said, despite a negative total return recorded in the September quarter.
“Income returns improved both on a quarter-on-quarter (qoq) and yoy basis, to 5.2%, up 0.1% and 0.4% respectively. Despite a -7.8% fall in asset values in the September 2024 quarter, this was a 0.6% qoq improvement. An increase, albeit small, in transaction volumes and a stabilisation of cap rates has provided some support to valuations in the September 2024 quarter.
“However, delays in interest rate cuts and the continued unwind in office sector valuations weighed on overall returns.”
Cap rates across all property showed some signs of stabilisation in the quarter, coming in at 5.8%, up marginally from 5.7% in the June quarter. Cap rates in the retail sector contracted over the period to 5.6%. Property-specific factors remain key drivers of valuations, most notably in the office sector where cap rates were flat qoq at 6.0% but have expanded 70 basis points from 5.3% in September 2023 and 120 basis points from September 2022.
Cap rates for industrial assets expanded marginally over the quarter to 5.4%, although up 130 basis points since September 2022, while the sector continues to benefit from low vacancies, rental increases have returned to levels more in line with other sectors.
