Commercial property investors will increasingly focus on the income growth they can generate from property assets, as yield compression – driven by the wall of money which has pushed up property values – bottoms out in the current cycle, according to CBRE.
“Yield compression has driven strong investment returns in recent years. However, investors will now increasingly be looking at the income growth fundamentals of their assets and what they can do to improve the growth potential of their individual assets and property portfolios,” said CBRE’s head of research in Australia, Stephen McNabb.
The CBRE outlook report noted a “deep buyer pool remained for quality assets” with the expectation that transactions would push yields lower in the short-term – though only marginally in some sub-sectors. However, the yield compression cycle would finish in the first half of 2016 and yields would start to soften in 2017, driven by upward pressure on domestic debt.
“Yield softening will vary between markets and sectors,” said CBRE. Markets like Sydney that have a superior rental growth outlook will be better placed to offset the “systematic upward pressure cased by higher interest rates” the real estate group said.
CBRE said rental growth was now evident in Sydney, Melbourne and Canberra office markets, though incentive levels will remain high and the market would continue to favour occupiers.
In most industrial property markets, CBRE forecast rental growth to improve driven by the lower Australian dollar and a high level of construction activity while in the retail sector, demand from foreign retailers was driving the recent strong growth in CBD retail rents, across most retail segments.
Driven by historically low yields in many markets and with a deep pool of capital, Mr McNabb said owner-occupiers had an opportunity to offload standalone assets and portfolios. “Portfolio sales will particularly appeal to overseas investors and this will contribute to vendors achieving maximum pricing,” he said.
With the worst having now passed for Brisbane and Perth commercial property markets, he said: “As 2017 approaches there will be increasing interest from counter-cyclical investors, with the focus likely to be for prime assets.”
The report also noted strong demand for student accommodation as the lower dollar drives growth in international student numbers and said that changing demographics and consumer preferences would influence retail landlord decisions in repositioning shopping centres.