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Australian commercial property returns highest in two years

The Property Council/IPD Australia All Property Index Q2 2014 results show a total return of 9.7 per cent for the year ending June 2014.

This was comprised of a 7.2 per cent income return and 2.3 per cent capital return.
The June 2014 total return is a 50 basis point increase from the same period a year ago and a 20 basis point increase on the previous quarter. It is also the highest annual return for Australian commercial property since June 2012.
Core property sector returns for retail, office and industrial were 9.8 per cent, 9.0 per cent, and 12.1 per cent respectively. Over the last 12 months, the industrial sector has shown the most improvement increasing by 210 basis points. Retail sector returns improved from 8.7 per cent a year ago but office sector returns weakened from 9.4 per cent in June 2013. Amongst non-core sectors, healthcare returns increased to 12.5 per cent and hotel returns grew to 10.7 per cent. Healthcare assets have been boosted by strong income growth while hotels have been helped by strong occupancy and investor demand.
The strong growth in industrial total returns has been led by warehousing (12.4 per cent) and distribution (13.6 per cent) assets as well as assets located in New South Wales (13.2 per cent). With more traditional office and retail assets becoming increasingly expensive, some investors have started to look up the risk curve to find value and industrial, traditionally the riskiest of the core sectors has received increased attention. In looking to industrial, investors have shown a preference for warehousing and distribution assets with ties to non-discretionary retail and the strong growth in online retailing.
A feature characterising investors’ move up the risk curve has been the disconnect between space markets and capital markets. Demand for commercial space has been weak due to below trend economic growth, weaker labour markets, and the end of the mining investment boom. By contrast, the buoyance in capital markets is being driven by a historically low cost of debt and a global chase for yield. Symptomatic of this disconnect, cap rate compression has continued despite slowing net income growth and rising vacancy rates in the office sector. As of the end of Q2 2014, the All Property cap rate was 7.0 per cent, down from the previous peak of 7.5 per cent in 2010.
Sustainability was the theme at this quarter’s launch of the Property Council/IPD Australia All Property Index and commercial office buildings that have been awarded a Green Star or NABERS environmental rating have continued to outperform their unrated counterparts. This is true in both CBD and non-CBD markets where buildings with 4-5 star NABERS Energy ratings or Green Star ratings have outperformed the all office measure.  Across Australia, Green Star rated buildings returned 10.0 per cent and 4-6 star NABERS Energy rated buildings returned 9.4 per cent over the year to June 2014.
Returns for Australian real estate over the year to June 2014, at 9.7 per cent, exceeded bond returns of 1.5 per cent (JP Morgan 7-10) but were surpassed by equities returns of 16.4 per cent (MSCI).
Anthony De Francesco, executive director and head of IPD Australia and New Zealand, says: “The latest index results suggest that the overall commercial property market has finally reached the trough of the current cycle as investment returns edge upwards.
“The improvement in returns is underpinned by strengthening capital growth due to firming in capitalisation rates. However, the recovery is mixed across property sector markets; it is strongest in healthcare sector followed by industrial and weakest in the office sector.
“With reference to the office property sector, green buildings tend to outperform non-green buildings in terms of both investment and occupancy measures. This is highlighted in high NABERS Energy-rated offices buildings and green Star-rated building.”    
The Property Council/IPD Australia All Property Index has a combined value of around AUD142 billion representing 1,572 assets, and provides a broad measure of returns for commercial property investment in Australia.
The IPD Australia Quarterly Green Property Index comprises 414 property assets from 33 participants with a combined asset value of AUD58 billion, representing around 93 per cent of the IPD Australian commercial office database by capital value.

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