There’s a conundrum facing the commercial property sector just when A-REITs are basking in the glow of the excellent performance of those that survived the GFC credit squeeze: yields are falling and supply is rising, but prices are rising too.
To blame is the “weight of money” – many billions of dollars of international funds looking for a home and any half-decent yield in an era of low returns and low inflation.
Foreign investors in residential real estate receive plenty of media and political attention – too much, in my opinion.
It’s much easier for politicians to jump on the shock jock’s bandwagon and shout “Look over there! A foreigner!” than to deal with the fundamental tax, planning, zoning, NIMBY, red tape and rent-seeking problems that make Australian housing more expensive than it should be.
While the barbie conversations concentrate on the relatively few foreigners breaking our foreign investment rules on residential real estate, the big money has been rushing into office towers as well as the odd shopping centre and industrial park.
At the Australian Property Institute annual Victorian conference, an expert panel gave a taste of just how big the “weight of money” has become.
The Investa portfolio of office buildings sold for $2.45 billion – but the winning bid was only fractionally ahead of five underbidders and those five were at the top of a much larger pack of interested parties.
International institutions are dominating the space with their appetite increased by the Australian dollar’s fall.
When the Australian dollar was above parity with the greenback, the biggest impediment to foreign investment was the currency risk.
Yields were nice, but how much might be lost when the Aussie caught up with where it should be based on commodity prices?
Despite the currency risk, some big money still came from pension funds with long-term views.
Now that that the Aussie is down closer to where it might stabilise, the impediment of currency risk has largely been removed.
Which is why big institutions are looking to pay big money for commercial properties despite there being little or no chance of higher rent.
Thus capitalisation rates (“yield” to most people) are being squeezed despite the rental outlook.
It seems the internationals grasp better than many locals that we are in a time of low yields.
Cap rates that were unacceptable yesterday are starting to look good today.
There’s enough tension between yield seekers and more traditional investors to keep markets wondering when there’s plenty of office vacancies in key markets.
In Sydney, for example, all these extra office floors in Barangaroo are coming onto a market that isn’t stretched.
That should be depressing prices – but it’s not.
Yield compression is all the rage.
The weight of money looks like being the commercial property investor’s friend for a while yet.