Commercial property delivers for investors

At their highest levels since September 2008, average annual returns on property have outstripped bonds and shares, according to the latest Property Council / IPD Australia All Property Index.

The Index, which records direct investment in property, tracks more than 1400 commercial assets valued at $160 billion, representing approximately 60 per cent of the institutional investment market.

Annual returns on commercial property were up 14 per cent to the year ending 31 March. In comparison, property shares delivered a 9.2 per cent return and bonds a tiny 1.6 per cent return. Balanced share portfolios actually fell by 11.3 per cent.

This 14 per cent return is up marginally on the 13.9 per cent in the December quarter. Capital returns increased over the quarter by 30 bps.

Anthony De Francesco, executive director of MSCI, which manages the Index, says strengthening in capital return performance reflects the ongoing compression in capitalisation rates.

“The property market showing signs of moderating and approaching the peak in the cycle,” he says.

The office sector recorded the biggest annual uptick in investment performance with returns at 15.1 per cent. This was followed by the industrial sector at 15.0 per cent and the retail sector at 12.0 per cent.

De Francesco says the office sector is showing strong growth and rentals are picking up – but only in Sydney and Melbourne.

“In other markets, like Perth, investment performance is going backwards with rental growth declining and asset prices moving down, not up.”

In the retail sector, returns have stabilised, and De Francesco points to the softening housing market – which is closely linked with retail sales – as a “key factor”.

“Some of the strength in the industrial sector has been through occupancy of warehousing facilities. Declines in the Australian dollar inevitably moderate the demand for storage facilities for goods purchased offshore,” he explains.

With one interest rate cut under our belts, and another anticipated for later in the year, De Francesco predicts this will provide a boost to the economy and will “feed into stronger aggregate demand”.

“Another rate cut is likely to extend the duration of the peak of the cycle. If a rate cut is not forthcoming, the cycle peak may be shorter in duration.”