Savills News

The surge of interest back towards property

The continued decline in the Australian 10-year government bond yield has now reached a record low since the 10-year rate sunk to below 1 percent for the first time ever on Tuesday.

The continued decline in the Australian 10-year government bond yield has now reached a record low since the 10-year rate sunk to below 1 percent for the first time ever on Tuesday, which subsequently could attract investor attention towards property in search of higher return on investment.

As a result of this, traders are now expecting (and pricing in) a further two interest rate cuts with a reduction to 0.75 percent in October looking even more likely.

This is leading to investors beginning to accept lower returns on investment (for property acquisitions) as these returns are still higher than alternative investment returns.

According to Phil Montgomerie, Head of Research and Consultancy at Savills Australia, despite the evident yield compression cycle, office assets are not yet deemed to be ‘expensive’ in comparison to 10 year bonds, which have sunk below 1 percent for the first time.

“Since June 2004 the average yield spread to 10yr bond has been 2.5 percent, however the years around 2006 to 2008 saw the spread come close to zero. In June 2014 the spread expanded to near 4 percent and has continued to rise.

“With lower interest rates looking more likely, subsequent lower debt funding costs could attract further buying in commercial assets as the yield gap expands.

Mr Montgomerie went on to say that with the AUD falling 1.2 percent to a decade low of 66.77 US cents (as of close of business 7 August 2019), foreign buyers may look more favorably on Australian income investments such as commercial property.

According to Tom Tuxworth, State Director, NSW Metropolitan & Regional Sales at Savills Australia, “As bonds rates continue to decline, the ASX is still trading at close to record highs and with gold trading at almost $1,500 per ounce, commercial property becomes a clear alternative as it offers more attractive returns (although transacting record low yields) to investors whilst (most importantly) remaining a tangible asset.”

“Our team has seen a strong flight to quality, with purchasers looking for well located, income producing assets which they are willing to compete aggressively for if they display secure fundamentals.

“Commercial property offers purchasers a strong investments case, with most leases presenting rents (within Sydney) at record highs, with fixed annual increases, with terms of 5-10 years in length still with an opportunity to see rental growth and strong depreciation,” he said.

According to Nick Lower, Director, Metropolitan & Regional Sales at Savills Australia, due to the lack of alternative investment options, investors searching for security are happily accepting sharper returns in tangible assets.

“On the back of the recent interest rates cuts and now having certainly around governance, with the stock market being at all-time highs and government bonds being at record lows, the achievable returns in commercial assets (although sharp) are still offering a relatively attractive return on investment.

Industry examples include:

Property Address

Sale Price

Yield

NLA sq m

Rate p/sq m NLA

Sale Date

85-97 William Street, Darlinghurst

$17,150,000

3.70%

1784sq m

$9,609

Jun-19

19 Foster Street, Surry Hills

$39,500,000

4.87%

3150sq m

$12,524

Mar-19

Shop 2, 60 Park Street, Sydney

$1,550,000

4.20%

41sq m

$37,804

Jun-19

869 George Street, Ultimo

$5,050,000

3.48%

237sq m

$21,308

Nov-18

4-8 Australia Street, Camperdown

$12,000,000

3.90%

1,811sq m

$6,626

May-19


According to Savills Australia data, as at June 2019, A Grade office yields for the nation are:

Sydney CBD

4.75%

Melbourne CBD

5.1%

Brisbane CBD

5.75%

Perth CBD

6.5%

Adelaide CBD

7.25%

Canberra Civic

6.15%

 

 

East coast average (exc. Canberra)

5.2%

                                                                    Source: Savills Research

Savills believes Commercial Office has more yield compression to come, encouraged by lower interest rates and subsequently lower debt funding costs, a more competitive AUD for foreign capital and the continued search for secure passive income streams. Savills expects the yield differential to bonds to compress as valuations rise for good quality and strongly leased and located assets.

“Current market conditions combined with a falling bond rate clearly demonstrates that now is the time to invest in the property market if investors are to achieve the desired level of return,” said Mr Lower.

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