Property asset sales slump to the lowest level in a decade

Sales of commercial property have slumped to the lowest level in more than a decade as investors and deal makers, frustrated by high-interest rates, fears of valuation declines and economic uncertainty, stay on the sidelines.

The latest Australia Capital Trends report from MSCI Real Asset, which is a part of MSCI, shows transaction volume for January to March 2023 dropped by 73 per cent to $5.3 billion. That is the lowest level since the first quarter of 2012.

As a result, deal volume over the past six months was more than 25 per cent below the average of the past 10 years, the report said.

Real estate agents call the current environment a “mexican stand-off” where buyers are offering prices at levels way below what the vendors are asking. Hence, no deals are being completed.

MSCI Real Asset’s Benjamin Martin-Henry said there are many properties on the market, but pricing has become a real sticking point due to the soaring cost of debt.

He said due to the muted levels of deal activity, the process of price discovery has been challenging for buyers and sellers. Buyers also have to contend with steeper financing costs after a long series of interest rate hikes by the Reserve Bank of Australia.

“Couple this with uncertainty around economic fundamentals, and it’s no surprise that investors have been very subdued,” Martin-Henry said.

On a sector basis, industrial, office and retail asset deals have tumbled in the last quarter, each posting declines in activity of more than 70 per cent.

The one bright spot was the hotel sector, which posted an increase in activity and saw a record-breaking deal in Sydney – the Waldorf Astoria sale to billionaire couple Nicole and Andrew Forrest.

The global head of real assets research at MSCI, David Green-Morgan, said despite the hotel volume being dominated by one large purchase in Sydney, the positive sentiment around the sector following the reopening of borders and the economy continues.

On a sector basis, office sale volumes fell 71 per cent, with only a handful of properties trading for more than $100 million.

The biggest was Charter Hall’s settlement of the ATO headquarters in Canberra for $290 million. Yields continued to expand, with CBD office yields increasing for a sixth consecutive quarter to hit 5.5 per cent.

The report said yield expansion is now coming through in underlying valuations as the office sector recorded negative capital growth in The Property Council of Australia/MSCI Australia Annual Property Index.

Even the booming industrial property sector took a breather in the past three months, with the volume of deal only reaching $1.1 billion, an 82 per cent decline on the same time last year. Yields for warehouses moved out to 5 per cent.

In Melbourne, deals were noticeable for their absence, while Sydney was home to the five largest industrial deals of the first quarter; the largest being Goodman Group’s acquisition of 2-8 Lanceley Place for $95 million.

Martin-Henry said retail sales dwindled to $1.5 billion and yields for most retail subtypes expanded further. Large format retail yields, which had sharply compressed to a low of 5.5 per cent in the first quarter of 2022, have moved up to 5.8 per cent.

But the burgeoning build-to rent sector is a bright spot for lenders, according to the latest Lender Sentiment Survey, by CBRE.

CBRE Research tapped a mix of 31 local and international banks and non-bank lenders for its H1 survey of Australian commercial real estate lenders.

The majority expect lending costs to increase going forward. There was a moderate dip in the percentage of respondents expressing a desire to grow their commercial loan books – from 44 per cent in October last year to 32 per cent when this month’s results were calculated.

CBRE’s Pacific head of research Sameer Chopra said the top-line results showed that industrial remained the favoured asset class, with more than 80 per cent of the survey respondents expressing a preference to lend into that sector.

“The overall reduction in lending appetite was most prominent among non-banks, although the results show they are still interested in growing their BTR, residential-to-sell and industrial portfolios,” Chopra said.

“Tighter credit conditions are placing undue downward pressure on future supply, which could boost longer-term rent growth across all sectors.”

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