New High in Quarterly Real Estate Transactions
Property transaction values in the 2nd quarter of 2019 have pushed well ahead of the previous quarter to a new high of $11.8bn. A total of 246 transactions above $5M were recorded in RESourcedata across each of the Commercial, Retail, Industrial and Development sectors during the quarter.
Whilst the overall value of transactions were higher, the number of transactions was lower than in Q3, and Q4 of 2018 due to several significant sales.
Transactions in the commercial property sector totaled $7.6bn for Qtr2, predominantly driven by the disposal program pursued by Scentre and Oxford Properties which together account for $2.94bn of sales over 8 assets. The weighted average yield for commercial property remained the same as the previous quarter at 5.3%.
Metropolitan commercial assets continued to be highly sought after with 56 major sales worth $1.6bn in Q2 at a weighted average yield of 6.0%. The largest metropolitan sale in Q2 was the sale of the Zenith Centre at Chatswood by Centuria and Blackrock for $438m.
The retail sector accounted for $1.27bn of activity with overall volumes at about average level. The sale of 50% of Westfield Burwood to the Perron Group was the highest value transaction for the quarter at $575m, followed by Charter Hall's purchase of Rockdale Plaza for $142m. The weighted average yield for retail property sharpened 90bps to 5.7% due to the impact of the Burwood sale which yielded 4.8%. Excluding this transaction the weighted average yield would have softened by 1bps to 6.7%.
The industrial sector recorded an average number of transactions totaling $1.1bn. Frasers sale of their Parkinson asset to DWS was the highest value transaction at $134m, followed by GPT acquisition of a site in Erskine Park for $107m. The weighted average yield for industrial property softened by 20bps to 6.3%, however yields on some of the significant sales was not available.
The development sector recorded a higher than average volume of sales with total sales at $1.9bn. The largest development sale was the Sirius building in the Rocks which sold for $150m and a property at 506 Gardeners Rd Alexandria which was sold for $110m.
Demand by local and offshore groups is expected to drive yields lower over the next 6 months as global and domestic bond yields head to record lows.
As the charts below indicate, the dramatic fall in the Australian 10 yr bond rates over past 6 months has pushed the yield spreads for commercial, retail and industrial property to above average rates, leaving the prospect of tightening cap rates a real possibility.
Strong occupier demand in the office and industrial sector will likely see the most attention with further cap rate compression for prime assets.
Investors are re-pricing the risks of the retail sector which continue to face headwinds with higher vacancy, higher capital requirements and the prospects of lower rents. With several wholesale shopping centre funds holding significant redemption requests and $2bn of assets already on the market, the retail sector is heading for tough times ahead with the likelihood of softer yields diminishing returns for existing investors and bringing opportunities to the for for new investors. The more liquid, highly convenient neighbourhood centres will continue to attract greater demand.
We will continue to review each of these sectors in more detail over the next few weeks.