Market Update – Hadyn Stephens

4 July 2016

Transaction activity has been relatively muted through the first six months of 2016, with a lack of reinvestment options being the primary reason cited by owners for not considering disposals, despite continued strong demand from domestic and offshore buyers for quality commercial real estate.

We are currently seeing a clear divide in the Australian commercial real estate market between the ‘Yield Markets’ (Adelaide, Brisbane, Canberra and Perth) and the ‘Growth Markets’ (Melbourne and Sydney).

As the name suggests, the Yield Markets currently offer relatively high initial yields on commercial properties, and continue to attract investors looking for immediate return on their capital.  However, weak economic growth and tenant demand in these markets is having a marked impact on tenant retention rates, downtime, incentives and market rental growth.

In contrast, underlying demand/supply dynamics are much more favourable in the Growth Markets, with buyers prepared to accept lower initial yields in these markets on the expectation of strong rental growth to drive an acceptable total return.  Sydney remains Centuria’s preferred market, particularly those metropolitan markets that are benefiting from infrastructure investment by the NSW Government and an improving demand/supply dynamic driven by strength in the underlying state economy and the withdrawal of office stock for residential conversion.

As always, we believe that good deals can be identified in any market at any point in the real estate cycle.  Although fundamentals are currently challenging in the Yield Markets, we note that the May 2016 Centuria Office Valuation Indicator (“COVI”) suggests that these markets offer the most compelling valuations relative to other markets and their own historical averages.  Accordingly, we expect to see counter cyclical investment opportunities in these markets over the next 6-12 months, and look forward to bringing these opportunities to our investors as we see value emerge.

Other articles appearing in this quarter’s newsletter

New Funds and Upcoming Opportunities Update – Michael Blakes

Centuria Metropolitan REIT Update – Nick Collishaw

Portfolio Update – Victor Georos

Staff Snapshot