Matthew Cranston and Nick Lenaghan
Australian real estate investment trusts saw an increase in real estate values of more than $4.7 billion this reporting season with capitalisation rates tightening by double-digit percentages as both the growth in income and demand for prime property improves.
In just the six months to December, overall REITs added 5 per cent to their net tangible assets according to the latest data by UBS analysts, and while the $4.7 billion figure is well up from the $2.3 billion increase recognised in the six months to June last year, it is slightly down from the previous corresponding period where values rose $4.9 billion.
The continued big rise in value from shopping centres, such as Vicinity’s Chadstone mall where cap rates tightened 50 basis points to 4.25 per cent in just six months and Scentre Group’s Bondi Junction tightened to 4.5 per cent, down from 4.75 per cent a year earlier, along with office towers such as Investa Office’s Fund’s 151 Clarence Street redevelopment, where a 35.4 per cent increase in value to $138 million has been booked, reflects some concerns about the high levels of values at this point in the property cycle.
The International Monetary Fund’s latest review of Australia mentions the concerns around rising values in commercial real estate.
“Commercial real estate prices in Australia have increased rapidly since mid-2014. Rents have not followed at the same pace, and the price-to-rent ratio is now above average. Whether the latter is a good metric of fair value is difficult to assess,” the IMF said.
“The deviations from average are now close to levels last seen before the global financial crisis. Shortly thereafter, there was a sharp correction in CRE prices in the context of the crisis.”
Resolution Capital’s senior portfolio manager Andrew Parsons captured the uncertainty in the market.
“I have never speculated about cap rate compression. It’s been a momentum story which no one really knows when it will pause or reverse. Good luck to the crystal ball gazers who just pretend they know.”
Colliers International’s national director for retail valuation and advisory services Andrew Johnston said the retail sector had proven to be unstoppable in terms of values despite some questions around the strength of retail sales.
“The retail ‘juggernaut’ will continue until something or someone turns off the switch,” Mr Johnston said.
“Whilst retail sales remain relatively benign, a lack of supply and a low cost of money continues to underpin the retail investment market in this country.”
Leading fund managers such as AMP Capital head of global listed real estate James Maydew said the REIT’s reported valuation increases were largely expected and that there was still room for growth.
“The way we have seen asset appreciation is in line with our forecasts,” Mr Maydew said. “We still think there is a way to go for values and I think we are just taking the lead from overseas.
“There is still a good risk-free spread between cap rates and yields and we think that will last.
“The growth in office assets we are now seeing is also in line with our expectations, especially as a lot of assets are being taken offline either for refurbishment or change of use.”
Colliers International’s managing director for valuation and advisory services Dwight Hillier, who values large office towers, said the increase in value was expected and he saw further growth.
“Capital value growth continues to be driven by the traditionally confined period of cyclical paired benefit of yield compression in combination with a strengthening forecast for rental growth. The balance of these paired contributing factors to capital growth may change weighting over the next 12-24 months, however, we forecast that capital values will continue to grow at a steady pace over this corresponding period.”
John Talbot, who leads JLL’s national valuation team, said the reporting season continued to deliver positive and favourable upward movements in real estate property valuations, particularly prime assets in Sydney and Melbourne.
“There are no real surprises here from a fundamentals perspective,” Mr Talbot said.
“Key investment markets continue to perform strongly with positive performance indicators, particularly in the office sectors around occupancy, rental growth and a generally limited supply pipeline all flowing through to more positive valuations.
“The capital markets are also underpinning stronger asset values with more capital, both domestic and offshore chasing fewer deals and this has a direct bearing on pricing metrics.
“The key point to make here though is that much of the valuation growth, particularly in the office sector, is linked to income growth, not so much cap rate compression.”
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