Outstanding in their yield
While this trend will boost the bottom line, the market is cautious about over-inflation.
The head of research and consulting, Australasia at Jones Lang LaSalle, Dr David Rees, said at the group's investor conference in Sydney on Wednesday that yield spreads to real bond rates were near record highs and that the same yield spreads between central business districts and many non-CBD markets were also widening.
Dr Rees said the yield spreads within prime and secondary sectors were also widening. "Wider spreads offer a range of opportunities to active managers and investors to reposition assets, trade the spread or enhance returns by moving prudently up the risk curve," he said.
"The conundrum is how the gap will be narrowed. Adjustment from both sides is likely. In a low-growth, risk-averse world, with many governments under long-term funding pressures, bond yields may not revert to previous benchmark levels.
"Meanwhile, two drivers - the global hunt for yield and risk-averse investors - will drive prime real estate yields lower, at the upper bound of the yield spread."
Dr Rees said that on a sector basis, the present yield profile appeared to offer short-term investment opportunities and incentives to upgrade and reposition assets. "Neighbourhood retail shopping centres, prime industrial assets and non-CBD office markets fall into this category."
In an Investa Property report, general manager of research Pete Carstairs said Australian office markets were experiencing a high level of yield compression not seen since the global financial crisis.
Cap Rates at the Crossroads - Capital Market Dynamics says that with the recapitalisation of REITs post-GFC, trusts now have access to debt that is inexpensive by historical standards, resulting in increased competition from not just Australian REITS but from unlisted funds, superannuation funds and foreign domiciled investors seeking viable commercial assets.
"Office towers have rapidly returned to being considered a stable investment in a volatile economic environment, resulting in a re-rating of office investment yields," the report says. "In the next 24 months, yields are expected to tighten by 50 basis points and anecdotally we are seeing yields drop week-to-week."
The report reveals the buyer pool has broadened recently, with fewer vendors offloading assets to reduce debt. Increasing competition for a small number of assets is behind the price pressure.
Frequently Asked Questions about this Article…
The article says investor demand from real estate investment trusts (REITs), superannuation funds and sovereign funds is pushing prices up in the Australian office sector. That demand is driving yield compression and a re‑rating of office investments — yields have been tightening and, anecdotally, are dropping week‑to‑week.
Yield spreads are the difference between property yields and benchmark rates (such as real bond rates) or between types of markets (CBD vs non‑CBD, prime vs secondary). The article notes these spreads are near record highs and widening, which matters because wider spreads can create opportunities to reposition assets, trade the spread or enhance returns — but they also signal differing risk and pricing across markets.
Yes. According to Jones Lang LaSalle’s head of research Dr David Rees, yield spreads within prime and secondary sectors are widening. That divergence creates potential opportunities for active managers to shift into higher‑return positions or to trade relative value between sectors.
The article highlights neighbourhood retail shopping centres, prime industrial assets and non‑CBD office markets as sectors that currently appear to offer short‑term investment opportunities and incentives to upgrade or reposition assets.
A post‑GFC recapitalisation of REITs has given trusts access to historically inexpensive debt, increasing competition. The report cited in the article says competition now comes from listed REITs, unlisted funds, superannuation funds and foreign investors. A broader buyer pool and fewer sellers are creating price pressure and contributing to cap‑rate tightening.
Investa’s research manager Pete Carstairs describes a high level of yield compression similar to the global financial crisis period. Practically, that means yields have been moving lower quickly, office towers are being re‑rated as stable investments, and the report expects yields to tighten by about 50 basis points over the next 24 months.
Dr David Rees notes a conundrum: yield gaps could narrow through adjustments on both sides, but in a low‑growth, risk‑averse world bond yields may not revert to previous benchmarks. That dynamic, combined with a global hunt for yield and risk aversion, could keep prime real estate yields lower at the upper end of the spread.
The article suggests being aware of both the upside and the risks: wider spreads and yield compression create opportunities to reposition, upgrade or trade assets, but rising competition and price pressure mean investors should be prudent to avoid overpaying. Active, considered moves — rather than chasing yield blindly — are the themes highlighted.
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