Outstanding in their yield
The focus back to the Australian office sector by the real estate investment trusts, superannuation funds and sovereign funds is forcing prices up beyond their values, according to investors.
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.