Yields steady for now but squeeze is coming
Although the appetite of investors is increasing, in the short term yields would be kept in check because occupier markets were still subdued, CBRE's latest ViewPoint says.
The report compares current market conditions to a "balancing act", but a range of factors would swing the balance in the longer term, CBRE's research head Stephen McNabb said.
"In general, yields are driven by confidence and growth expectations, both of which are below historical averages, with only tentative signs of a recovery emerging," Mr McNabb said.
Subdued confidence was offsetting lower bond yields, falling credit risk premiums and borrowing rates. That in turn was holding property yields relatively stable, he said.
But medium-term factors unfolding will support yield compression - namely a reallocation of superannuation funds to "riskier" assets, leverage capacity and improvement in relative return, Mr McNabb said.
Continued foreign investor interest in Australia was expected to help drive yield compression, CBRE said.
There were clear differences in the outlook yields from premium grade versus secondary assets.
"While a number of factors are supportive for yields in the longer term, the fact that confidence remains weak will support prime rather than secondary yields in the next six to 12 months," he said.
Several factors were likely to drive acquisition activity, CBRE's national capital markets director Josh Cullen said.
Lower levels of leverage in the REIT sector and falling borrowing costs would enhance the purchaser's ability to fund acquisitions.
Mr Cullen said "A-REITs in particular are expected to be more aggressive buyers this year".
Frequently Asked Questions about this Article…
CBRE's ViewPoint says property yields are relatively steady for now. Short‑term yields are being held in check by subdued occupier markets and weak confidence, even though lower bond yields and falling credit risk premiums are supportive. Over the medium term CBRE expects yield compression as other factors unfold.
CBRE highlights several medium‑term drivers of yield compression: superannuation funds reallocating money into riskier assets like property, improved relative returns, increased leverage capacity in major REITs, and continued foreign investor interest. Together these forces are likely to push yields lower over time.
Occupier markets influence confidence and growth expectations. When occupier markets are subdued, demand for space is weaker, which keeps investor confidence low and limits yield compression in the short term. A recovery in occupier markets would help support tighter yields.
The report notes super funds are reallocating capital into property and other riskier assets. That reallocation increases demand for property investments and, over the medium term, is expected to support compression in property yields as more capital competes for assets.
CBRE expects prime or premium property yields to be supported before secondary yields over the next six to 12 months. Because overall confidence remains weak, investors are likely to favour lower‑risk prime assets, delaying any recovery in secondary market yields.
CBRE says lower levels of leverage in the REIT sector and falling borrowing costs improve purchasers' ability to fund acquisitions. As a result, A‑REITs in particular are expected to be more aggressive buyers this year, which could increase transaction activity and push yields tighter.
Lower bond yields, falling credit risk premiums and reduced borrowing costs generally put downward pressure on property yields because they lower investors' required returns. However, CBRE points out that weak confidence can offset those effects in the short term, keeping yields relatively stable.
Investors should monitor reallocations by superannuation funds into property, changes in occupier market strength, borrowing costs and REIT leverage levels, and levels of foreign investor interest. Improvements in confidence and growth expectations would also be key indicators that yield compression may accelerate.
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