Yields steady for now but squeeze is coming

Super funds reallocating money to property, improvements in relative returns and the leverage capacity of major REITs support a compression in property yields in the medium term, research suggests.

Super funds reallocating money to property, improvements in relative returns and the leverage capacity of major REITs support a compression in property yields in the medium term, research suggests.

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".

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