Sales of commercial property in Australia lowest in 10 years

Increased debt costs and uncertainty over pricing have seen sales of commercial property in Australia fall to the lowest level in more than a decade at the start of 2023, according to MSCI Real Assets.

Between January and March 2023, transaction volume slumped to $5.3 billion which was the lowest level since Q1 2012. Following this, deal volume over the past six months was more than 25% below the average of the past 10 years.

On top of that, the steeper financing costs after a series of interest rate hikes left buyers struggling and all three sectors (industrial, office and retail) posted declines in sales activity of more than 70%.

Benjamin Martin-Henry, head of Pacific Real Assets Research at MSCI, said that unlike the fluctuations in relative activity brought on by the pandemic, the current challenges facing the market were common to all sectors.

However, the hotel sector was the only standout market segment and registered a record-breaking deal in Sydney as the Waldorf Astoria’s forward sale for $520 million represented a $2.4 million price-per-key, the highest on record.

During the first quarter, the office activity fell 71% with only a handful of properties trading over $100 million and the biggest was Charter Hall’s settlement of the ATO headquarters in Canberra for $290 million.

The office sector also recorded negative capital growth in The Property Council of Australia/MSCI Australia Annual Property Index in Q4 2022.

The explosion in industrial deal activity also came to a stop, with deal volume having reached just $1.1 billion, an 82% decline compared to Q1 2022.

At the same time, yields for warehouses moved out to 5.0%. Melbourne’s deals were noticeable for their absence, while Sydney was home to the five largest industrial deals of the first quarter; the largest being Goodman Group’s acquisition of 2-8 Lanceley Place for $95 million.

Sales also dropped to $1.5 billion and yields for most retail subtypes expanded further.

Large format retail yields, which had sharply compressed to a low of 5.5% in Q1 2022, moved up to 5.8% in Q1 2023.

The largest transaction in the quarter across the sector was the sale of the Forest Hill Chase Shopping Centre to The JY Group’s joint venture with HabenProperty Fund for $256 million.

Martin-Henry also said that the deal represented the largest involving cross-border capital in the first three months of 2023.

“However, overseas players acquired less than $0.5 billion of Australian commercial property in the quarter, or about 9% of total deal volume, representing a smaller portion of Australia’s transaction market than in prior years,” he added.

In 2021 and 2022 cross-border investors were behind 25% of the market, down from roughly 30% in the five previous years.