The returns on Australia’s shopping centres, office towers and industrial facilities are rising but show the widening gap in the nation’s economic performance.
The returns on properties in Melbourne and Sydney exceeded those in Brisbane, Perth, Adelaide and Canberra according to the Property Council/IPD Australia All Property Index for the year to March 31, released on Tuesday.
Presenting the results, MSCI vice president, Deyan Radanovic, said the returns, which are driven by “the force of capital” also showed the disconnect between investment demand and underlying fundamentals – a disconnect that has concerned the Reserve Bank.
Overall the average total return, income and capital, for the year was 10.7 per cent.
The figure is strengthening, up from 10.4 per cent in the year to December 2014, as investment demand for commercial property has risen. Mr Radanovic, called the figures “historic outperformance.”
It is only the second time since 2008 that the index has shown a better return than the long run average of 10.4 per cent. And it has outperformed the global index of 9.9 per cent.
Nevertheless, other asset classes bettered direct commercial property. The total return on equities was 14.3 per cent, on bonds 21.1 per cent and on listed property, 36.7 per cent.
Within the commercial property, industrial real estate showed the best return for the year, up to 12.4 per cent. Retail property returns rose to 10.9 per cent and office property returns increased to 10.2 per cent.
All sectors show geographic variation. In retail property, the strongest capital growth is in NSW and Victoria; office property shows the better white collar employment growth in Sydney and Melbourne; and industrial property returns are strongest in NSW.
(The returns on industrial property in Victoria are muted by the availability of land.)
MSCI noted that the overall capitalisation rate had not tightened in the past quarter. But the average cap rate on retail property has tightened to 6.2 per cent and on office to 6.9 per cent.
Mr Radanovic said the volume of transactions in the quarter had been muted compared with the big rise in sales in 2014. He said the slowdown in sales reflected no lack of interest but a lack of stock.
The Property Council/IPD Australia All Property Index is now prepared by MSCI based on the performance of over 1,200 properties with a combined value of $137 billion.