Average net effective rents for logistics properties in Sydney gained 30 per cent year-on-year and 24 to 25 per cent in other markets, as elevated levels of supply were more than offset by demand, pushing the national vacancy rate below 1 per cent.
Nevertheless, that tremendous cash surge may not be enough to completely offset the cap rate expansion, according to Macquarie analysts led by Stuart McLean.
Rising bond yields are beginning to impact on valuations, with cap rates expanding 60 basis points quarter-on-quarter in Melbourne and by 40 basis points in Sydney.
“All else [being] equal, this would imply a 15 per cent decline in Melbourne values and 10 per cent in Sydney, although this is being offset by rising cash flows,” the analysts wrote in a client note.
Soft demand in office sector
Capital value indicators declined 4.1 per cent in the last quarter in Melbourne and by 6.4 per cent in Sydney, with rising rents at least partially offsetting yield expansion, according to Macquarie.
Cap rates are also expanding in the retail sector, where rents ticked up only slightly in the last quarter, and in the office sector, where demand softened in Sydney over the third quarter.
“Looking forward, we are cautious on the outlook for office leasing markets,” the Macquarie team wrote.
“On the demand side, we see potential for further softening as leading indicators (employment growth, business conditions etc) continue to moderate.”
Fergal Harris, JLL’s head of capital markets, said there was a broad pause in deal-making across commercial property due to market uncertainty as investors remained on the sidelines. Foreign investors were the most likely group to spur a rebound after the market reset, he said.
Over the first three quarters, offshore capital flows into Australia hit $6.1 billion, compared to the full-year 2021 result of $15.7 billion, on JLL’s preliminary tally.
“We expect to see a major focus from offshore buyers on build-to-rent and industrial assets. Industrial remains a strong sector with the rental growth story a big positive. Capital is still favouring industrial as a sector while also acknowledging the risk side.
“We see that many investors are still underweight in industrial and will continue to reweight their portfolios to address this.
“The big thing everyone is waiting for is price discovery. And we won’t see that until we have some large transactions in the market to assess.”