A strong Q4 brought commercial property sales for 2014 to $26.8 billion, six per cent higher than in 2013. Over the year sales were buoyed by higher transaction activity in the industrial sector, in addition to a further increase in office sales.
Foreign investors remained a feature of the market in 2014 although the growth rate of inflows from offshore slowed, as expected, following a doubling of foreign purchases in 2013.
Chart 1 – Commercial Property Transaction Value by Sector – Calendar Year TotalKey trends by sector and state
Office sales sustained the strong 2013 levels, with a total of $14.5 billion of transactions in 2014, slightly above 2013 levels.
There was an increase in sales in the sub-$50 million price bracket but a decline in the >$75 million bracket. 80 per cent of office turnover occurred in the Sydney/Melbourne markets, compared to 65 per cent in the previous year. This is consistent with stronger demand for assets in these core markets in which the vacancy risk over the next few years looks more contained for both prime and secondary assets.
Similarly, vacancy appears close to its cyclical high point in Adelaide which supported domestic purchaser demand for four office assets sold by German funds in the second half of the year. This buoyed Adelaide office transaction activity to $530 million for the year compared to $135 million in 2013. On the other hand, sales volumes were down in Brisbane, Perth and Canberra.
Retail property sales eased back from a record volume in 2013 to $7.3 billion in 2014. Queensland ($2.3 billion) and Victoria ($2.5 billion) bucked the national decline, both recording solid increases in sales of 51 per cent and 18 per cent respectively.
Sales volumes dropped for regional and sub–regional centres, but increased for neighbourhood centres. Large format retail activity eased back but to a lesser extent than sub-regional and regional centres.
The trend emerging in retail is one of improved confidence at the higher yielding end of the market aligned to the generally healthier trading environment for retailers. This supported the pattern of transaction activity and yield compression in 2014, in which yields fell by close to 50bp (yoy) for neighbourhood centres compared to 10bp for regional centres.
Industrial sales were strong in 2014 with total sales of $5 billion, an increase of 55 per cent, driven by a number of large portfolio sales. Activity is being prompted by divergence of opinion as to the degree to which yield compression can continue.
Strong yield compression in the super prime sector (80-90bp in Sydney/Melbourne) through 2014 prompted selling from some owners, in an environment where new sources of demand are looking for income yield combined with an expectation that the risk of yield softening is low.
Foreign purchase activity grew by 12 per cent in 2014 accounting for $6.2 billion or 23 per cent of purchase activity. As expected the level of demand has held up from foreign investors, although the growth rate did slow following more than a doubling in foreign purchase activity in 2013.
As noted in our Capital Attraction (September 2014) and Australia Market Outlook (December 2014) reports, we expect current levels of foreign demand to be sustained through 2015, with the economy growing at just below trend and the interest rate/yield spread to major regional and global markets to hold (although not widen) through most of the year.
In general, activity in Sydney and Melbourne is consistent with more positive sentiment on these markets which are supported by a shift in the economic growth pendulum to the South East of Australia. Within this broader trend, the concentration of purchaser interest in these markets has driven yield compression for prime and secondary assets due to the perception (by purchasers) of lower risk over the next few years.
On the other hand there has been a rise in the gap between vendor and purchaser expectations in some markets (e.g. Brisbane/Perth office), reflecting a higher perception of risk.
Chart 2 – Commercial Property Transaction Value by State – Calendar Year Total