Property Australia

Returns soften for commercial real estate

Karen Jamal Karen Jamal March 2, 2021

The investment performance of Australia’s commercial real estate has softened but returns remain resilient as industrial and healthcare assets post positive capital growth, finds the latest Property Council/ MSCI Australia Annual Property Index.

 

  Three key takeaways

  • The Property Council/MSCI Australia Annual Property Index achieved a total return of 0.1% in the fourth quarter of 2020, down from 7.6% a year earlier
  • Markets continue to soften, with total returns 750 basis points lower than the previous year
  • The annual income return of 4.7% is the lowest figure in the Index’s 26 years history, but reflects lower net operating income rather than income compression.

 

The fourth quarter of 2020 recorded the lowest annual growth rate since 2010, when asset values were beginning to trend upwards post global financial crisis.

“Income return has softened to unprecedented levels, which is unique to this cycle, and which may see capital values impacted more severely in the future,” says MSCI executive director Mitchell McCallum.

“While markets continue to soften, led by retail, returns remain resilient with industrial and healthcare continuing to report positive capital growth.”

 

Property Council/MSCI Australia Annual Property Index

Property Council MSCI Australia Annual Property Index 

The speed of decline in the retail sector has slowed “somewhat” to -10.1 per cent for the year to December 2020. This has been driven by rising income returns, McCallum explains.

 

Performance by sector

Performance by Sector

Office annual total returns continued to slow to 4.7 per cent; 12 months earlier they were at 11.6 per cent. For the first time since the third quarter of 2010 the office sector has posted negative capital growth. “This suggests some investors remain uncertain around future income and the impact of COVID-19 to the sector,” McCallum adds.

MSCI’s vice president Benjamin Wyburd says the latest results “indicate we may be seeing a flight to quality” in CBD areas but non-CBD assets have proven “surprisingly resilient up to this point in the cycle”.

 

Total office returns CBD versus non-CBD

Total office returns CBD verus non-CBD

Healthcare total returns increased on an annual basis, but quarterly returns indicate that they are slowing.

Industrial continues to outperform in the uncertain economic climate, posting an annual total return of 13.9 per cent, up from 11.5 per cent 12 months earlier. “This reflects the industrial sector’s strong value proposition, as the move to ecommerce is accelerated by current market conditions,” McCallum says.

Across the major cities, Sydney fared the best, posting an annual total return of 2.3 per cent. Trailing Sydney were Brisbane (0.1%), Canberra (-0.5%), Melbourne (-1.2%), Adelaide (-1.3%) and Perth (-1.7%) total returns over the 12 months to December 2020.

 

Total returns by city

Total Returns by City