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Herron Todd White (HTW) has painted a clear picture of how months of rate rises have impacted the commercial property market.
In its monthly market overview, HTW’s industrial director, David Walsh, expressed: “What a difference six months makes!”
Reflecting on the 2022 landscape, he looked back to the April edition of the Month in Review when he discussed strengthened investment sentiment within the industrial sector. Fast forward to October, he’s now considering the impact of the Reserve Bank of Australia’s (RBA) continued interest rate hikes.
“The frequency and aggressive nature of the rate rises handed down by the RBA have surprised many,” he said.
Consistent monthly increases have resulted in “yields for prime assets [softening] in the order of 50 to 100 basis points from their highs [as] the larger REITs, funds, and property syndicates have retreated somewhat as they struggle to structure and balance their target returns for their clients”.
“Mum and dad investors watch on closely as their cost of bank funding increases and closes the gap between an investment return (and cash surplus) and debt costs,” Mr Walsh added, comparing the current market to that during its last peak in 2007–08.
HTW’s October Month in Review listed three national industrial property markets as currently peaking — Sydney, Melbourne, and the Sunshine Coast. Conversely, three further regions’ declines have begun (Brisbane, the Central Coast, Ipswich); Orange is entrenched in its market decline, while Alice Springs, Darwin, and south-west Western Australia (WA) are approaching the bottom of the market.
On Western Australia, Mr Walsh indicated that on-ground discourse within Perth has hinted that “both private and institutional investors are looking at Perth industrial property due to higher available yields”. HTW listed Perth’s market as “rising” in the report.
“However, as they’re looking through their Sydney, Melbourne, or Brisbane lenses, they’re paying prices that reflect yields as low as 4.5 per cent,” he continued. “This view on yield level tends to be in contrast to local Western Australian based investors and private family offices who are major players in this market, with Perth categorised by higher-than-average private ownership of large industrial assets.”
Moreover, Mr Walsh illuminated that aside from leasing — which is still buoyant — the owner-occupier market, primarily in the sub-$15 million bracket, is still performing strongly.
HTW’s report revealed that the RBA’s initial interest rate hike back in May “had an immediate effect on market confidence”, according to commercial director Angeline Mann, who added that capital values had not deteriorated too drastically since.
She noted that “there are signs that there is potential for confidence to remain in the market” as markets are yet to show solid signs of a weakening market as overall sales continue to achieve strong results.
It is a similar story in Melbourne, with director Nick Michael illustrating that “industrial sales levels over the first six months of 2022 have already exceeded $3 billion with offshore purchasers accounting for 55 per cent of the volume of sales”.
“Leasing activity has also remained high as there was an increased requirement for warehouse space to diminish disruptions to supply chains,” he said.
Conversely, Brisbane has experienced a “docile” year regarding investment activity, “with a number of notable headwinds tempering the voracious demand witnessed last year”, according to valuer Isaac McConnell.
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