Industrial property is going from strength to strength in the Australian market, recording the strongest total returns across the sector of 14.8 per cent over the year to June.
Across the overall property market, total returns fell over the 12 months from 11.9 per cent to 10.3 per cent, dropping below 11 per cent for the first time since early 2015, but remained slightly above the long-term total return of 10.1 per cent, according to the latest MSCI Australia Annual Property Index. Capital growth was at 4.6 per cent and income return at 5.5 per cent. Bonds, in comparison, recorded a total return of 6.8 per cent.
Returns in office property increased slightly from 13.4 per cent to 13.7 per cent.
“Some of the heat appears to have come out of the Sydney secondary (grade B, C and D) market with annual total returns moderating from nearly 29 per cent at the end of the March quarter to 17.1 per cent by the end of the year,” according to the report.
A lack of prime office space, particularly in Sydney and Melbourne which have been operating at record low vacancy rates, led to demand spiking to a 10-year high in the first half of 2018.
The worst performer across the industry was retail property – total returns fell from 10 per cent to 6 per cent as capital growth shrunk significantly.
Australia’s retail landlords are facing an existential crisis, as bricks-and-mortar shops come under attack from online shopping and e-commerce giants such as Amazon competing for business.
“Concerns have continued to mount for the retail sector as changing consumer behaviours, low wage growth, mounting debt levels and falling house prices weigh on investors’ minds. While capital growth for all retail assets remains marginally positive, it has slipped into negative territory for regional, sub regional and neighbourhood assets,” the report said.
The performance of assets in the hotel and healthcare sectors also weakened. Total returns fell from 15.2 per cent to 7 per cent for hotels as capital growth withered away, and for healthcare properties, it slid from from 20 per cent to 8.2 per cent.
The outlook is expected to worsen for investors – property returns across the board are expected to halve over the next five years, according to a recent forecast by BIS Oxford Economics.
“Yield compression has driven the majority of the growth in asset values this cycle and kept total returns high. On average asset values have increased about 40 per cent over the last five years and about three quarters of that increase has been driven by yield compression,” MSCI vice-president of research Bryan Reid said.
Australia’s commercial real estate performance, with total returns at 10.3 per cent, was lower than that of the Netherlands at 14.8 per cent but stronger than the US, UK, Canada and Ireland.