No risk of commercial property bubble

No risk of commercial property bubble

27 September 2019

Amidst all the global turmoil, trade challenges, and talk of international recession, Australia’s commercial property industry is remarkably upbeat.

For the leaders of the Australia property industry who spoke at The Financial Review’s Property Summit in Sydney, the immediate challenge is not a looming cyclical correction.

With record low bond rates, and a commercial property environment that screens well on a global basis, investors can expect a crescendo of more capital, falling yields and rising prices, notes Robert Harley.

Dexus chief executive Darren Steinberg has swatted away suggestions that a dangerous asset bubble is forming in Australia’s property sector, saying rising valuations and falling yields (or cap rates as they are called in property) need to be seen in the context of changing sector dynamics.

“If it’s an asset bubble, it’s a global one,” Steinberg told The Australian Financial Review Property Summit in Sydney on Thursday.

“There is a flooding of capital into real assets that provide stable income growth and some capital return.

“If we look at office fundamentals, we are super attractive in the global context,” said Mr Steinberg.

He said while yields had fallen, this needed to be seen in the context of falling rates around the world, which had sparked a global search for yield prompting money to pour into attractive assets such as office property.

For example, he is seeing no shortage of interest from big Asian investors in prime office real estate in Sydney – safe, stable and high quality assets that he argues still look very attractive on a 4 per cent cap rate.

“We are in uncharted territory in terms of interest rates, frothy equity markets generally, the understanding of technology and the like, and I guess property is a nice safe haven,” said Trevor Loewensohn, managing director of private equity firm Alceon.

This point was reinforced by Stephen Conry, Australian boss of JLL, who said inflows to the property sector so far this year were running at about $19 billion – with a staggering $9 billion of that flowing into the Sydney CBD, albeit with a relatively small number of deals.

Rewind to the 1980s when Oliver started his career, property yields across all classes were sitting somewhere between 8 per cent and 9 per cent, while bond yields were sitting around 14 per cent.

Today, global bond yields are just under 1 per cent and while residential property yields have tracked back towards 3 per cent, commercial property yields have only come back to about 5 per cent.

It’s very different today to the conditions seen during the 1990s commercial property or the global financial crisis. Back in those periods, property companies couldn’t get debt with a tenure much longer than two or three years. In the current low-rate environment, there’s no shortage of cheap 20-year money around; Steinberg says Dexus’ average tenure is about seven years.

“If you have long-term debt you won’t get caught when the cycle turns,” he explained.

Fresh from the sale of the Telstra portfolio on a yield of 4.4 per cent, UBS head of real estate Australasia, Tim Church prophesied that “3s will be the new 4s”.

“This is a very conducive environment for asset values,” he said. “I think the REIT sector (with the average yield on the AREIT 300 at 5.7 per cent) looks very undervalued.”

Despite record flows of offshore capital to Australia, property lawyer and Minter Ellison managing partner Virginia Briggs said the Australian regulator, on top of foreign buyer fees, was making it very difficult for offshore capital to enter the local market.