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Relative value revisited: Correction triggers?
Cushman & Wakefield is pleased to present its latest Australian Property insight "Relative value revisited: Correction triggers?".
- Australian CRE remains in strong demand, ranking the sixth most desirable destination for global capital in 2017.
- Over the past six months bond yields have moved sharply higher and Australian CRE yields have continued to compress with yields in many sectors and markets at or near historic lows. As a result, Australian property’s relative value proposition has diminished.
- But while relative value is fading, the property – bond yield spread remains relatively large compared to history and other global market and our stable open economy is attractive to global investors. In addition, while yields are historically low in some markets, strong rental growth is supporting total returns.
- This suggest yields can continue to compress, but the market will become increasingly vulnerable to a change in sentiment. So the question is not so much can they go lower, but what could change the positive sentiment?
- Trigger options include: large and rapid increases in interest rates, bond yields and/or corporate debt rates, a sharp reduction in credit availability, a collapse in tenant demand, a geo political crisis or some combination of the above.
- Of these potential correction triggers, none appear imminent in the short-term, although the increase in bond yields and reduced credit availability may be more likely.
- This suggests long-term investors should still find value in Australian commercial property though reduced relative value may mean some investors will increasingly look to recycle capital.