Commercial property yields to continue growing

CBA’s latest Property Insights report indicates that Australian commercial property is set to break pricing records before the end of the year, with yields also surpassing previous highs.

Despite a 32 per cent drop in commercial property sales in the first half of 2015, the asset type continues to be popular with both domestic and international investors, CBA’s head of property strategy and research, corporate financial services, Kevin Stanley said.

“Despite strong price increases for commercial property in this cycle, Australian assets are still provoking significant investor interest — especially prime real estate generating stable income streams for the medium- to long-term,” he said.

Mr Stanley attributed a new injection of foreign capital into the commercial sector as a major contributor to high yields and rising prices, which have been recovering since the GFC.

“With investor interest predicted to remain strong through the balance of 2015, prices are set to rise even higher. As a result, yields are on track to hit and surpass previous peaks, riding a fresh wave of purchases, particularly by international investors.”

Sydney and Melbourne are emerging as the clear leaders in the CBD-based commercial markets, according to the report.

“As demand for office space in the Melbourne CBD and Sydney CBD bounces back, these markets are predicted to lead short-term growth,” the report stated.

This will work to create a further disparity between the remainder of Australia’s capitals, a situation familiar to the residential property market.

“The Brisbane, Perth and Adelaide CBDs and the Canberra region are less likely to see high levels of trading, other than for very prime quality assets or selective value-add opportunities,” the report read.

At a weighted average of 7.01 per cent, yields for commercial properties in suburban and regional areas remain higher than city-based stock.

Mr Stanley said that despite a drop from last year’s $30 billion turnover, overall commercial transactions are still performing above long-term averages.

“Commercial property transactions are forecast to jump to around $10 billion in the second half of 2015, rounding out the calendar year with a total of close to $20 billion.

Mr Stanley advised investors to seek medium-term opportunities, despite short-term growth still being achievable.

“At this late stage of the current cycle, it would be advisable for investors to adopt a medium-term view. However, it is not too late to invest in commercial property in the short term and see prices rise," he said.