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Commercial Property Market Report 2021

Updated: Mar 24, 2021

Property as a whole remains an attractive asset class, particularly when comparing yields to bond rates, combined with the current low interest rate climate. With the Reserve Bank of Australia slashing the official cash rate to a record low of 0.10% in November, and further quantitative easing measures introduced, we will see bond yields fall closer to zero. The COVID-19 pandemic has impacted all property asset classes in Australia to some extent, with both positive and negative outcomes.

The retail sector has been the hardest hit as a result of store closures as a result of reduced foot traffic and weak consumer spending. However, as restrictions are eased and locally acquired cases have reached zero, consumer sentiment has recovered and physical retail consumer spending has improved.

Total returns for the sector were recorded at -9.4%, with capital growth falling -13.1%. This evidences the fact that retail as an asset class will continue to face the greatest amount of challenges throughout this recession, and despite a lack of forced sellers currently in the market this will likely change in the next 6-12 months as government stimulus packages such as JobKeeper and JobSeeker, which have helped to keep unemployment relatively low, continue to reduce and near an end. Insolvency experts predict that forced sellers will not come in an avalanche, but will be instead spaced out across a period of one to two years.

Industrial property has been a prime beneficiary of the shift in consumer spending, which has translated to strong investor interest in well located warehouse and storage facilities which service densely populated areas. Domestic institutional players have continued to aggressively acquire properties throughout 2020, with many funds seeking quality assets to bury into 'core' portfolios.

Office assets have continued to trade both on and off-market throughout the year. Total returns for the office sector were recorded at 8.0% in the 12 months to June, falling below double digits for the first time since 2014. This was mainly due to a drop in capital returns to 2.8%, down from a peak of 8.8% in 2018.

Foreign investment has been a key feature of Australia's office market over the last decade. Funds from Asia, Europe and America have demonstrated strong interest as a result of our stable geo-political environment where investments are deemed relatively low risk, with above average capitalisation rate yield returns. This stability has been further emphasised and evidenced by the government's handling of the pandemic, which has allowed us to keep case numbers and deaths low in comparison to the vast majority of developed nations around the globe.

However, it is likely that we will see foreign investment into Australia decrease in the short term, with temporary changes to FIRB policies having an impact on the timeframe and completion of foreign investment in Australia.

This was reflected in the office sales volumes throughout 2020 which were nearly half of those from the year prior. In the 12 months to September 2020, Savills recorded AUD$12.6 billion of office transactions (above AUD $5 million).

Domestic institutional groups remained the most dominant purchasers over the last 12 months, contributing close to 42% of total volumes (in dollar terms).

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