The Australian, December 3, 2019

Investors flock to commercial property

With interest rates at record lows, yield hungry investors are finding safety in commercial property.

Diminishing interest rates globally have proved a boon for commercial property valuations – and not just because the lower cost of debt servicing enables buyers to pay more for an asset and still justify the investment.
In key Australian geographies, booming property valuations have been supported by fundamental tenant demand spurred by high employment rates and the growth of space-intensive sectors such as office co-working, ecommerce and logistics.
Supporting the demand, yield-chasing investors have turned to property because the same influence of rock-bottom interest rates has eroded their returns from ‘safer’ asset classes (notably government-guaranteed term deposits).
The ultra-low rate environment has spurred robust demand for both prime office space and industrial warehouses, especially in Sydney and Melbourne.
CBD office rents are at or close to record highs, while vacancy rates are at very low levels
According to property agent JLL, prime Sydney CBD yields averaged 4.5-5 per cent in the June quarter, compared with a ten-year average of 6.1 per cent. 
In Melbourne the story is similar: current yields of 4.5-5.25 per cent compared with the decade run rate of 6.5 per cent.
Vacancy rates similarly have tightened: 4.1 per cent in Sydney and 3.8 per cent in Melbourne compared with the ten-year averages of 7.8 per cent and 7.5 per cent respectively.
“Midpoint market yields are at the lowest level since JLL started tracking the series in the late 1970s,” says the firm’s senior research director Annabel McFarlane.
“However though commercial property return expectations have fallen … this has been less than the decline in bond yields so the spread (between property yields and bond returns) is currently wider than historical benchmarks.”