The key indicator that will determine where commercial property markets head
ONE OF MY FAVOURITE MARKET COMMENTATORS IS AMP CAPITAL'S DR SHANE OLIVER. I'VE BEEN READING HIS STUFF FOR OVER A DECADE NOW AND FIND HIME TO BE ONE OF THE FEW ECONOMISTS THAT PROVIDE CONCISE INSIGHTS THAT MAKE (SOMEWHAT!) SENSE.
Now Shane’s analysis covers all aspects of the overall economy but in a recent article, he turned his attention to Australian commercial property, providing his insights on where he thinks things are heading.
In this article, Shane provided a market 101 breakdown of how different assets historically perform at different stages of the market. He noted that:
- Bonds do well in economic downturns as interest rates fall and inflation is rising.
- Shares are first to rise out of an economic recovery.
- Real estate does particularly well later in the cycle.
Looking at commercial property as an investment, one of the key drivers for him was yield. The below graph shows that commercial property yields have fallen from 7.3% to 5.25% since 2009. This drop in yield has meant today’s values are nearly 40% above where they were in 2009.
COMMERCIAL PROPERTY YIELD COMPARED TO OTHER ASSETS
Although there has been a drop in commercial property yield, it still remains very attractive compared to residential property and bonds.
One thing I wasn’t aware, which Shane noted was that back in the 80s, commercial property actually had a very similar yield compared to residential property. However, as they years have passed the gap between the two has continued to widen and commercial property now has far higher returns than residential.
Looking ahead, Shane notes that the biggest risk to watch for commercial property is “if bond yields back up sharply as global growth and inflation rises.” However, he predicts bond yields to only rise gradually, which means that overall returns for commercial property are expected to remain strong, with a predicted return of around 9.5%.