Image – Canva.
  • Logistics to evolve and likely continue strong growth
  • Industrial real estate has no signs of slowing
  • Retail and office will recover, but innovation will be key to resilience

An industry-wide description of real estate could be captured by the wordplay: all boom and gloom.

Whether it is residential data from SQM Research, CoreLogic, Domain, or the real estate institutes across the country, or industry heavyweights like Savills, CBRE, JLL, Knight Frank and more, the story is the same: property is sublime, not subprime.

Aside from much-discussed low interest rates, the ‘seller’s market’, and ‘red hot property’, what else is happening in the Australian property market?

Ongoing lockdowns and lacklustre vaccination rates don’t seem to have hindered investment interest, albeit that residential investment activity is still below 10-year trends.

Over in the industrial property market, two trends are emerging, with large format retail (LFR), and healthcare becoming popular. Both areas enjoyed mounting interest by traditional players in the field, as well as others looking to enter or diversify into LFR or healthcare.

On the logistics front, the Knight Frank Urban Logistics Australia Report affirmed the growth in the logistics sector, with online shopping rising sharply due to Covid restrictions and lockdowns.

The chain reaction was evident across logistics real estate, with dark stores and other distribution and fulfilment centres attracting investment. Other activity in the sector including accelerated technological development and high-er rise fulfilment centres.

Industrial winners

Referring back to the countless industrial real estate sales and developments over the past six months alone would be an effort, hundreds of articles have been written about them.

The highlight was the $3.8 billion sale of Blackstone’s Milestone Logisitcs sale to ESR, a purchase by Logos Property from Qube worth $1.65 billion, and another by Charter Hall for $270 million.

The sector eclipsed the usual top dog (office property) with the effect seemingly two-fold: for one, offices aren’t doing well with work-from-home and lockdowns, but also the increased commercial activity around industrial property.

Dexus’ Australian Real Estate Quarterly Review Q3 2021 reported yield spreads over 10 years bonds have narrowed for industrial, but remained wide for other sectors.

The report also confirmed what many in the industry are certain of: there are no signs of slowing.

“Competition to deliver new product to the market continues to place upwards pressure on land values. In Outer West Sydney and West Melbourne markets values lifted by $100/sqm and $75/sqm respectively in the past quarter,” the report said.

Land values continue to climb

Land values continue to climb, particularly in the favoured markets of sydney and melbourne
Source – JLL Research, Dexus Research.

It was also noted that “investment demand continues to push yields tighter across all markets.”

An interesting nugget from the report was that cold storage remained strong following “Charter Hall transacting a sale and leaseback with PFD Food Services on a yield of 4.9% and another with food manufacturer Patties foods within Victoria at 4.4%.”

Cap rates continue to tighten

cap rates continue to tighten across all states with sydney prime asets down to 4 per cent on average
Source – JLL Research, Dexus Research.

Over six months of reporting, large format retail looked promising. While regional and sub-regional retail were the hardest hit, large format and neighbourhood retail fared well.

HomeCo also did well in the large format, with the company making a number of acquisitions earlier this year.

This subsector represents more than 24.7% of all retail sales and employs almost half a million Australians.

Dexus’ report found something notable though:

“There has also been a mini-trend towards purchases of large format retail assets with industrial conversion potential.”

Dexus Australian Real Estate Quarterly Review Q3 2021

Economic outlook

The Property Tribune explores this in more detail here, but the essence is: the housing boom will continue unless a deterioration of lending standards warrant what is called ‘macroprudential regulation‘.

Dexus’ report had six key assumptions over the next 12 months, including:

  • Business confidence bouncing back later this year,
  • Export income benefiting from a strengthening economy,
  • Housing and infrastructure construction to continue positive growth,
  • Retail spending to benefit from low interest rates, rising house prices and accumulated savings,
  • Slow opening of international borders with travel limited until FY23, and
  • Short term interest rates to remain low throughout FY22, with ‘modest’ rises within two to three years.
Jun-21 Jun-22 Jun-23
Real GDP %pa 9.6% 2.9% 2.7%
Final demand %pa 11.7% 2.9% 2.4%
Employment %pa 8.1% 1.0% 1.1%
Goods imports %pa  14.8% 1.6% 2.2%
Retail sales %pa (real) 8.5% 0.7% 1.6%
CPI %pa 3.5% 1.8% 2.2%
90 day bond % 0.1% 0.1% 0.2%
10 year bond % 1.6% 1.4% 1.4%
AUD/USD  $0.77  $0.76  $0.74

Source – Deloitte Acces Economics, June 2021; Dexus Research

The hardest hit: retail and offices

These two sectors may find inspiration in the Japanese art of kintsugi.

While bricks and mortar retail may have suffered, the internet seems to be that golden glue. Online retail has perhaps been a blessing for retail, and with the logistics behind the scenes catching up to the rapidly developing nature of the new form of retail, a solid recovery over the next year is likely.

The Dexus report noted “sales growth [is] reverting to more normal patterns,” and while shopping centres weren’t able to make the most of increased spending activity, household goods reigned, particularly standalone and bulky goods.

Offices on the other hand have been hampered by the internet, with work from home a trend that’s often cited by sensationalists as the death of offices.

That’s perhaps not actually the case though, despite the challenges, Dexus’ reported that “Positive hiring intentions have led to strong white-collar employment growth to in the year to May 2021 in NSW (18.3%), Victoria (34.1%) and WA (17.3%).”

While the CBD has traditionally been the main economic hub, both the suburbs and the city may need to work in tandem to collectively find the niches that suit both moving forward.

One common future predicted in scenario planning includes the ‘urban village’. While it may have different names depending on who conducts the planning or study, suffice to say suburban offices and local hubs may have strong growth to come, but office flexibility will still be key.


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